The legal challenge by businessman Paddy McKillen and several of his companies to the proposed transfer of €80 million in "non-impaired" loans to the National Assets Management Agency (Nama) presents a "very real threat" to the "vital work" of Nama and must be urgently decided, the State has argued before the Commercial Court.
Mr Justice Peter Kelly today granted the State’s application to have the case fast-tracked by the Commercial Court and fixed October 12th next for the hearing, expected to last four days.
Mr McKillen and 15 of his companies claim their €80 million loans from Bank of Ireland are "fully performing" and their transfer to Nama would have a "drastic and significantly detrimental" impact on their business and property rights.
They dispute the loans are "eligible bank assets" under the Nama legislation and have challenged the constitutionality of sections of the Nama Act 2009. Mr McKillen has also expressed "grave concern" about the impact on his reputation internationally of transfer of the loans to the "toxic bank", the implications for his ability to raise additional facilities and the valuations placed on the loans by Nama.
His companies had not purchased any Irish assets since 1998 "and hence have not engaged in speculative development", he said.
The State contends the Nama Act 2009 expressly provides for Nama to take non-impaired loans and says the fact Nama would do so was "explicitly recognised" by the European Commission in endorsing the agency.
Provision for such loans is necessary to enable Nama to achieve its purpose and any perception the Nama system was flawed "would undermine the building of confidence within international financial markets which the ongoing work of Nama seeks to foster", it also argues.
The case is the first legal challenge to the Nama legislation and is of "enormous economic significance", the Chief State Solicitor, David J. O Hagan, said in his certificate today seeking transfer to the Commercial Court, the big business division of the High Court.
Michael Cush SC, for Mr McKillen, agreed the case was urgent and consented to transfer. The case was not "a full-frontal attack" on Nama but very important from his clients’ perspective and would involve a lot of expert evidence, counsel said.
Mr Justice Kelly directed Mr McKillen’s application for leave to bring the judicial review proceedings will be heard in tandem with the substantive judicial review in a "telescoped hearing". Under the Nama Act, an applicant for leave for judicial review of its procedures has to establish "substantial grounds" for leave to be granted.
Urging a speedy hearing, Brian Murray SC, for the State, said if the court upheld the claims Nama’s definition of "eligible assets" was flawed, that would have "very significant implications" for NAMA’s operation.
The judge asked whether the case would be influenced by a continuing review regarding whether Mr McKillen’s loans with Anglo Irish Bank should be transferred to Nama. Mr Cush said his clients were not part of that review and this case related only to their loans with Bank of Ireland.
Mr Murray said the review of the Anglo loans does not relate to the issues of principle in the action. If the review impacted on the issues in the case, the court would immediately be informed.
In an affidavit on behalf of the Minister for Finance, Brian Lenihan, Ann Nolan, Assistant Secretary in the Department of Finance, said the performance by Nama of its functions, as provided for in the 2009 Act establishing it, "is vital to the viability of the financial system of the State and the wider economy".
When announcing the establishment of Nama, the Minister said its purpose was to ensure a sustained flow of credit on a commercial basis to individuals, households and businesses "in the real economy". The Minister said it was clear the principal uncertainties in relation to asset quality in the Irish financial system lay in the land and development loans of credit institutions and the largest aggregate associated exposures in credit institutions.
Those assets posed "the main systemic risk" to the financial sector in Ireland and the most significant obstacle to the recovery and restoration of lending by the financial system. It was proposed those assets would be transferred to Nama and that was why Nama was established.
Nama forces banks to realise their losses while also providing a mechanism for survival through the provision of Nama securities as reserve liquidity, she said. It was vital Nama decides what assets to require as otherwise banks could pick and choose assets (in conjunction with borrowers) and become "semi-zombie" banks.
Nama needed to be the decision maker for the purchase of eligible assets, Ms Nolan said. That was made clear from the outset to the banks and was "the only basis" on which they got State aid.
The bank assets prescribed as eligible for acquisition by Nama consisted of all the loans from the riskiest part of the bank’s portfolios, namely land and development loans and certain associated loans, whether impaired or not, she said. The Act expressly provided for the taking of those loans by Nama and the fact Nama would do so was explicitly recognised by the European Commission.
Any perception from legal proceedings such as these that the Nama system is flawed and may falter would undermine the building of confidence within international financial markets which the ongoing work of Nama
seeks to foster, Ms Nolan added.
The proceedings are by Dellway Investments, 14 other companies and Mr McKillen against Nama and the State.The companies also have loans with Anglo and Irish Nationwide Building Society but the action relates to the BoI facilities. Mr McKillen says he is reserving his rights relating to those other facilities.
Mr McKillen wants declarations the procedures and processes adopted by Nama are lacking in natural and constitutional justice and deny his companies the opportunity to argue their loans are not "eligible bank assets" within the meaning of the Nama Act. The proposed loans transfer breaches their property rights under the Constitution and European Convention on Human Rights, it is also claimed.
