Siteserv co-founder Niall McFadden set out a “story” scenario and a “reality” scenario in a scheme to ensure a €350,000 bonus paid to the company’s chief executive was not declared to the Revenue, a High Court judge has found.
Mr Justice Brian Cregan’s lengthy report on the sale a decade ago of Siteserv to businessman Denis O’Brien was published this week, concluding the deal was not commercially sound from the perspective of the State-owned Irish Bank Resolution Corporation (IBRC), Siteserv’s main creditor. The sale proved contentious because IBRC wrote off €118 million from Siteserv’s debt in the deal, with taxpayers bearing the cost.
Mr McFadden met Mr O’Brien’s adviser, Dermot Hayes, on the afternoon of March 15th, 2012, 30 minutes before IBRC cleared the sale to Mr O’Brien and 2½ hours before Siteserv approved it.
They were to finalise management incentive plan proposals under which Mr McFadden and chief executive Brian Harvey took a significant shareholding in the O’Brien company that bought out Siteserv.
The 1,500-page report said Mr McFadden sent three separate emails to Mr Hayes during that meeting from his private gmail account, with “doonloughin” in the address.
“One of these emails had as an attachment a memorandum setting out two scenarios prepared by Mr McFadden – one called ‘Story’ and the other called ‘Reality’,” the report said.
“In the light of what subsequently transpired, this ‘story/reality’ memorandum is a remarkable document. In effect, Mr McFadden is explicitly setting out in this document what appears to be two different versions of the same events, one of which appears to be a ‘story’ to be told to various parties, and the other of which was the ‘reality’ of the situation.”
One purpose was to set out money available to Mr Harvey from a Siteserv bonus he expected and also the proceeds of Siteserv shares. The other was to set out money he needed to repay his €1.7 million IBRC debt and buy shares in the O’Brien company that was acquiring Siteserv.
“The memorandum states that Mr Harvey would receive a bonus from Siteserv of €300,000. This was to be, according to the memorandum, both the ‘story’ and the ‘reality’.” [Although Mr McFadden knew Mr Harvey expected to receive a €300,000 bonus, the bonus came to €350,000.]
“Mr McFadden then suggests as part of the ‘story’ that Mr Harvey would pay income tax and PRSI on his bonus at 55 per cent, which would come to €165,000, meaning that he would only receive €135,000 from his bonus after tax,” the judge said.
“The ‘reality’, however, according to Mr McFadden, was that Mr Harvey would purportedly ‘waive’ his bonus and therefore not pay tax on it, and as a result he would in ‘reality’ still receive €300,000 for his bonus.”
The report said Mr McFadden wrote the word “waive” in the document, which the judge described as “the fiction” that Mr Harvey would purportedly waive his bonus from Siteserv and therefore never pay tax on it. Still, the judge found that Mr Harvey never waived his bonus.
“Instead what happened was that Mr Harvey [through Mr McFadden] agreed with Mr Hayes that, at the completion of the transaction, Mr O’Brien’s new company would agree to take over from Siteserv the obligation to pay Mr Harvey’s bonus and, in return, Siteserv would leave a sum of money with the Siteserv subsidiaries being acquired by [the new company] to enable [the new company] to pay this bonus to Mr Harvey.”
After Mr Harvey was awarded the €350,000 bonus, Mr O’Brien’s company Cathkin Holdings then paid that bonus by giving Mr Harvey Cathkin shares worth €360,000. That was known as a bonus barter, Mr Harvey exchanging or bartering the bonus for shares. “No tax was ever paid on this bonus or on this grant of shares,” the report said.
Elsewhere in the report, the judge said: “It is clear from the ‘story/reality’ document that was sent by Mr McFadden to Mr Hayes... that Mr McFadden constructed a scheme that was designed, from start to finish, not to disclose Mr Harvey’s bonus to the Revenue Commissioners at any time.”