Air Afrik Aviation, led by Managing Director Captain Eric Lugalia, is seeking compensation from Stanbic Bank for allegedly crippling its business operations by freezing and reversing a staggering Ksh 9.2 billion (approximately $7.2 million) that had been credited to its bank account in February 2016. The case has drawn significant attention in Kenya’s financial and aviation sectors, raising questions about banking regulations and the responsibilities of financial institutions in safeguarding their clients’ funds.
Background of the Dispute
The roots of this legal battle trace back to a leasing agreement Air Afrik Aviation had with the government of South Sudan, valued at around $20.64 million. Under this agreement, the South Sudanese government was required to pay a 35% deposit of $7.2 million to Air Afrik. The funds, credited to Air Afrik’s account, were crucial for the operational stability of the airline, which was looking to fulfill its obligations under the leasing contract.
However, the situation took a disastrous turn when Stanbic Bank froze the account containing these funds and later reversed the credit. This unexpected action led to the termination of the leasing agreement, which Captain Lugalia described as a devastating blow to the airline’s operations.
Court Testimonies Unfold
During the hearings presided over by Justice Nixon Sifuna, Captain Lugalia provided detailed testimony about the impact of the bank’s actions. He explained how the freezing of the funds not only halted the execution of their contractual obligations but also resulted in substantial financial losses for the airline. According to Lugalia, the bank later acknowledged that the freezing of the account was an error. He recounted meetings where bank officials admitted fault, naming specific officers responsible for the blunder.
“The bank admitted it was an accrediting error and even named the officers who had committed the error. They mentioned that the officers were punished following the complaint,” Lugalia stated, highlighting the contradictory statements made by the bank regarding the freezing of their account.
In a sworn statement, Lugalia emphasized the significant time and resources Air Afrik expended in pursuit of the unfreezing of its account. He noted, “The 1st Defendant (Stanbic) adamantly refused to unfreeze or allow the Plaintiff to access the said credit balance.”
Breach of Banking Regulations
The legal team representing Air Afrik argued that the bank’s actions constituted a breach of banking regulations. The case, which Air Afrik filed in 2018, hinges on the claim that Stanbic Bank acted without a valid court order or directive from the Central Bank of Kenya when it reversed the funds. This alleged misstep raises serious questions about the protocols banks are expected to follow in managing customer funds.
A financial expert, Emmanuel Mosoti, testified that he was hired by Air Afrik to analyze the situation surrounding the payment reversal. Mosoti confirmed that, based on banking standards, a bank should not interfere with the terms agreed upon by its customers. He further clarified that the funds in question were transferred from the Bank of South Sudan to Stanbic Bank, asserting that the bank should have managed the transaction with diligence and transparency.
Insights from the Bank of South Sudan
The Director of Financial Market Departments at the Bank of South Sudan, Chan Andrea Chan, also provided critical testimony. He confirmed that the $7.2 million cheque assigned to Air Afrik was indeed frozen and reversed by Stanbic Bank due to insufficient funds in their account. Chan emphasized that Stanbic Bank failed to make the necessary requests to replenish its nostro account, which ultimately led to the freezing of Air Afrik’s funds.
“It is a standard procedure for any bank to request for replenishing of its nostro account since the bank could be in need of more funds to honor pending external payments,” Chan stated. His insights underscored the responsibilities financial institutions hold in ensuring that they have adequate funds to manage external payments, particularly when dealing with international transactions.
The Aftermath of the Fund Reversal
The repercussions of the bank’s actions have been profound for Air Afrik. The termination of the leasing agreement not only led to direct financial losses but also jeopardized the airline’s reputation and operational capabilities. In the courtroom, Lugalia illustrated the extent of the damage caused by the bank’s actions, detailing how Air Afrik spent considerable time and resources addressing the illegal freezing of its account.
The airline’s lawsuit seeks compensation for the losses incurred due to the contract termination and the ongoing challenges faced as a result of the bank’s actions. The case emphasizes the critical need for banks to operate with transparency and accountability, particularly in handling large transactions that can significantly impact clients’ businesses.
Future Implications for Banking Regulations
As the hearing continues, with the next session set for November 25, the outcome of this case could have far-reaching implications for banking regulations in Kenya. It highlights the need for stricter oversight and accountability mechanisms to protect consumers in the financial sector. Moreover, the case raises questions about how banks manage large international transactions and the communication protocols in place to prevent errors that could lead to severe financial repercussions.
The legal battle between Air Afrik and Stanbic Bank serves as a cautionary tale for businesses operating within the aviation sector and beyond, emphasizing the importance of understanding the banking landscape and the potential risks involved in financial transactions.
Conclusion
As Captain Lugalia and his team await the court’s decision, the aviation industry, financial experts, and regulators will be watching closely. This case not only underscores the complexities involved in banking transactions but also highlights the vital role that financial institutions play in ensuring the stability and success of businesses. For Air Afrik Aviation, the pursuit of justice may pave the way for better practices in the banking sector, ultimately benefiting consumers and fostering trust between banks and their clients.
