Time to play the strong card we still hold

The EU needs this deal as much as Ireland, for if an Irish bank goes down, it endangers banks around Europe

A CHAP called Chandler rented a room from another chap called Webster in 1901. The agreed fee was £140, payable up front. Chandler paid £100 and owed Webster the balance. Chandler wanted to view the coronation procession of Edward VII, the heir to Queen Victoria, and his wife Alexandra on June 26th of that year.

But on June 24th, Edward got appendicitis and the coronation had to be deferred. Chandler wanted his money back on the grounds that the contract he had entered into with Webster had been frustrated by the supervening event of the cancellation of the coronation procession.

Chandler not alone did not get his money back but he was required by the courts of England to pay the outstanding £40 on the grounds that the frustration operated not from the beginning of the contract but from the entry of the supervening event.

Brian Lenihan may have been reading about Chandler and Webster over the weekend as he tried to untangle himself from his expressed helplessness in the face of AIB paying out €40 million in bonuses right at the time when the State was coming in to rescue the bank from insolvency.

It is not at all clear that Lenihan is right, however, in claiming that the contract with the AIB staff was frustrated by a supervening event, namely the requirement of a State bailout. But there is another issue here. At the time that AIB agreed to pay the €40 million bonuses, the management and board of AIB were fully aware that the bank could not survive without a State rescue. In other words the bank was insolvent – ie unable to pay its debts as they fell due. In circumstances of insolvency, all the assets of a company become owed to the company’s creditors.

And payments to the company’s creditors, which in this instance may have included the staff, can be made only after the legally preferred creditors, such as the Revenue Commissioners, are paid and then the remaining creditors can be paid only on a proportional basis. Any preference shown to any of these remaining creditors is illegal, and not just illegal, it is a crime, the crime of fraudulent preference.

The circumstances in which this €40 million bonus was agreed are notclear but there are grounds for an apprehension that all was not well with this arrangement. I am not stating that anything illegal occurred, but I am saying there are reasons for this matter to be inquired into by the Garda Síochána and Director of Corporate Enforcement.

But there is a more significant point to emerge from this. Lenihan said in his letter to the board of AIB on Monday evening: “the provision of further State funding to AIB will be conditional, inter alia, on the non-payment of any bonuses, no matter when they may have been earned”.

This warning is in clear breach of the terms of the “EU-IMF Programme of Financial Support for Ireland”. Page after page of this agreement outlines in detail the support the Irish State will give to the banks, in consultation with the IMF and EU and supported by financial support from the EU and IMF.

If Lenihan was prepared to break the agreement with the IMF and EU over a relatively trivial matter – trivial in financial terms, for €40 million is trivial in the context of a bank rescue of 2000 times greater – what are the grounds for the Government arguing that today’s vote on the EU-IMF deal must be passed in the national interest? If the deal could be broken over €40 million, why then not over €80 billion?

Why should the deal not be broken over the straitjacket it imposes on an incoming government, over the priorities it accords social objectives, over the destructive effects on the economy of the scale of deflation and the intolerable burden of debt repayments?

There is every reason for the Dáil to vote against this EU-IMF deal and very little to lose, other than irritation and annoyance at finance ministers meetings and perhaps a scolding from the affable Olli Rehn, plus another visit from Ajai Chopra.

The fact is that the EU needs this deal as much as Ireland, for if an Irish bank goes down, it endangers banks around Europe. We have a card to play now and we should play it. Europe encouraged us into this disastrous bank rescue and now that we find we can’t pay, Europe has to bear the burden or at least share it.

Incidentally, in that letter to AIB there is a little sting in the tail.

Lenihan wrote: “Nothing in this letter is intended to prevent the bank meeting its obligations on foot of a court order already obtained”. Does that not vitiate what went before? Isn’t the point that a court has found in favour of the staff demanding the payment of the bonus and if nothing in the letter was intended to prevent compliance with the court order, then what was the point of the letter other than a bit of grandstanding?