Vol 8 (2011) - Issue 5

Article preview

NAMA Survives First Legal Challenge: What Impact for Future Challenges?

Introduction

The first legal challenge in Ireland to the operations of the National Asset Management Agency (NAMA), (an agency set up to deal with the fall-out from the Irish property and economic crisis) was recently decided in the Irish Supreme Court.

Ireland experienced an unprecedented level of property growth between 2004 and 2007 which led to significant lending by financial institutions to meet the demand. The collapse of the property market in 2008 led to a banking crisis, as the market value of properties fell rapidly during the course of that year leaving financial institutions facing massive losses on their loan books as well as a funding crisis.

In September 2008, the Irish Government responded to the crisis by enacting the Credit Institutions (Financial Support) Act, 2008, which provided the statutory basis for the State to enter into a scheme to guarantee the liabilities of the banks. A review of the loan books of the institutions covered by the scheme took place and following this, it became apparent that recapitalisation of some institutions was required. Following this recapitalisation, the Government announced that an asset management agency would be set up to, inter alia, acquire impaired property and associated loans from the institutions covered under the guarantee scheme in order to remove any uncertainty about those assets. NAMA was subsequently established under the National Asset Management Agency Act, 2009 (the Act) to carry out this function.

The Minister for Finance when announcing the establishment of NAMA stated that 'because it is clear that the principal uncertainties in relation to asset quality in the Irish banking system lies in the bank’s land and development loans and in the largest aggregate associated exposures in the banks, it is these categories of loans that will be transferred to the Agency. These assets pose the main systemic risk to the banking sector in Ireland and the most significant obstacle to the recovery and restoration of lending by the banking system.' In the same statement the Minister indicated that the potential maximum book value of the loans to be transferred to NAMA was estimated to be in the region of EUR80 to EUR 90 billion. Following the establishment of NAMA a lengthy due diligence process was undertaken by each of the participating banks which as at 19 May 2011 has culminated in the transfer to NAMA of property loans of circa 850 debtors with nominal balances totalling EUR 72.3 billion.4 NAMA has paid a sum of EUR 2.1 billion for those loans. In light of the level of debt transferred to NAMA a successful challenge to it would potentially have had a catastrophic impact not only on the survival of the agency but also on the steps taken by the Government to stabilise the participating banks.


Background to the challenge

The plaintiff in this case was a long established Irish property developer and business man, Mr Paddy McKillen. He, along with 15 of his companies, had an interest in a portfolio of 62 properties with an estimated value of up to EUR 2.2 billion. 26% of the portfolio consisted of properties in Ireland, with the balance spread between the UK, France and the USA. It became clear during the case that loans secured on those properties in favour of Irish banks covered under NAMA amounted to approximately EUR 2.1 billion. NAMA took a decision to acquire a number of Mr McKillen and his companies’ loans ('the McKillen loans') and Mr McKillen challenged that decision on a number of grounds.