The Act was signed into law in the early hours of 7 February. The Act allowed for the immediate liquidation of IBRC (formerly Anglo Irish Bank and Irish Nationwide Building Society) by the appointment of joint Special Liquidators (“SL”). The SL’s have full custody and power over all the assets and undertakings of IBRC, and the power to carry on its business so far as may be necessary for the liquidation.
The winding up of IBRC will be similar to any official liquidation. The SL’s job is to gather in the assets and pay the creditors according to law. That means the liquidator will continue to maximise recoveries from all assets of IBRC and then will pay creditors in the following way: (i) preferential creditors as identified in the Companies Acts, (ii) the holder of the floating charge, currently the Central Bank of Ireland and (iii) unsecured creditors. Unsecured creditors will include deposit holders, bond holders and trade creditors. However, deposit holders and some bond holders have the benefit of guarantee schemes namely, the Deposit Guarantee Scheme and the Eligible Liabilities Guarantee Scheme and they can claim against the State pursuant to those schemes if they qualify. There are no special arrangements for trade creditors.
The SL will attempt to secure the maximum price for each asset upon disposal. In disposing the assets, it will be necessary for the SL to appoint persons to carry out independent valuations of each IBRC asset. The assets will be offered for sale and in the event that a third party makes an offer that is at or above the valuation, the assets will be sold to the highest bidder. If no bid matches the independent valuation, the assets will be sold to NAMA at their valuation price.
The Special Liquidation Order constitutes notice to each employee of IBRC of the termination of his/her employment with immediate effect. The SL can retain persons on such terms as they see fit where required. The Minister has indicated that the majority of employees are likely to be re-employed by the SL, for some time at least.
There is effectively no impact on those who have obligations to IBRC. IBRC (In liquidation) will continue to be entitled to enforce borrowers’ obligations. When IBRC sells its loans and associated security to NAMA or others, those purchasers will equally be able to enforce borrowers’ obligations.
The Practical Implications of the Act
As a result of the Act, Ireland has renegotiated the terms of its debt with the European Central Bank (“ECB”). The promissory note, an obligation created by the Irish State in favour of IBRC, was a unilateral promise by the State to pay IBRC the sum of €30.6bn plus interest, in installments between March 2011 and March 2031.
Accordingly, IBRC borrowed money on an emergency basis from the Central Bank of Ireland in order to repay depositors and bondholders, under a scheme known as Exceptional Liquidity Assistance (“ELA”). These ELA advances addressed the liquidity issues faced by IBRC but did not address its capital adequacy. Therefore, in order to address this, the State issued a promissory note to IBRC. The State used a promissory note because the State could not borrow the funds at reasonable rates in the market. The Central Bank created money, which money was then advanced to IBRC as part of its ELA programme. The Central Bank was accountable to ECB for the monies created.
Section 17 of the Act gave the Minister for Finance power to redeem and cancel any of the Minister’s obligations to the Central Bank of Ireland (i.e. the promissory note) in return for the issue of securities at an interest rate and with such conditions regarding repayment as the Minister sees fit. The promissory note payments are gone and have been replaced with long-term government bonds. The first principal payment on these bonds will be made in 25 years time, 2038, with the final payment being made in 2053. The average maturity of these bonds will be over 34 years rather than the 7 – 8 years on a promissory note. The average interest rate on these bonds will be 3 per cent, compared to 8 per cent on the promissory notes.
Is it a good deal?
On the face of it, the deal looks like a good one for the Irish taxpayer. The Government has negotiated with the ECB to provide this State with what is technically called “monetary financing” but in common language, the ECB is allowing Ireland to print money, or at least to print bonds which can be exchanged at the ECB for cash loans for up to 15 years which carry a rock-bottom rate of interest, presently 0.75%.
There are however, potentially negative Implications of deal for tax payer, as the liquidation of IBRC could end up costing the taxpayer billions of euro. The appointment of the SL could depress the value of its €15bn loan book and warned that a speedy sale could see billions of euro in loans sold off at a heavy discount. The implications for the taxpayer of such a sale by the SL could see the €1bn in short-term savings secured by the Government’s successful negotiation of a deal with the ECB on the €30bn promissory notes wiped out.
There could also be potential anger from the taxpayer, if any of the high-profile legal actions being pursued by the IBRC flounder as a consequence of the liquidation. These include IBRC’s case against the Quinn family, former Irish Nationwide chief executive Michael Fingleton and former Anglo Irish Bank CEO David Drumm through the courts in the US.
On a positive note, Standard & Poor’s has upgraded its outlook on the Irish economy from ‘negative’ to ‘stable’ following last week’s promissory note deal. The ratings agency said the exchange of promissory notes for long-date government bonds should reduce the government’s debt-servicing costs and lower the refinancing risk to the country. It also stated that the deal increases the likelihood of Ireland’s full return to the bond market by the end of the year, marking an exit from the EU-IMF bailout programme. That can only be considered a positive sign.
Solicitor Lavelle Coleman