Victory over Nama may prove Pyrrhic

The Supreme Court has given Nama a rap on the knuckles but other issues were kicked to touch

IT IS hard to see how Paddy McKillen’s win over the National Asset Management Agency in the Supreme Court will affect the wider workings of the agency given his victory is quite narrow and his legal challenge was unique.

The court has ruled on a key issue specific to McKillen’s case but not on the broader contentious issues that could affect the agency.

The seven-judge Supreme Court overturned an earlier ruling of a three-judge High Court that Nama had acted legally, saying that Nama’s decision to acquire the businessman’s property loans had “no legal effect” as it was made before the agency came into force under law.

The decision to take over McKillen’s €2.1 billion in loans was made on December 11th and 14th, 2009, by an interim Nama team but before December 21st, 2009, when Nama came into force legally.

It emerged on the first day of McKillen’s High Court challenge against Nama that the only record of its decision to take over his loans was a spreadsheet with the agency adding the word “disagree” to the banks’ view that his loans were not eligible for Nama.

The Supreme Court found that the decision was given no legal effect by any subsequent Act or by Nama after December 21st, 2009.

Nama had argued the decision to acquire his loans was implied by the agency’s later actions but the court said the agency had to follow the rules by the book.

“A decision to acquire assets is an essential step in the statutory process,” the court concluded.

The court rapped Nama on the knuckles for this failure, saying this was “fundamental to the functioning of a statutory body”.

The agency was quick to point out that the ruling related specifically to McKillen and “does not have implications for other acquisitions now completed by Nama”.

Nama chairman Frank Daly said the ruling was “a disappointment” but Nama aimed “to work as efficiently and objectively and fairly as possible in order to deal with the onerous responsibilities that were entrusted to us”.

The agency has acquired €71 billion in loans so far from five participating banks so it must be relieved the Supreme Court has not, as yet, ruled on three of McKillen’s five grounds of appeal which would have more serious ramifications for the State agency.

On one of the grounds of appeal, the court ruled that Nama did not breach EU state aid rules.

This effectively approves Nama’s legal right to acquire the loans of both impaired and unimpaired borrowers. (McKillen had claimed he was meeting his loan obligations and that they should not be acquired as a result.)

The court has kicked to touch three broader matters – whether Nama is constitutional, whether it failed to take into account relevant considerations when acquiring his bank loans and whether the agency followed fair procedures.

The court put the case back to next Wednesday when it invited the views from both sides on whether these other issues “can now be considered a justiciable controversy between the parties at this stage”. In other words, it is asking whether this is a matter now that is capable of being settled by law or the court given that the court has already ruled in favour of McKillen on the legality of his bank loans being acquired.

The effect of the court’s decision is to avoid ruling on the most controversial aspects of the case – whether Nama is at a broader level constitutional or not – while still ruling in favour of McKillen.

This avoids opening the wider debate on the operation of Nama which could undermine the agency and the crucial if controversial tool in the Government kit to repair the Irish banks.

In theory, other developers could – following this decision – challenge the acquisition of their loans if they could prove that Nama decided to acquire their loans before December 21st, 2009.

For many of the most indebted borrowers whose loans are now in Nama, the timing of the decision may mean they have a case. Nama started working on the biggest borrower loans soon after the setting up of the agency was unveiled in the April 2009 emergency budget.

In practice, for most borrowers’ loan acquisition schedules were served on the banks sanctioning the transfer of their loans so it could be very difficult to argue the same case as McKillen.

McKillen was alone in launching a legal challenge against Nama and in not having a loans acquisition schedule served in relation to his borrowings, as his proceedings stopped this process.

Frank Daly said Nama would now “study the ruling carefully over the coming days and reflect on the options ahead”.

One option would be for both sides to agree to walk away.

In that scenario, McKillen would stop the transfer of his bank loans to Nama – his sole aim in taking his action – and the agency could avoid opening up the most contentious issues relating to its operations that could expose it to legal cases from other developers.

The downside for Nama is that, on top of having to cover McKillen’s substantial legal costs – estimated at about €1 million – the agency would lose a borrower which it had claimed constituted “a systemic risk” given that his loans amounted to €2.1 billion.

Or Nama could start the process of acquiring McKillen’s loans again, following procedures by the book this time and getting the Nama board to sign off on the acquisition of his loans. Yesterday’s ruling could well amount to an empty victory for McKillen.

If the agency pursues this option, McKillen could then seek a Supreme Court ruling on the other matters, which could open the floodgates to other legal challenges. The 850 borrowers whose loans have been transferred – and the thousands more whose loans of less than €20 million have yet to move – are likely to watch Wednesday’s hearing with interest.