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Archive for July 16th, 2011

It seems that yesterday’s costs hearing at the Supreme Court in Dublin marked the conclusion of the Paddy McKillen and NAMA saga. That, and the decision by NAMA, communicated to Paddy yesterday morning, not to acquire €1.4bn of Paddy’s loans.

NAMA is understandably trumpeting its success in having had parts of the NAMA Act tested for compatibility with the Constitution – remember the NAMA legislation was galloped through the Oireachtas in 2009 and signed off by President McAleese without a referral to either her Council of State or the Supreme Court. The NAMA Act is a long document, however and it should be noted that this case dealt with specific sections of the Act. There may well be other attacks on the constitutionality of other parts of the NAMA Act in future. NAMA also claims its operation under EU state aid rules has been approved. And lastly, NAMA has acquired €0.7bn of loans “linked to” Paddy.

Paddy is reported to be “delighted” at the outcome in the sense that he has kept the majority of his loans – apparently €1.4bn at NAMA banks – and his substantial legal costs have been awarded against NAMA. Whilst some costs may need to be finalised, reporting today suggests that NAMA might be bearing €7m of costs for the action, though it is not yet clear if these are just Paddy’s costs or the total of Paddy’s and NAMA’s costs.

The case was closely followed on here, and there is a 15,000-word “Paddy McKillen v NAMA” page dedicated to the background and progress of the case, including the participants, witnesses and Joe Stiglitz’s witness statement. The “Paddy McKillen v NAMA” page is now being moved from the tab at the top of this page but will still be available here.

To summarise the case – Paddy McKillen, one of Ireland’s most successful property developers (he claims “property investor” is more appropriate), was identified as one of the developers whose loans were to be absorbed into NAMA. Paddy is probably most associated with the Maybourne group of luxury hotels in London including Claridges, in Ireland his flagship development is the Jervis Street shopping centre. Paddy objected to NAMA’s plans and took his case toIreland’s High Court where he comprehensively lost in October/November 2010. He then appealed the ruling to Ireland’s Supreme Court where Paddy won in February 2011 on what seemed like narrow points – that NAMA failed to make a proper “legal” decision to acquire Paddy’s loans because the good folks at NAMA decided to acquire Paddy’s loans before NAMA was incorporated without subsequently ratifying the decision after incorporation, and also Paddy was entitled to be consulted before his loans were acquired, even though NAMA had the right to absorb them anyway. NAMA said in February 2011 it would consider whether or not to make a fresh decision to acquire Paddy’s loans. And yesterday, six months later, it communicated its decision to Paddy not to acquire €1.4bn of loans, though it has already acquired €0.7bn of loans “linked to” Paddy.

Final thoughts on here – firstly it seems almost incredible that NAMA failed in this legal case, and failed on such a narrow point : that the decision made by NAMA in December 2009, days before NAMA came into legal being, was not “valid”. We suffer from “Blamegame” fatigue in this country but in this case, there are questions that impinge on competence that need be asked of NAMA and its legal advisers. How could the agency get this so wrong? Specifically how could the agency not know that decisions taken prior to the legal coming into existence of an entity, taken in the name of the entity, need to be ratified in the name of the entity. The cost of NAMA’s failure can be partly measured in the €7m reported costs plus the overwhelming distraction of this case during NAMA’s loan acquisition phase. To balance this, NAMA might say that its legal position was competently assessed, and this is evidenced by the fact NAMA won at the High Court.

Secondly, Ireland is a country where you can lose comprehensively at its High Court; and remember it was a special three judge panel that heard the case at the High Court which comprised President of the High Court, Mr Justice Nicholas Kearns with Mr Justice Peter Kelly and Mr Justice Frank Clarke. And in Ireland, having comprehensively lost at the High Court, you can then “win” three months later at the Supreme Court. Other countries’ courts might also reach different decisions on appeals, but on the narrow question of whether or not a legal entity has made a valid decision, it seems remarkable that two senior courts can reach opposing conclusions and it gives an impression of a shaky legal system.

And lastly, NAMA’s decision to abandon the acquisition of Paddy’s remaining €1.4bn loans is curious. Although, according to NAMA, the loans now have a smaller “land and development” element than previously, there is no intimation that the loans have lost their NAMA eligibility. So NAMA is walking away from €1.4bn of what are understood to be performing loans secured on good-quality assets. Let’s remind ourselves that NAMA was supposed to take over a certain class of loans, good or bad or toxic and was entitled to apply discounts to the loans when valuing them. The view on here is that NAMA is walking away from profitable loans that might have yielded the agency profits over €100m, comprising the interest margin it would earn on the loans plus the discount applied on acquiring the loans. For an agency charged with maximizing the return to the taxpayer, it seems a curious decision. Though no doubt the agency will be formally challenged on its decision, for example, the next time it appears before an Oireachtas committee.

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