High Court Rules Government Loan to Kenya Airways Does Not Convert It to Public Entity

The basis for the petition was that KQ used public monies to fund the programme and that KQ discriminated against local pilot training schools and pilots trained by local institutions licensed by the Kenya Civil Aviation Authority. The petition, therefore, sought to have KQ designated as a public entity and subject it to Article 227 of the Constitution of Kenya 2010 (CoK), the Public Finance Management Act, 2012 (PFMA), Public Procurement and Asset Disposal Act, 2015 (PPADA) and State Corporations Act, 1986 (SCA). The petition was centred on shareholder loans extended to the airline by the Government of Kenya which has a 48.7 percent shareholding in the national carrier.

While KQ ultimately discontinued the programme, the effect of an injunction or termination at the time would have hampered its operations and made it difficult, if not impossible, for the carrier to keep up with its regional and international competitors, as well as the requirements under the International Civil Aviation Organisation’s (ICAO) standards and recommended practices (SRAPs). This would have seriously exacerbated the difficulties the airline was facing with its operations, ultimately threatening its survival as a national carrier and devastatingly affecting the country’s air transport sector.

Potential Effects of the Petition
The petition, had it been successful, would have had the following adverse effects:

1. It would have classified KQ as a state corporation under the SCA. As such, KQ would be required to competitively float a tender when procuring all its services/goods, not only for the programme. This would have negated the role of KQ’s board, especially in decision-making.
2. The ricochet effect of the above is that any entity in which the Kenyan Government has a shareholding of less than 50 percent would automatically be a public entity.
3. The fact that the government advances shareholder loans to an entity in which it has a stake automatically makes that entity a public entity and subject to Article 227 of the CoK, the PFMA, the PPADA and the SCA. The petitioner argued that these shareholder loans were public money. This would have resulted in the illegal conversion of privately owned entities to state corporations/public bodies, notwithstanding that the same are registered under the Companies Act, 2015.
4. Practically, it would have jeopardised KQ’s other training programs, which take place outside of Kenya, and greatly affected KQ’s quality of pilots under the ICAO SRAP. This training cannot be offered locally due to a lack of the necessary equipment to match KQ’s specific needs based on its aircraft fleet. For example, despite having two Boeing 737-300 freighters-huge aircraft primarily used for transportation and freight globally- KQ does not have a recurrency training simulator for this type of aircraft. The training programs are necessary to equip KQ’s pilots with the skills needed to operate aeroplanes such as the Boeing 737-300 aircraft or undertake other operations that serve the entire country and the region.

The Judgment
In dismissing the petition, the High Court found that KQ is not a public entity because the Government of Kenya neither holds a controlling interest in it nor is KQ established under the State Corporations Act. KQ is a company registered under the repealed Companies Act (CAP 486 of the Laws of Kenya) and therefore does not fall under the provisions of the PFMA or the SCA. Further, the High Court found that shareholder loans extended by the Government do not amount to public money. As such, KQ is not subject to Article 227 of the CoK, the PFMA or the PPADA on procuring goods and services. The judgment further clarified what constitutes a public entity, especially companies where the government has a stake and advances loans in its capacity as a shareholder.

The implication of the judgment is that:

1. If the Kenyan Government invests in a private company and does not have the controlling stake, it is treated as other shareholders within such entities, and the entity’s management/board decisions cannot be interfered with merely on account of the said shareholding.
2. Any monies advanced by the government to a private entity, which is equivalent to the government’s shareholding in the form of loans, do not qualify as public monies under the PFMA.
3. The goods or services procured by such a private entity will not be subject to Article 227 of the CoK or the PPADA.

Should you have any questions regarding the information in this legal alert, please do not hesitate to contact Faith M. Macharia.

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Contributors

1. Odhiambo Obonyo – Principal Associate
2. Ian Kanja – Associate
3. Abdulmalik Sugow – Trainee Lawyer