Court bars Fly540 asset transfers over Sh101m tax bill

Low-cost flights operator Fly540’s assets have been frozen in the wake of a vicious court battle with a former employee seeking compensation for wrongful dismissal.

The airline’s assets were frozen after former airport manager Imtiaz Khan told the Labour Relations Division of the High Court that the carrier had hatched a scheme to transfer its assets to a holding company to escape a Sh101 million tax demand from the Kenya Revenue Authority (KRA).

Ms Khan had argued that such a transfer would make it impossible for the airline to compensate her in the event that the court ruled in her favour.

Justice Nzioki wa Makau stopped Fly540 from moving any of its assets until an application filed by Ms Khan is heard and determined. The High Court orders also bar Fly540 from voluntarily winding up before Ms Khan’s application is heard.

“A temporary order is hereby granted restraining Fly540 and EASAX from transferring, wasting or vesting all the assets of Fly540 and from voluntarily winding up the company pending hearing on March 9,” the judge ruled.

East African Safari Air Express (EASAX), one of the first casualties of Kenya’s air fare wars, was a rival low cost airline purchased by Fly540 in 2010. It was rebranded as FlySAX and operates as a safari and private charter airline.

Ms Khan told the court that despite an earlier judgment by Justice George Odunga, the airline had started transferring its assets to EASAX and, if not stopped, would leave her with no remedy in the event she won her Sh12.3 million claim against the carrier.

The former employee of the airline had initially been hired as a resource training and development manager in 2006 shortly after the firm launched its Kenya operations, and had risen to the post of airport manager by the time of her sacking last year.

Ms Khan said that a search on Fly540 at the companies registry shows it is a sole proprietorship but that the airline identified itself as a limited liability company when it sued KRA over the Sh101 million tax claim.

READ: Fly 540 loses bid to block Sh101m KRA demand

Her lawyers Gikama & Vedgama Advocates said in suit papers that a search on both firms had produced different outcomes causing them reason to suspect foul play.

“A similar search on EASAX indicated no results. This shows that the records of the two companies are in the process of being changed or the files are being intentionally withheld,” Ms Khan said.

“There is a high likelihood that the current goings-on are an attempt by Fly540 to evade tax obligations and all its financial liabilities including this suit.”

Ms Khan’s contract was verbally terminated in October last year, an action she says was in contravention of the law.

She is seeking Sh3.3 million compensation for wrongful dismissal, Sh4.3 million for house allowance over the nine years she worked at Fly540 and Sh1.1 million in salary arrears not paid since October last year.

She is also demanding Sh1.1 million in gratuitous settlement and Sh833,000 for severance pay.

Ms Khan reckons that the termination of her contract has aggravated her blood pressure, diabetes and heart condition, and that she now cannot afford proper medical attention.

She has also blamed Fly540 for not formally communicating to her that she was no longer needed at the firm. Labour laws provide for prior written notice before termination of a contract, which she holds the airline did not follow.

“Ms Khan is terminally ill and the respondents’ actions have made her lose her source of income hence she cannot acquire medical attention. It is, therefore, a matter of urgency that this matter be heard and determined at the closest day available to this court,” the judge said.

Fly540 has not responded to the suit.

The regional, low-budget airline was last year ordered to pay KRA for taxes accrued from air navigation services offered in 2012.

The taxman asked Fly540 to pay the amount it claimed to have accrued from a number of new charges that came into force following the enactment of new legislation.

But Fly540 moved to court claiming that KRA had overstepped its mandate in demanding the colossal sum, and asked Justice Odunga to stop the taxman from collecting the amount.

The judge, however, found that KRA had done its part in the dispute and faulted the airline for fighting the tax demand instead of seeking to quash the new laws.

Justice Odunga said that had Fly 540 sought nullification of the law and won, it would have made every action arising from the law, including the tax claim, null and void.

KRA’s claim on the airline is likely to deal a major blow to the airline that has been struggling to stay afloat. Fly540 entered the Kenyan market in 2006 but has struggled to survive in the wake of stiff competition from Kenya Airways’ subsidiary JamboJet.

The airline flies to Kisumu, Lamu, Lodwar, Mombasa and other Kenyan towns, as well as Juba in South Sudan and Zanzibar.

Fastjet, another budget airline, last year sold its stake in Fly540 after a loss-making streak, and has since embarked on plans to re-enter the Kenyan market.

Fly540’s fight for survival has seen it challenge rival JamboJet’s ticket prices, which it claims are aimed at creating a monopoly.

The collapse of Jetlink, another regional air operator in 2013, offered Fly540 a lifeline, as it has since expanded to become the second largest carrier on the Mombasa-Nairobi-Kisumu route, which is Kenya’s busiest.