The marathon Paddy McKillen versus the Barclay brothers court case in London’s High Court was in its 15th day today as two NAMA executives took to the witness stand. You’ll find background to the case here and here and here. This blogpost details what we learned today.
It should be said that this court case is really between Paddy McKillen and the billionaire Barclay twins, David and Frederick and about the struggle for control of three luxurious Londonhotels. NAMA is involved because NAMA controlled loans to the hotel group and last September 2011 sold the loans to a company controlled by the Barclays, and the expectation is that the Barclays will be able to foreclose on the loans and get control of the hotel group and elbow Paddy out. Paddy is not happy with getting the elbow and naturally enough wants to maximise his investment in the hotels which he doesn’t think he can do with the Barclays calling the shots.
So NAMA’s involvement is peripheral to the case really, and it centres on whether or not NAMA followed the correct procedures in selling the loans to the Barclays last September 2011. Despite being peripheral however, if Paddy is successful on his points in relation to NAMA, then NAMA may have to reverse its single biggest disposal and may have to pay damages to Paddy.
So, today in Court 26 of the Royal Courts of Justice, two NAMA executives Paul Hennigan who is a portfolio manager at NAMA, and his boss, John (Francis!) Mulcahy who is the Head of Asset Management and is also a director on the NAMA board, were both giving evidence on their dealings with the loans to Coroin, the company that ultimately owns the three 5-star hotels in central London – Claridges, the Connacht and the Berkeley.
First up was the baby-faced 40-ish Dub Paul. Here’s what we learned:
(1) NAMA believed Derek Quinlan – a shareholder in Coroin, and who has now sided with the Barclay brothers – was promoting his interests ahead of his creditors. NAMA learned that in the case of the sale of one property, known as The Glebe in Chelsea, that Derek Quinlan had sought a secret bonus or promoter’s fee from the other investors who had originally bought the property with him. The fees were never paid and NAMA removed Derek from the sale process for that property. The property was sold in July 2011, and NAMA pocketed all of Derek’s proceeds.
(2) Derek Quinlan was selling the car park – see blogpost with photos here – in South Audley Street and eventually a sale was going ahead with mobile telephone magnate John Caudwell for GBP 143m (€174m) but at the last minute Derek Quinlan introduced a new buyer, named as a consortium which called itself Supandia which was offering GBP 150m but with a delayed completion date. NAMA became suspicious about this buyer and seemingly though Derek Quinlan might have been a beneficiary of any sale. NAMA then threatened Derek that unless he agreed the sale at the lower price to John Caudwell that NAMA would not sell the Coroin loans to Derek’s allies, the Barclays. NAMA’s evidence today was that it was certain that Derek would comply with their demands, and NAMA didn’t even consider the scenario where Derek might cock a snoop and tell NAMA where to go on the Audley Square car-park sale to John Caudwell. NAMA described the threat to Derek as “appropriate pressure”
(3) NAMA was up close and personal in its dealings with Derek. Its communication shows the Agency to be at the very least robust in Derek’s case and perhaps also confrontational. In January 2011, the Agency warned him in an email to “think long and hard” about his promoting the Barclays offer ahead of better offers, and the Agency made him aware that it was sensitive to mechanisms which would seek to protect Derek’s and his family’s “lavish lifestyle”. It seems that there might have been an offer for GBP 1.04bn floating around for the Coroin group but Derek seems more focussed on promoting the GBP 0.9bn being offered by the Barclays.
(4) NAMA knew that Derek had expensive tastes, that he was moving from Switzerland to London, that he had a large family with children in boarding school. NAMA learned of the monies given by the Barclays to the Quinlans – a total of GBP 740,000 and that Derek was driving a spanking new Range Rover, all seemingly courtesy of the Barclays. NAMA didn’t think it “appropriate” to ask the Barclays what support they were giving to Derek Quinlan.
(5) NAMA receives a lot of information and tip-offs seemingly. Paul was asked if he could divulge his sources today, and he replied that he could but that he didn’t want to. Apparently the sources will be provided in confidence to Paddy McKillen’s legal team.
(6) NAMA concluded in February 2011 that the shareholders of Coroin, the Barclays, Derek Quinlan and Paddy McKillen were “dysfunctional” and no matter how long NAMA’s loans to the group were extended, there would be no substantial repayment until the shareholders agreed on strategies.
(7) NAMA’s affidavits in the Paddy McKillen case in Dublin – that’s the Dellway versus NAMA case in 2010 that went to the Supreme Court where Paddy substantially won – might come back to bite them on the bum. Aideen O’Reilly, NAMA’s head of tax and legal said in her affidavit that NAMA took the place of a bank once it took over loans, and acted as a bank until those loans fell due. NAMA was challenged on this today, but asserted that it did indeed act like a normal bank. It may find itself exposed on this in future court cases.
(8) Unbelievably, it seems that NAMA had not received a business plan or statement of affairs from Derek Quinlan.
Overall Paul Hanningan came across as a sympathetic, competent and best of all, credible witness who wanted to assist the court. Most of his responses were “that is correct”, “of course”, “that is absolutely the case”. There was one “I can’t recall” but it seemed natural in the context of the question he was asked. He corrected Paddy’s barrister on several occasions and was able to think on his feet and deal with what is a fairly intimidating experience. He deserves a pat on the back from his colleagues.
Paul was on the stand for over three hours and then John Mulcahy took his turn and was there for about 30 minutes, which was a shame really, because John was very talkative and gave us a few laughs. Here’s what we learned
(1) In August 2011, John had an exchange with Paddy McKillen in which John congratulated Paddy for the recent strong performance of the Coroin group. When asked by Paddy’s barrister if this meant NAMA had confidence in Paddy’s abilities, John floored us all by saying “no, I was just having a dig at him” because Paddy had previously claimed that having Coroin’s loans in NAMA would damage the trading prospects of the hotel group, and apparently even cited Floridians who wouldn’t have Bar Mitzvehs in the hotels because of the NAMA association. “Bonkers” thought John, so this message in August to Paddy was what John called a Beckettesque dig at what Paddy had previously claimed. Barristers are generally expected to only ask you questions to which they already know the answer, but I’m willing to bet this wasn’t the case here!
(2) On the day that the Coroin loans were sold to the Barclays, NAMA informed Coroin’s director Mark Faber – who was in the Barclays’ camp at 10.30am (elsewhere 11.30am) – and it was only at 1.03pm (13.03 on the 24-hour clock) that NAMA notified the Coroin company secretary, Carol Walker, and said if there was any response, it should be delivered by 2pm. That’s where Paddy McKillen gets his 57 minutes notice. At 2.06pm NAMA was sending its bank details to the Barclays so that it could get paid later that day.
(3) John seems to interpret “consultation” as “giving notice” and as far as he was legally advised, NAMA had adequately consulted with Coroin last September before the loans were sold. Until a sale of loans is 90-95% certain, John doesn’t think you need consult. NAMA communicates with debtors when it is legally obliged to, or commercially in NAMA’s interests.
(4) NAMA typically offers three-month extensions on overdue loans, but said that if it was approached with a commercially sound reason for a longer extension, it would favourably look on that approach. So if you’re a developer who wants to refinance, but think that a three-month loan facility from NAMA is deterring potential investors who might be suspicious of short term funding, then NAMA will consider a longer extension, if it makes commercial sense for the Agency.
(5) John is adamant that the maximum NAMA could have recovered on the Coroin loans was GBP 660m, their par value. There was no discussion about whether the loans had a premium value to a special purchaser like the Barclays who would use the loans as a bridge to taking control of the Coroin grouop.
John was a nightmare witness for NAMA’s legal representatives – in this case Robin Dicker, the barrister representing NAMA – in the sense that he was very expansive in his replies. Luckily for NAMA, he knows his stuff inside out and seemed like a duck in water during a downpour on the witness stand.
The gossip
NAMA is seemingly not paying bonuses for 2011, certainly not to any portfolio manager. and the staff were notified of this in February 2012, though this situation was informally known in the Agency during 2011 because of “the state of the Irish economy”
At least Brian O’Connell from RTE turned up to cover the case today. What he does with the rest of his time is unclear – maybe he’s taking elocution lessons so that he doesn’t get beaten up when the London office is closed in September and he has to return to Dublin.
Paddy McKillen’s barrister, Philip Marshall QC seemed to be fishing for material from NAMA to potentially use in another case that he might take against the Agency. The judge, Mr Justice David Richards intervened to get a line of questioning wrapped up and in response to an intervention by NAMA’s barrister seemed to believe the questioning could be in preparation of yet another legal case.
Less gossip, more advice, if NAMA is fielding more people to take to witness stands in court cases, they might limit their water intake so they don’t need ask to take a toilet break, as poor Paul had to today. Sucking wine gums for an hour or so, before giving evidence is a good way of lubricating the throat, so you don’t feel the urge to down yet more fluids, and then sit there distracted with a full bladder when questions are put to you. Newbies might also find themselves grappling with what the French call “esprit de l’escalier” – remembering things they should have said – which can keep them awake at night but from this perspective both did perfectly well today.
The bottom line
As impressive as NAMA was on the witness stand today, the view on here is that the Agency faces a challenge in winning this case. It will be next week when Paddy McKillen’s side delivers its legal arguments – NAMA seems to be in a weak position in showing that it fulfilled its loan agreement term to “consult” with Coroin and there will also be argument about whether the loan agreement allowed the loans to be sold to the Barclays’ company which is not another lender but a special purpose vehicle, apparently set up to deal with this one transaction. If NAMA fails to convince the court that it did consult or that the Barclays’ company was one allowed under the loan agreement as a company to which loans could be sold, then NAMA may have to reverse this transaction and may be exposed to substantial damages payable to Paddy McKillen.
NAMA Wine Lake 
Reblogged this on emigratesafe.com.
@NWL,
Thank you for the report and colour. Interesting outcome awaited….
A1 coverage. “no, I was just having a dig at him”, priceless.
Excellent In Depth Coverage
@NWL
Will NAMA automatically recover its costs in this case?
And if Paddy McKillen loses will the loss impact his ability to discharge any outstanding loans to NAMA (if he has any) or to other State owned banks (if he has any)?
@Joseph,
“Will NAMA automatically recover its costs in this case?”
Good God, no! This is going to be a reasonably expensive case and it comes on the back of three pre-hearings on preliminary points, so NAMA is running up a tasty legal bill on its own account. The usual rule in court cases is that costs are awarded to the winner, though there can be mitigations.
From where I’m sitting, and as set out in “the bottom line” above, NAMA is exposed on this case, because it has a pretty shallow interpretation of what constitutes a consultation which is what the loan agreement with Coroin demanded before the loans were sold, and the other strand to Paddy’s case, that the Barclay brothers’ vehicle for buying the loans, Maybourne Finance Limited, was not a suitable company as specified in loan agreement with Coroin in that it is not a general provider of finance and is indeed just a special purpose vehicle.
So no, NAMA is exposed to its own costs PLUS Paddy’s costs PLUS damages.
“And if Paddy McKillen loses will the loss impact his ability to discharge any outstanding loans to NAMA (if he has any) or to other State owned banks (if he has any)?”
That should follow, if Paddy loses he faces an humongous legal bill which would eat into his personal wealth and that could indeed potentially impact on his ability to discharge other loans.
So par debt is GBP 660m and previously we know that NAMA acquired this at “a discount” of undisclosed amount. (Given that the hotels I am sure service their loans and the loans were subsequently sold at par then this acquisition discount is -and should be – a scandal for bank shareholders who were ripped off. Let’s assume a 10% discount. Which is GBP£ 66m. When all the translation is done selling at 800m euro will give you a profit of 100m euro if you bought at 10% discount.
A thought occurs – is this the source of some of NAMA’s surprisingly large Q4 2011 results? September is a stones throw from Q4. Could the profit have been booked as exit fees or transfer fees or equivalent so as to make it appear not as profit but more of “interest”?
Also didn’t one of the judges in the Irish McKillen judgment in one of the courts roundly criticise how NAMA dealt in communicating with Paddy, saying that he expected more from an arm of government? And here we see Nama Directors talking about ‘giving him a dig’? And saying they will communicate with him if they are legally obliged to do so or it’s in their interests? Think about the logical corollary of that. Is the way that these things work down there?
@Capoliman, The stated attitude certainly doesn’t fit with Aideen O’Reilly’s assertion that NAMA acted as a “normal” bank. Unquestionably, NAMA has a fiduciary relationship whereby it is expected to act in good faith. There is not much “good faith” perceived in its actions as they unveil in the High Court.
P.S. Your point in relation to the effect on NAMA’s accounts if it loses here is well made. I’m sure that it has already booked the profits. I did read NAMA’s acquisition price somewhere, but can’t put my finger on it just now. Will get back on it later.
@WSTT, no I think you’re mistaken about the Maybourne loans. We did get what sounded like credible info on Treasury Holdings loans, but I’ve never seen an acquisition price for the Maybourne loans. NAMA said it made a profit when it sold the loans to the Barclays last September 2011 but we don’t know how much (or at least I have never come across a figure)
One of your links above goes to an RTE report at the time of the sale (presumably leaked by NAMA) saying that a profit was made and that the loans were originally purchased at a discount. As regards all the adjustments for enforcement costs etc that were deducted from all loans I suspect the discount was min 5%. There is even headroom in 800 million euro at an FX rate of say mid 80s to generate a few million of profit. I suspect that min 100 million euro is booked on this.
@Capoliman, you might be right but NAMA did acquire some loans without any discount whatsoever, and not just loans advanced after April 2009 when there was a special concession to banks.
The second point under Paul’s testimony yesterday has been amended to make it clearer and this was possibly the most explosive revelation for developers – NAMA threatened a developer that if he didn’t sell a property to a purchaser who was offering less for the property than the highest bidder, then NAMA would scupper a sale of other property – the €800m loans – to recover what NAMA thought was the maximum that could be recovered on those loans. That’s pretty amazing really.
In fairness to NAMA, it thought there was something fishy about the highest offer for the Audley Square carpark, and it was 100% confident that Derek Quinlan would comply with NAMA’s wishes and sell the carpark to the lower offer bidder. But if, IF, Derek Quinlan cocked a snoop and said “No, NAMA I will not sell the carpark for GBP 143m when there is a competing offer for GBP 150m”, would NAMA have jeopardised the sale of the Maybourne loans for €800m, the par? Either NAMA is very knowledgeable about the behaviour of Derek Quinlan or it was acting recklessly. Actually I had the impression it was the former, but if it’s the latter then we should be very concerned.