H418 Dowling & Ors -v- The Minister for Finance [2014] IEHC 418 (15 August 2014)

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Judgment Title: Dowling & Ors -v- The Minister for Finance

Neutral Citation: [2014] IEHC 418


High Court Record Number: 2011 239 MCA

Date of Delivery: 15/08/2014

Court: High Court

Composition of Court:

Judgment by: O'Malley Iseult J.

Status of Judgment: Approved




Neutral Citation: [2014] IEHC 418

THE HIGH COURT
Record No. 2011/239 MCA

IN THE MATTER OF IRISH LIFE AND PERMANENT GROUP HOLDINGS PLC AND IN THE MATTER OF IRISH LIFE AND PERMANENT PLC AND IN THE MATTER OF AN APPLICATION FOR THE SETTING ASIDE PURSUANT TO SECTION 11 OF THE CREDIT INSTITUTIONS (STABILISATION) ACT 2010 OF THE DIRECTION ORDER WHICH WAS MADE ON THE 26TH JULY 2011 PURSUANT TO SECTION 9 OF THE CREDIT INSTITUTIONS (STABILISATION) ACT 2010 AND ANCILLARY ORDERS




BETWEEN:

GERARD DOWLING, PADRAIG McMANUS, PIOTR SKOCZYLAS AND SCOTCHSTONE CAPITAL FUND LIMITED
Applicants
-AND-

THE MINISTER FOR FINANCE

Respondent
-AND-

PERMANENT TSB GROUP HOLDINGS PLC AND PERMANNENT TSB PLC

Notice Parties

Judgment of Ms Justice Iseult O’Malley delivered the 15th August, 2014.

CONTENTS

Section A

1.. Introduction 5

2.. The parties 7

3.. The witnesses 7

Section B

4.. Background- The economic crisis and the Irish banks 10

5.. Specific evidence relating to ILP 12

SECTION C

6.. The Programme for Support 14

7.. The Memorandum of Understanding 14

8.. Council Regulation 407/2010 (11th May 2010) 16

9.. The Implementing Decision 17

10.. United Kingdom loan 17

SECTION D

11.. The Prudential Capital Assessment Review 2011 18

12.. The BlackRock assessment 19

13.. PCAR 19

14.. Legal requirements for capital adequacy 19

15.. PLAR and deleveraging 20

16.. Central Bank decision 20

17.. The Updated Memorandum of Understanding 20

SECTION E

18.. Developments after PCAR and PLAR 22

19.. The company’s reaction 24

20.. Shareholder reaction to the FMPR 25

21.. Irish Takeover panel approval 26

22.. State Aid approval 26

SECTION F

23.. The Extraordinary General Meeting, 20th July 2011 32

24.. Correspondence between the company and the Minister 35

25.. Submissions made to the Minister on behalf of shareholders 37

SECTION G

26.. The Credit Institutions (Stabilisation) Act, 2010 39

SECTION H

27.. The Proposed Direction Order 46

28.. Compliance with s.7 of the Act 47

SECTION I

29.. The application for the Direction Order 50

30.. The purposes of the order 53

31.. The details of the order sought 55

SECTION J

32.. Alternative means of raising capital 58

SECTION K

33.. The “False Market” Issue 63

SECTION L

34.. The relative contributions of the Minister and the shareholders 66

SECTION M

35.. Potential Consequences of failure to recapitalise by 31st July 2011 68

SECTION N

36.. The Duty of Candour in an ex parte application 71

SECTION O

37.. Summary of the Applicants’ Case 72

SECTION P

38.. The test to be applied 75

39.. The Application of the test to this case 83

SECTION Q

40.. The Second Company Law Directive/ The Greek Cases 84

SECTION R

41.. Conclusion and Findings 96

SECTION S

42. Appendix 100


SECTION A

1. Introduction
1.1 This case concerns a direction order made by the High Court pursuant to the provisions of s. 9 of the Credit Institutions (Stabilisation) Act, 2010 (“the Act”) in relation to Irish Life and Permanent Group Holdings plc and Irish Life and Permanent plc.

1.2 Irish Life and Permanent Group Holdings (hereafter “ILPGH” or “the company”) is a company which came into existence on foot of a scheme of arrangement approved by the High Court in January 2010. At all material times it was, as the name suggests, a holding company and it was the entire owner of Irish Life and Permanent plc (hereafter “ILP” or “the bank”), a bank which now trades in this jurisdiction as Permanent TSB. ILPGH did not own any other asset.

1.3 At the relevant time, ILP was the owner of the Irish Life Group, which included the profitable Irish Life Assurance plc and Irish Life Investment Managers Limited.

1.4 In the month of July, 2011 the Minister for Finance (“the Minister”) caused a proposal to be put to shareholders at an Extraordinary General Meeting of ILPGH. The objective of the proposal was to facilitate the recapitalisation of ILP in the sum of €4 billion, by means of inter alia a capital injection by the Minister of €2.7 billion.

1.5 The EGM was held on the 20thJuly, 2011. The proposal was rejected by the shareholders, who instead passed a number of resolutions mandating the company to take various other steps to achieve recapitalisation.

1.6 On foot of the rejection of his proposals by the shareholders, the Minister prepared a “proposed direction order” under s.7 of the Act. The proposed order recited that it was the opinion of the Minister that a direction order was necessary to secure the achievement of certain purposes of that Act. He then applied to the High Court for a direction order under s.9 of the Act. The order was made by the High Court in the terms sought, after an ex parte application, on the 26thJuly, 2011.

1.7 The Act, which has been described as “an extraordinary piece of legislation” (Fennelly J in Dowling v Minister for Finance [2013] IESC 58, “unique, unprecedented and stringent” (Feeney J in Dowling v Minister for Finance [2012] IEHC 89), permits of a truly radical encroachment on the legal rights of shareholders.

1.8 In summary, the effect of the order was to enable the Minister to acquire 99.2% of the company. This was done by compelling it to issue a very large number of new shares to him, at a share price dictated by him (being just under 6.5 cents per share), in return for the sum of €2.7 billion. For this purpose control of the company was taken from its organs and shareholders; the Memorandum and Articles of Association were altered; the decisions taken at the EGM were nullified and the company was delisted from the London and Irish Stock Exchanges. Further, various relevant legal rules, whether deriving from statute, common law, equity, codes of practice or contract were in effect disapplied insofar as the company was concerned.

1.9 A full copy of the order is appended to this judgment.

1.10 This is an application to set aside the direction order. Section 11 of the Act provides that it may be set aside only if the court is of the opinion that there was non-compliance with the requirements of s.7, or that the opinion of the Minister under s.7 (2) (that the direction order was necessary to achieve stated objectives of the Act) was unreasonable, or that the opinion of the Minister was vitiated by an error of law. The task of this court is not, therefore, to embark upon a review of, or an appeal from, the order of the 26th July, but to determine whether it is legally undermined by errors on the part of the Minister in seeking to obtain it.

1.11 The applicants are all shareholders of the company, while the third named applicant was also a director. They have argued that the order is invalid by reason of alleged non-compliance with the procedural requirements of the Act, unreasonableness on the part of the Minister, and errors of law vitiating his opinion.

1.12 The need for recapitalisation of the bank is not challenged in principle, although the applicants do maintain that the sum of €4 billion was far in excess of what was actually needed. Their complaint is that the actions of the Minister involved an illegal takeover of the company and amounted to an expropriation of their interest in it.

1.13 This judgment is concerned with the proper interpretation of the statute and the evidence. It does not deal with the constitutionality of the provisions - that issue is the subject of separate proceedings which have been adjourned pending the outcome in this case. It therefore proceeds on the basis that the Direction Order mechanism is constitutionally permissible, with the issue being the lawfulness of what was done in this particular instance.

1.14 It may also be important to stress that the judgment is not concerned with the still-controversial questions as to the manner in which this State dealt with the undoubtedly extreme difficulties that beset it in recent years. It will not deal with the strategic rights and wrongs of particular steps taken or not taken. The issues are

      • Was there compliance with the requirements of s. 7 of the Act?

      • Was the Minister’s opinion (that the direction order was necessary) reasonable?

      • Was the Minister’s opinion vitiated by errors of law?

1.15 It will however be necessary to consider the background to the decision of the Minister to make the application in this case.

2. The Parties
2.1 The first three applicants are individual shareholders in the company and have represented themselves in these proceedings. Mr Skoczylas was for a period a director of the company, having been elected at the EGM in July, 2011. By agreement with the first and second named applicants he has presented the case on their behalf. It will not, I hope, be patronising to say that his advocacy has been both diligent and effective.

2.2 Scotchstone Capital Fund Ltd (“Scotchstone”) is a company owned by Mr Skoczylas and is also a shareholder in ILPGH. In these proceedings it was represented by solicitor and counsel on what was termed a “limited technical basis” but in effect its case was made by Mr Skoczylas.

2.3 A challenge by the respondent to the locus standi of Mr Skoczylas and Scotchstone was rejected by the High Court (Feeney J.) on the 3rd February, 2012. That decision is under appeal by the Minister but it is accepted that the court should proceed on the basis that all the applicants were members of ILPGH at the relevant time and therefore entitled to maintain this application.

2.4 Permanent TSB (Group Holdings) plc and Permanent TSB plc are the current incarnations of ILPGH and ILP. They were joined as notice parties by order of the Supreme Court. They support the position of the Minister. Where the judgment refers to submissions made by “the respondents”, this includes the notice parties.

3. The witnesses in the case
3.1 The main affidavits relied upon by the applicants were those sworn by Mr Skoczylas, Professor Dr. Ted Azarmi and Professor Eddy Wymeersch.

3.2 Mr Skoczylas is a former investment banker who has held positions in leading investment banks, including that of Vice President of Credit Suisse. He has also been a strategy advisor and corporate finance professional in the Boston Group.

3.3 Professor Azarmi is the Professor and Chair of International Finance and Accounting at the University of Heilbronn and Adjunct Professor at the Eberhard Karls University of Tubingen. He says that part of his current research work focuses on “Asset Impairment Theory” and is relevant for determining valuation and shareholding break-up in a situation where a stakeholder such as a government is likely to take benefit at the expense of another class of stakeholders.

3.4 The respondents have objected to portions of Professor Azarmi’s affidavits where they deal with matters of law, hearsay or matters in relation to which he is not qualified as an expert.

3.5 The court takes note of this objection and has not relied upon hearsay or evidence which the witness is not qualified to give. There is, however, no objection to treating his views on legal issues as submissions made by the applicants.

3.6 Professor Wymeersch is an Emeritus Professor of Commercial Law. He is also the Chairman of the Public Interest Oversight Board, a global independent body that seeks to improve the quality of international accounting standards.

3.7 He has had a notably distinguished career, having served inter alia as the Chairman of the Committee of European Securities Regulators and of the Supervisory Board of the Belgian Banking, Finance and Insurance Commission, Regent of the National Bank of Belgium and consultant to the European Commission, the World Bank, International Finance Corporation EBRD and the OECD.

3.8 Professor Wymeersch has provided two opinions, by way of affidavit, dealing with the Second Company Law Directive and other relevant EU legislation. The respondents have objected to the admissibility of this evidence on the basis that they are affidavits as to law, which is, of course, a matter for submissions to and determination by the court. This objection is well-founded insofar as it relates to the status of opinion evidence. However, again, there is no reason not to treat the opinions as legal submissions made on behalf of the applicants.

3.9 The affidavits sworn on behalf of the Minister come from the following deponents.

3.10 Mr John Moran was, at the time of swearing his affidavits, the Secretary General of the Department of Finance. At the time of the making of the Direction Order he was a Second Secretary and Head of the Banking Division in that Department. He is a solicitor and has worked as an attorney in New York. He worked for 18 years for Zurich Bank and Zurich Capital Markets. From July 2010 until March 2011, when he joined the Department of Finance, he was the head of Wholesale Banking Supervision in the Central Bank of Ireland.

3.11 Mr John Montgomery is the Senior Vice President of NERA Economic Consulting, which is described as “a global firm of experts dedicated to applying economic, finance, and quantitative principles to complex business and legal challenges for government authorities and leading law firms and corporations”. He is an economist and has held positions at the Federal Reserve Board of the United States, the IMF and the U.S. President’s Council of Economic Advisers.

3.12 Ms Rose McHugh is the Head of Corporate Finance in Merrion Capital Group, an Irish financial services firm that is a division of Merrion Capital Group. Part of the business of the firm is the giving of advice to potential investors and potential vendors. She says that since 2008 she has engaged frequently with parties contemplating investment in Ireland, with the targets including businesses in the financial sector.

3.13 Professor Philip R. Lane is the Whately Professor of Political Economy in Trinity College Dublin. He was previously the Assistant Professor of Economics and International Affairs at Columbia University. He has been, inter alia, a research consultant for the IMF, the World Bank, the European Commission and the European Central Bank. He says that his primary research areas include financial globalisation, European Monetary Union and the economy of Ireland.

3.14 Mr Ivan Murphy is the Head of Corporate Finance in Davy, who were appointed brokers to ILP in 1999. He says that it was Davy’s role to advise ILP on engagements with capital markets, investor feedback, corporate transactions and securities regulatory matters.

3.15 Two affidavits have been sworn by Mr Alan Cook, the chairman of the bank and of ILPGH. The applicants have objected to the admissibility of these affidavits on the grounds that there is no averment as to the authority of Mr Cook to swear them on behalf of the company and that they contradict in important respects the stance adopted by him before the direction order was made.

3.16 Mr Cook has averred in his first affidavit that he made it at the request of the Minister. The second is stated to be on behalf of the notice parties. While it does not state that he is authorised to make the affidavit, the court takes account of the fact that the notice parties were joined as such by order of the Supreme Court, on foot of an application that undoubtedly was authorised by the board. A technical deficiency of this nature is not sufficient to render the affidavit inadmissible.

3.17 The respondent has also filed affidavits from Spanish and Portuguese lawyers relating to relevant legal provisions in those countries. The applicants have objected to those on the ground that they were filed at such a late stage that the applicants did not have time to consider them, to which the Minister replies that they were filed in response to a late affidavit averring that no other European State had enacted legislation comparable to the Irish Act.

3.18 The court considers that, in any event, evidence of this nature will not be of assistance. The issue here is, as stated above, the status of the direction order in Irish law. This of course includes European Union law but the domestic law of other States is not relevant.

SECTION B

4. Background - the economic crisis and the Irish banks
4.1 The central role of the Irish financial sector in the economic crisis as it developed in this country is not in dispute (although of course other factors were significant). Irish banks were, in summary, overly exposed to the deterioration in the property market and overly reliant on borrowings from international markets.

4.2 Ireland was not unique in experiencing severe problems in the financial sector, but the link between the financial stability of the banks and the financial stability of the State was particularly strong here because of the relative size of the sector coupled with the extensive guarantee by the State of bank liabilities. The financial sector is said to have been, at its peak, five times the size of the economy.

4.3 The consequence was that, while most if not all European Union members had to take radical measures to support their financial systems, the intervention by the Irish State was in relative terms enormous. By the time the State entered into the Programme of Support in 2010, it had, according to Mr Moran, spent or committed €46 billion on the financial system. In 2011 the level of State support given to the banks was the equivalent of 223% of Gross Domestic product. The EU average was 12.5% GDP.

4.4 The first major step taken by the State was the “bank guarantee” of September 2008, which was provided for in the Credit Institutions (Financial Support) Act, 2008. This gave a State guarantee to customer deposits for amounts over €100,000 for a period of two years. Amounts under that figure were already protected under the Deposit Guarantee Scheme. The CIFS scheme was replaced on its expiry by the Eligible Liabilities Guarantee (“ELG”) scheme. This was established in 2009 as a means of providing liquidity and other financial support to Irish credit institutions. Emergency liquidity assistance funding (“ELA” funding) was also available from the Central Bank of Ireland and the European Central Bank (referred to as “Eurosystem” funding).

4.5 These schemes were not cost-free - for example, the banks were charged for the cover provided by the guarantee. ILP paid €45m for the first half of 2010, and €94m for the same period in 2011. It also paid the European Central Bank for liquidity assistance.

4.6 Despite these measures, the markets continued to lose faith in the banks. Deposits continued to be withdrawn and were not replaced, making the banks ever more reliant on Eurosystem funding.

4.7 During the year to the end of October 2010 ILP’s share price fell by 69%. At that point it was down 93.3% from its peak market value, which had been €6.3 billion in February, 2007. (It was down to €3.3 billion by the end of that year). The equivalent percentage falls for AIB and Bank of Ireland were 82% and 51% in 2010, with drops of 98.7% and 95.5% from peak value. The ratings given by the international credit rating agencies also fell significantly.

4.8 In the year 2010, 25% of the total Eurosystem borrowing was by Irish banks. This borrowing grew very rapidly towards the end of that year as deposits fell. “Regular” ECB liquidity rose from €36 billion in April to €74 billion in September, while “Emergency Liquidity Assistance” went from €14 billion in August to €44 billion in November.

4.9 The State’s budget deficit also increased to a multiple of the limit prescribed by European Union law, due in large part to its efforts to support the banks.

4.10 The financial position of the State deteriorated. Its credit rating fell persistently from the AAA+ it had enjoyed in early 2009, culminating in a “sub-investment” rating in mid-2011. In the year to the end of October 2010 five year bond yields (i.e. the cost of State borrowing on the international bond markets) rose from 3.1% to 5.2%. The broader economy was also radically affected in terms of cuts in public expenditure and rising unemployment.

4.11 There was throughout this period a great deal of tension in the bond markets. In part, at least, this was because of a fear of contagion in the Eurozone. Greece received a €110 billion bailout in May 2010 and there was considerable speculation as to whether it would be followed by certain other Member States including Ireland. Ireland was thus not the only country to find its bond yields going up.

4.12 Mr Montgomery has described the “adverse feedback loop” that was creating difficulties for governments in the Eurozone. He says there were four main factors:

4.13 The interaction between these factors amplified the initial problems. Mr Montgomery says, for example, that the costs borne by governments to support banks increased governments’ budget deficits and exacerbated market concerns relating to sovereign default. These concerns in turn raised bank funding costs, as they raised market doubts over the willingness of governments to continue supporting the banks. Rising funding costs meant increased bank losses.

5. Specific evidence relating to ILP
5.1 The applicants point to certain significant positive factors relating to the bank’s finances that did not apply to other credit institutions. It had not become involved in NAMA (since it had not lent extensively to property developers). Unlike AIB and Bank of Ireland it was not, prior to the events in question, a recipient of State capital - these two banks had received €11 billion between them. It had not come under State control, as had happened to Anglo Irish, EBS and Irish Nationwide. (Ulster Bank had come under the control of the United Kingdom authorities.) It was not insolvent and it owned a profitable asset in Irish Life. (In 2010 Irish Life made an operating profit of €200 million, while the bank made an operating loss of €400 million.) It is argued that it was never bankrupt or on the brink of bankruptcy.

5.2 However, Ms McHugh has averred that in the challenging circumstances that developed in 2008, certain fundamental weaknesses began to become apparent in relation to ILP. It began that year with loan assets amounting to almost three times its deposits. It was therefore heavily reliant at that time on the wholesale money markets for almost two thirds of its funding.

5.3 Mr Skoczylas says that ILP’s deposits amounted to 38% of its funding and that this was broadly in line with the average for European banks between 2003 and 2007. The respondents argue that this was not a normal period, but was, rather, “the final phase of a global credit bubble” (per Mr Moran). It is also pointed out that ILP’s loan to deposits ratio of 228% as of June 2011 was significantly out of line with the figures for both AIB (143%) and Bank of Ireland (164%).

5.4 Mr Cook says that Mr Skoczylas is wrong in asserting that neither ILPGH nor ILP have ever been on the brink of bankruptcy. He says that in fact, from September 2008 onwards, the bank would not, because of liquidity problems, have been able to pay its debts as they fell due without the guarantees of the Minister under CIF and ELG schemes. Mr Skoczylas points out that ILP was hardly unique amongst European banks in relying upon State assistance over these years.

5.6 Furthermore, Mr Moran says, ILP’s reliance on monetary authority funding, expressed as a percentage of total assets, was materially higher than AIB or Bank of Ireland (20%, as opposed to 15% for AIB and 7% for Bank of Ireland).

5.7 Mr Moran notes that the loan to deposit ratio improved from 271% at the end of 2009 to 249% at the end of 2010 and to 228% at the end of June 2011. ILP had acquired €3.6 billion of deposits from Irish Nationwide Building Society in February 2011. However, between January and June 2011 it lost €2.8 billion of deposits.

5.8 Another difficulty specific to ILP was the percentage of its mortgage assets made up of tracker mortgages - 66%, compared to 42% for AIB.

5.9 By the end of October, 2008 the market value of the equity in the company was down to €600 million. It recovered to some extent during 2009, reaching €910 million by the end of that year. Ms McHugh ascribes this to a general hope of an early recovery from the crisis and some degree of expectation that ILP would be merged with one or more of the other financial institutions.

5.10 In 2010, any confidence that Irish bank losses had been realistically estimated diminished. The full scale of the disaster that was Anglo Irish Bank became apparent. EBS and Irish Nationwide were nationalised. Banks owned by overseas parents began to wind down their operations in Ireland.

5.11 During 2010 the shareholders’ equity in ILP fell to €300 million.

5.12 At the end of 2010 the bank had a Tier 1 capital ratio of 10.6%. In November, 2010 the Central Bank announced that ILP was to be required to raise about €100 million in new capital to meet a new capital target of 12%. Compared to what was to come, this was indeed a modest sum and the Group Chief Executive was quoted as saying that it “confirmed the capital strength at the Group and its unique position in the Irish financial marketplace”. However, the share price continued to fall.

5.13 The applicants have consistently maintained that the company was, during these years, undervalued by the market. Dr Azarmi points to the fact that on the 30th June, 2011 the company’s equity had a book value of just under €2 billion. It was, after all, the owner of the profitable Irish Life Assurance business. The company accounts showed it to be solvent. Some independent analysts were publicly giving their view that its share price was undervalued. Mr Skoczylas and Dr Azarmi also point to various positive statements made by officers of the company and note that none of them have been the subject of criminal prosecutions for making false statements.

5.14 The observation made by Mr Moran in this regard is that if investors are not willing to pay a price related to the book value, then either the market is undervaluing the company or it is sceptical about the book value and believes that it is going to degrade. It is noted that the views of the analyst referred to were publicly available, but obviously were not accepted by the market.

5.15 Apart from the issue of the share price, ILP had the problem that, in common with the other Irish banks, the debt markets were closed to it and it was reliant on the Irish Central Bank and the European Central Bank for funding. According to Mr Moran, it had not issued any unsecured term debt funding since September 2008 other than with the benefit of either the CIFS scheme or the ELG scheme.

5.16 Mr Cook says that in March 2011 ILP had to seek increased ELA from the Central Bank. This was forthcoming only on the basis of a guarantee from the Minister in the sum of up to €5 billion.

5.17 At the end of June 2011 ILP had €17.8 billion of deposits and bonds guaranteed under the ELG scheme and €9.3 billion of deposits guaranteed under the Deposit Guarantee scheme, giving the State a potential exposure of €27.1 billion.

SECTION C

6. The Programme for Support
6.1 In late 2010, it became clear that Ireland had lost the confidence of the international bond markets and required assistance to fund itself. The State entered into an agreement in principle relating to a Programme for Support in order to secure sustainable funding for the State. The Programme was what every citizen in Ireland knows as “the bailout”.

6.2 Funding under the programme came primarily from the International Monetary Fund and two European Union organs - the European Financial Stability Mechanism and the European Financial Stability Facility. It was overseen by the IMF, the European Commission and the European Central Bank (“the Troika”, or, more formally, “the External Partners”).

6.3 The programme put in place an €85 billion financing facility to be drawn on as necessary, to meet funding requirements of the State that could no longer be obtained at an affordable cost in the market. The IMF and the EU contributed about €22.5 billion each. The State committed €17.5 billion from the National Pension Reserve Fund. A sum of €3 billion was contributed by the United Kingdom under a separate bilateral agreement. Sweden and Denmark also made separate contributions, totalling about €1 billion, between them. (It should perhaps go without saying that these funds were not a gift and will have to be repaid with interest.)

6.4 It was envisaged that about €35 billion of this funding would be used for the recapitalisation and restructuring of the banking system.

6.5 The programme was based upon a number of core documents drawn up in December, 2010 and also upon Council Regulation (EU) No. 407/2010 of the 11th May, 2010 and relevant Implementing Decisions made thereunder. The documents and Implementing Decisions were updated and amended from time to time.

7. The Memorandum of Understanding
7.1 A Memorandum of Understanding was entered into between the State and the European Commission in December, 2010. This contained three main documents: a memorandum of economic and financial policies, a memorandum on specific economic policy conditionality and a technical memorandum of understanding. It was signed on behalf of the State by the Minister for Finance, and was also signed by the Governor on behalf of the Central Bank of Ireland.

7.2 The memorandum of economic and financial policies identified four key elements of the programme. The first related to the banks.

7.3 In a section headed “Restoring Financial Sector Viability”, the memorandum referred to the stressed state of much of the Irish banking system and to the continued lack of market access and the loss of deposits. It continued:
      “The key component of our efforts is an overhaul of the financial sector with the objective of substantial downsizing, isolating the non-viable parts of the system and returning the sector to healthy functionality. It will be important to support this process through capital injections into viable financial institutions.”
7.4 The banks were to be required to take a number of steps including the running down of non-core assets. For obvious reasons, the positions of Anglo Irish Bank and the Irish Nationwide Building Society were to be addressed swiftly.

7.5 At paragraphs 11 and 12, the memorandum set out the following obligations:

      “11.To achieve the above goals, banks will be required to submit deleveraging plans to the national authorities by end-February 2011. The plans will be prepared on the basis of clear periodic targets defined by the Central Bank, taking into account the Prudential Liquidity Assessment Review (PLAR) to be conducted with the EC, ECB and IMF. By end-March 2011, the Central Bank with assistance from an internationally recognised consulting firm, will complete the assessment of the banks’ restructuring plans (structural benchmark). The deleveraging plans will be a component of the restructuring plans to be submitted to the European Commission for approval under EU competition rules.

      12. This reorganisation and downsizing of the banks will be bolstered by raising capital standards. While we expect that, in a restructured system, banks will be able to raise capital in the market, we recognise that the higher standards may imply that, in the short run, public provision of capital will be needed for banks that are deemed to be viable. To support this process - and to render it credible - we will undertake a review of the capital needs of banks on the basis of a diagnostic of current asset valuations and stringent stress tests (PCAR 2011).”

7.6 Criteria for the “stringent stress test scenarios” were to be agreed in consultation with the European Commission, the European Central Bank and the IMF by the end of 2010. Draft terms of reference were also to be agreed with those bodies for the “due diligence” of bank assets by internationally recognised consulting firms. The diagnostic evaluation of bank assets and the PCAR process were to be completed and published by the end of March 2011.

7.7 The Central Bank was required to direct AIB, Bank of Ireland and EBS to achieve a capital ratio of 12% core tier 1 by the end of February 2011, and ILP to achieve the same target by the end of May 2011.

7.8 It may be noted that the Memorandum of Understanding imposed stringent reporting obligations of the Department of Finance, the Central Bank and the National Treasury Management Agency.

7.9 The memorandum on specific economic policy conditionality, dated the 8th December, 2010, is dealt with below.

7.10 An update to the Memorandum was published on the 28th April, 2011, after completion of the PCAR exercise. It recorded the fact that a total capital need of EUR 24 billion for Bank of Ireland, AIB, EBS and ILP had been identified. The PLAR had established a target loan-to-deposit ratio of 122.5%, intended to be achieved by the end of 2013, with interim targets to be set by the Central Bank.

8. Council Regulation 407/2010 (11th May 2010)
8.1 This is the instrument that established the European Financial Stability Mechanism (“the EFSM”). The preamble to the regulation refers to the deepening of the financial crisis; its effect on the borrowing capabilities of several Member States and the possibility that if this situation was not addressed it could present a serious threat to the financial stability of the European Union as a whole. It was therefore considered necessary to put in place a Union stabilisation mechanism, to allow the Union to respond to particular difficulties in particular Member States.

8.2 To put this in context, it must be recalled that there is a general Treaty obligation on Member States to keep their own houses in order with regard to budgetary matters and a general Treaty principle that there should be no “bailouts” (Article 125). However, Article 122(2) permits the Union to provide conditional financial support to a Member State if it is

8.3 This is the Article from which the EFSM ultimately derives.

8.4 The regulation provides that activation of the EFSM is to be in the context of a joint EU/International Monetary Fund (“IMF”) support. Assistance, which may take the form of a loan or a credit line, is to be subject to general economic policy conditions attached to it, and approval of an adjustment programme in relation to the Member State’s financial situation. The Commission and the Member State must enter into a Memorandum of Understanding detailing the conditions attached to the assistance. The Commission is to re-examine the general economic policy conditions as least every six months and to discuss with the Member State the changes that may be needed to its adjustment programme. It is also obliged to verify at regular intervals whether or not the economic policy of the beneficiary State accords with the conditions and the programme. To that end, the Member State must provide all necessary information and give its full cooperation to the Commission.

9. The Implementing Decision
9.1 Pursuant to Council Regulation (EU) 407/2010, on the 7th December, 2010 the Council adopted an Implementing Decision on the granting of European Union financial assistance to Ireland. The assistance was in the form of a loan of EUR 22.5 billion payable in 13 instalments. Instalments were conditional firstly, upon entry into force of a loan agreement and the Memorandum of Understanding, and, secondly, a favourable quarterly assessment by the Commission, in consultation with the ECB, of Ireland’s compliance with the general economic policy conditions defined by the Decision and by the Memorandum of Understanding.

9.2 Article 5 of the Decision required the State to

9.3 The memorandum on specific economic policy conditionality, included as one of the documents in the Memorandum of Understanding, referred to this Decision and set out a timetable of actions to be taken. It repeated that release of the instalments of financial assistance would be subject to quarterly reviews of conditionality for the duration of the programme.

9.4 It stipulated that the PCAR exercise to be undertaken in 2011 was to be based on terms of reference to be agreed between the Central Bank of Ireland, the European Commission, the IMF and the European Central Bank. The latter three bodies were to be involved in the validation of the process.

9.5 Under the heading “Deleveraging measures” this memorandum obliged the Central Bank to complete a PLAR exercise for 2011 with a view to

      “steadily deleveraging the banking system and reducing the banks’ reliance on short term funding by the end of the programme period.”
9.6 It provided that “ambitious” targets for loan to deposit ratios were to be set, designed to ensure that the banks would be able to meet the Basel III standards by the relevant dates.

9.7 The design and implementation of the PLAR was to be agreed with the Commission, the European Central Bank and the IMF, and to be monitored and enforced by the Central Bank. Depending on the results, the Government was obliged to ensure that the banks were recapitalised in the form of equity, if needed, in order to ensure that a minimum capital requirement of 10.5 % was maintained. A specific provision relating to ILP required that bank to be recapitalised to a level of 12% core tier 1 capital.

10. United Kingdom loan
10.1 The loan made to the State by the United Kingdom was conditional upon, inter alia, evidence that the European Union and the IMF were satisfied that Ireland was complying with the terms agreed with them.

SECTION D

11. The Prudential Capital Assessment Review 2011
11.1 In accordance with its obligations under the Programme for Support the Central Bank conducted a Prudential Capital Assessment Review (PCAR) and a Prudential Liquidity Assessment Review (PLAR) of the Irish banks in the early part of 2011. The results were published as the Financial Measures Programme Report on the 31st March, 2011.

11.2 To put the findings in context it is necessary to emphasise that the assessment of the capital requirements was avowedly conservative. According to the report

11.3 This approach was taken because of the following considerations: -
      • Actual and prospective loan losses associated with the collapse of the property market and the severe economic downturn had left the Irish banks dependent on the State for injections of capital, and on the Eurosystem and the Central Bank of Ireland for liquidity.

      • Despite the measures already taken, the market did not have confidence in the banks. It was stated in the foreword of the report that

            “Increasingly, wholesale deposits and bank bonds in domestic institutions began to be withdrawn on maturity, despite being protected by the Government guarantee.”
        It is noted elsewhere in the report that during the period September-December 2010 the six Irish banks lost over €100 billion in funding as debt instruments failed to roll and deposits were withdrawn.

      • It was necessary to produce a stressed loan-loss estimate that would be “fully credible on the international markets”.
11.4 The report assessed the capital requirements for each bank on the basis of three separate but complementary exercises: a loan-loss assessment exercise carried out by BlackRock Solutions; the 2011 PCAR stress test and the 2011 PLAR.

12. The BlackRock assessment
12.1 BlackRock Solutions is an international financial consultancy. According to the FMPR, its work on this exercise was independently assessed and monitored by The Boston Consulting Group which, in summary, reviewed the methodology adopted by BlackRock and its subcontractors, screened the personnel used for competence and experience, regularly reviewed the analyses being performed and evaluated the results as they emerged.

12.2 Estimates for losses were assessed both in relation to the lifetime of loans and by reference to classification of loans. For example, BlackRock assessed lifetime losses in relation to residential mortgages at €9.9 billion in the “base” scenario (assuming the correctness of EU forecasts for the Irish economy) and at €16.9 billion in the “adverse” or “stress” scenario (assuming, although not forecasting, a further economic contraction). The total residential mortgage exposure across the banks was put at €140.7 billion.

12.3 The relevant figures for ILP under this heading were €3.026 billion and €5.209 billion.

13. PCAR
13.1 Based on the figures produced by BlackRock, the Central Bank projected three-year losses on residential mortgages at €5.8 billion (base scenario) or €9.5 billion (stress scenario) across the banks, and at €1.624 billion or €2.679 billion respectively for ILP.

13.2 Similar calculations were carried out in respect of other types of loans.

13.3 Having assessed the losses and then subjected the figures to stress tests, the Central Bank added a requirement of a further capital “buffer”, or “extra layer of resilience” to deal with the possibility of events not considered in the stress test.

14. Legal requirements for capital adequacy
14.1 At the time this exercise was undertaken, the rules on capital adequacy derived from the Capital Requirements Directive as transposed into Irish law by the European Communities (Capital Adequacy of Credit Institutions) Regulations, 2006 and the European Communities (Capital Adequacy of Investment Firms) Regulations, 2006. This Directive was largely based on Basel II, a standard set by the Basel Committee of Banking Supervisors. Under the Regulations, the minimum capital requirement for a credit institution was 8% of its risk-weighted assets.

14.2 The Directive also governs the classification of different types of capital and prescribes which may be counted as regulatory capital. The highest quality class of capital is described as core tier 1 and consists of common equity, reserves and retained earnings.

14.3 The Central Bank was empowered to enforce the Directive and the regulations. Under their provisions it has a discretion to set a capital ratio higher than the minimum and since March 2010 it had imposed a requirement for all credit institutions of 4% Tier 1 and 8% “Total Solvency”.

14.4 An additional on-going requirement was imposed on the institutions covered by the PCAR 2011 process, who were now required to maintain capital adequacy equivalent to 10.5% Core Tier 1 during standard operation.

14.5 However it was also borne in mind that Basel III was to commence coming into effect in January 2013, and would be in full force by 2019. It was intended that the Capital Requirements Directive would be amended to take account of the new rules, which result in an alteration of the types of capital that can be included in the reckoning for capital adequacy. The Central Bank considered it appropriate to ensure that the banks would be in a position to comply with Basel III.

15. PLAR and deleveraging
15.1 The finding here was that, to reduce the ILP’s loan to deposit ratio to 122% by the end of 2013, it would be necessary to deleverage its loan book by €15.6 billion. This would require the bank to sell its UK mortgage book and its commercial mortgage book. The assumption was that this would be done at discounts of 25% and 50% respectively. The deleveraging process was estimated to give rise to losses in the order of €2.2 billion. ILP had core tier 1 capital of 10.6% (c. €1.7 billion) at the end of 2010, which was insufficient to absorb these losses.

16. Central Bank decision
16.1 Based on the foregoing, the Central Bank reached a decision as to the amount of capital each bank would be required to raise. The total for the four banks concerned came to €24 billion.

16.2 In the case of ILP the overall figure was €4 billion. This would, in the view of the Central Bank, allow ILP to cover the losses associated with deleveraging and to maintain a core tier 1 capital ratio of 6%, plus a buffer of €0.3bn, in a stress scenario (10.5% core tier 1 in the base scenario).

17. The Updated Memorandum of Understanding
17.1 On the 16thMay, 2011 the European Council adopted a further Implementing Decision. It required, inter alia, that the domestic banks be recapitalised by the end of July 2011. This deadline was subject to adjustment in the case of ILP in respect of the expected asset sales but not otherwise.

17.2 On foot of this decision, the EU Commission and the State adopted an updated Memorandum of Understanding on the following day. The Memorandum included a stipulation that plans for the recapitalisation of ILP were to be agreed with the company by the end of the month and that a process to effect the sale of Irish Life Assurance was to start immediately. The memorandum on specific economic policy conditionality was updated to require the recapitalisation of the banks in line with the PCAR results. The €24 billion figure identified by that exercise was to be comprised of €21 billion in core tier 1 capital and €3 billion in contingent capital.

17.3 The EU Council Implementing Decision was also amended to require the recapitalisation of the banks by the end of July 2011 in line with the PCAR and PLAR results. In the case of ILP, a Decision of the 30th May, 2011 required that €2.9 billion be achieved by that date, with the remaining €1.1 billion to be generated by the asset disposal and liability management exercise.

17.4 The decision also required the deleveraging of the banks towards the target loan to deposits ratio of 122.5% by the end of 2013.

SECTION E

18. Developments after PCAR and PLAR
18.1 On the 31stMarch, 2011 the Head of Financial Regulation in the Central Bank, Mr Matthew Elderfield, wrote to ILP referring to the review process. ILP was informed that, pursuant to Reg. 70 of the 2006 Regulations, the Central Bank was now requiring it to raise an additional €4 billion.

18.2 In explaining how the figure was reached, Mr Elderfield stated that the Central Bank had

18.3 The reasons given for the decision are here set out in full as follows: -
      a) “ ILP is considered important to the financial system in the State. This is evidenced by its inclusion in financial support schemes under the Credit Institutions (Financial Support) Act, 2008.

      b) ILP continues to be dependent on Eurosystem funding and Emergency Liquidity Assistance from the Central Bank. The reliance on central bank funding for such a period is not conducive to the proper and orderly regulation of the banking sector or the stability of the financial system.

      c) The Central Bank has had regard to the terms of the Memorandum of Economic Policies entered into between the Irish authorities, the IMF, and the European Commission in relation to a joint EU-IMF Joint Programme of Support for Ireland in consultation with the European Central Bank and the objective set out in these terms of expeditiously raising capital.

      d) Under section 11(1)(b)(v) of the CBA 1971[the Central Bank Act, 1971], a failure by ILP to, inter alia, maintain sufficient own funds would form grounds for the revocation of the licence of ILP to conduct banking business in the State.

      e) For the purposes of section 6A(2) of the CBA 1942, the Central Bank is of the opinion that it is necessary for the discharge of the Central Bank’s objectives, including without limitation the stability of the financial system overall and the proper and effective regulation of financial service providers and markets, while ensuring that the best interests of consumers of financial services are protected, that ILP hold own funds of an amount and character such that the Central Bank can be satisfied that ILP will maintain sufficient own funds over the period to which the Capital Review related (i.e. the period to 31st December, 2013). In reaching this conclusion, the Central Bank is also of the opinion for the purposes of Section 5A(11) of the CBA 1942 that this is consistent with the orderly and proper functioning of financial markets, the prudential supervision of ILP and the public interest and the interest of consumers.

      f) Regulation 70(1) of the European Communities (Capital Adequacy of Credit Institutions) Regulations 2006 (the ‘2006 Regulations’) states as follows:

            ‘The [Central Bank] shall require any credit ILP [sic - presumably “institution”] that does not meet the requirements of any law of the State giving effect to the Recast Credit Institutions Directive to take the necessary actions or steps at an early stage to address the situation.’
      g) Without prejudice to the generality of Regulation 70(1), Regulation 70(4) of the 2006 Regulations prescribes circumstances in which the Central Bank shall under Regulation 70(1) oblige a credit institution to hold own funds in excess of the minimum level set out in Regulation 19 of the 2006 Regulations.

      h) On the basis of the Capital Review, the Central Bank is of the opinion that


        (i) the requirements in this letter are necessary to provide for ILP to maintain sufficient own funds for the purpose of section 11(1)(b)(v) of the CBA 1971; and,

        (ii) the sole application of measures other than the requirements of this letter is unlikely to improve sufficiently and within an appropriate timeframe the level of own funds or the arrangements, processes, mechanisms and strategies the subject of Regulation 70(4) of the 2006 regulations.


      i) The need for the additional capital to be available to absorb expected losses and to provide for a prudent regulatory buffer up to 31st December 2013 means that the additional capital must:

        (i) be restricted to the highest quality capital in terms of permanence, flexibility of payments and loss absorbency;

        (ii) continue to be capable of being treated as own funds of the highest quality after the end-date for raising such capital; and;

        (iii) not be distributed or included within calculations of sums available for distribution without the prior consent in writing of the Central Bank.”

18.4 The letter concluded by notifying ILP that it would be required to submit a statement in writing of the steps that it would take to comply.

18.5 It is agreed that this communication from the Central Bank constituted a binding legal requirement.

19. The company’s reaction
19.1 In a public response on the same day, ILPGH said that the announcement was “extremely disappointing”. The Group had held a “strong belief” that it could have avoided this outcome and would have been able to “fix” its banking business over time “without compromising the integrity of the Group or the position of shareholders”.

19.2 It was stated that the result would mean that the Group would have a 2013 capital ratio in the order of 33% as measured by the Central Bank’s base case scenario.

19.3 The company planned to generate capital in the order of €1.7 billion as follows:

      • €1.1 billion from the sale of the life assurance and investment management businesses and a “liability management programme” (also referred to as a “liability management exercise” or “LME”) in relation to the bank’s subordinated debt (i.e. buying back debt for cash from the subordinated bondholders, at a discount).

      • €0.4 billion from contingent debt capital, and

      • €243 million from a dividend from Irish Life.

19.4 This left the sum of €2.3 billion to be raised. It was envisaged by the company that capital support would be available from the State.

19.5 On the 27th June, 2011 the company notified shareholders of an EGM to be held on the 20th July, the primary business of which would be consideration of the proposed State investment. The proposal involved

      (i) the proposed issue to the Minister of up to €3.4 billion in ordinary shares and of €0.4 billion in contingent capital notes;

      (ii) the proposed application for whitewash waiver of obligation under rule 9 of the Irish Takeover Rules;

      (iii) the proposed renominalisation of all ordinary shares; and

      (iv) the proposed delisting of all ordinary shares from the Official List of the Irish Stock Exchange and the Official List of the UK Listing Authority.


20. Shareholder reaction to the FMPR
20.1 In April Mr Skoczylas wrote on behalf of Scotchstone to the board of directors of ILPGH, calling on it to protect the interests of the shareholders. The concern expressed was that the Irish authorities had imposed artificially high capital requirements on ILP; was now forcing current shareholders to dispose of valuable assets in order to contribute 44% of those requirements, and was preparing to dilute the ownership of the company in a manner that would not recognise the extent of that contribution. Mr Skoczylas said that if it transpired that the €4 billion was not in fact needed, the Government would then be able to “pocket” most of the €1.7 billion provided by the shareholders by way of the asset sale.

20.2 In subsequent correspondence Scotchstone made suggestions as to how the government investment could be made in a way that, in its view, safeguarded the interests of all concerned. It was proposed that the investment should be by way of class B/preference shares, or that it could be by way of common stock with a call option for the company to buy back the shares after a number of years for the original price plus interest.

20.3 At all times Mr Skoczylas put forward the view that ILP was solvent and adequately capitalised.

20.4 Similar correspondence was sent by solicitors on behalf of some shareholders to the chairman of the board, to the Minister and to other holders of public office. It was accepted in that correspondence, as it has been in the course of these proceedings, that the company was obliged by the PCAR/PLAR results to raise the sum of €4 billion and that it was likely that the government would participate in the recapitalisation.

20.5 Subsequently, an alternative scenario was suggested. A solicitor’s letter of the 19th July, referring to the forthcoming EGM and the circular sent to shareholders, proposed that the company should sell the bank and warrant its losses for the benefit of the purchaser.

20.6 Other shareholders were of the view that the board should institute legal proceedings against the decisions of the Central bank and the government.

20.7 It is fair to say that the correspondence from individual shareholders demonstrates a great deal of anger against the board. This is perhaps understandable, not least because the share price was continuing to fall dramatically. On the 29th June it was 3 cents.

20.8 The company’s response was that the measures being taken were decided on foot of the FMP, which had to be complied with as a result of the Programme for Support. They could not be renegotiated.

21. Irish Takeover Panel approval
21.1 Rule 9.1 of the Takeover Rules, made under powers conferred by the Irish Takeover Panel Act, 1997 would in normal circumstances have required the Minister, as a person taking control of a company, to make an offer to the existing shareholders to buy their shares at the price being paid by him for his new holding.

21.2 By letter dated the 23rd June, 2011 the chairperson of the Irish Takeover Panel, Mr Denis McDonald, wrote to the Minister’s solicitor and to Davy to convey a conditional waiver of Rule 9.1 in the event of a direction order being made by the High Court under s.9 of the Act. The waiver was subject to the following conditions;

21.3 The applicants have claimed that the procedure ultimately adopted by the Minister breached the Takeover Directive and the Irish rules - this claim is however based on the overall contention that what the Minister did was unlawful, rather than by way of challenge to the waiver. As a result they say that, assuming the direction order is set aside, the Minister is obliged to make a cash offer to the shareholders.

22. State Aid approval
22.1 Article 107 of the Treaty on the Functioning of the European Union prohibits State aid where the effect of such aid would be to distort competition. However, it makes provision for approval by the Commission of State aid that would breach this principle in certain circumstances.

22.2 The Irish authorities applied in the month of July, 2011 for the approval of the European Commission for the proposed recapitalisation. The proposal submitted was the same as that which was to be considered by the EGM.

22.3 As part of this process the Governor of the Central Bank wrote to the Minister on the 14th July, 2011 in order to confirm

      “the systemic importance of ILPGH to the banking system in Ireland.”
22.4 He continued:
      “I understand that the European Commission will also require confirmation of the need for the scale of the proposed measures to ensure the financial stability of the credit institution.

      The Central Bank of Ireland endorses the sequenced and measured approach adopted by the Government to meet the very significant challenges that face our financial system in particular the requirement by the market, investors and credit rating agencies for higher capital ratios.

      In specific terms the Central Bank believes that it is essential in present conditions that ILPGH as a systemically important credit institution, the stability of which is essential to the maintenance of financial stability in the banking sector of Ireland, participates in the proposed measures which are currently estimated to be a maximum of €3.8 billion in capital terms. According to its FINREP Consolidated report as at 31st May 2011, ILPGH had customer deposits of €15.96 billion. As at the same date, ILPGH’s loan book was approximately €36.87 billion.

      The proposed measures are fully consistent with the Central Bank’s advice on the need to strengthen the capital position of the credit institution in order to ensure its financial stability and maintain its credit standing in the continuing very difficult market conditions.”

22.5 On the 20th July 2011 the European Commission granted temporary approval to a recapitalisation of ILP up to a sum of €3.8 billion by the Irish authorities. It had given such approval earlier in the month in respect of Bank of Ireland and AIB (which had by then been merged with EBS). A final decision was deferred pending the submission by Ireland of the new restructuring plan.

22.6 In making its decision the Commission considered, firstly, whether what was proposed constituted State aid within the meaning of the Article.

22.7 State aid is defined as any aid granted by a Member State or through State resources in any form whatsoever which distorts, or threatens to distort, competition by favouring certain undertakings, in so far as it affects trade between Member States.

22.8 In 2009 the Commission had issued a Communication setting out certain rules to be applied to the assessment of State aid in the context of bank recapitalisation.

22.9 The Commission made the following findings in this regard:

      • State resources were involved;

      • The measure was selective since the sole beneficiary was ILP;

      • The measure conferred an advantage on ILP, since it allowed it to absorb future expected losses, as well as potential “under stress” losses, on all its loan assets as well as the losses that would flow from the deleveraging process. As such it would allow ILP to potentially avoid insolvency;

      • The proposed recapitalisation would not have been provided by a market economy investor expecting a reasonable return on his investment;

      • The measure was capable of affecting trade and distorting competition as ILP was competing on, amongst others, the Irish retail savings markets, the Irish mortgage lending markets and the Irish commercial lending markets. Some of its competitors were subsidiaries of foreign banks.

22.10 The Commission therefore concluded that the measure fulfilled all the criteria laid down in Article 107(1) and would indeed amount to State aid to ILP.

22.11 The Commission then considered Article 107(3)(b), which permits State aid to be regarded as compatible with the internal market if its purpose is to remedy “a serious disturbance in the economy of a Member State”. Having regard to the evidence relating to the Irish economy, its banks and the position of ILP, the Commission accepted that the recapitalisation was necessary to avoid a serious disturbance in the economy of Ireland.

22.12 In accordance with Communications previously issued by the Commission on the subject of State aid to banks, the assessment of compatibility with the internal market required consideration of the measure under the headings of “Appropriateness”, “Necessity” and “Proportionality”.

22.13 For present purposes it should be specifically noted that the guidance given in the banking Communication stipulated that

      “The Member State concerned should in principle receive rights, the value of which correspond to their contribution to the recapitalisation. The issue price of the new shares must be fixed on the basis of a market oriented valuation.”
22.14 Mr Skoczylas says that this must be understood as meaning “in accordance with the principles of the market” and that since the actual market price of the shares was the result of a “false market”, an equitable price should have been determined. The “false market” issue is considered further below.

22.15 Mr Moran has averred that the rule means that the pricing of ordinary shares in the context of a State recapitalisation must be determined by reference to the quoted market price of such shares prior to the investment. He says that the recapitalisations of RBS (in December 2008) and of Lloyds (in January 2009) were both based on a 10% discount to the quoted market price prior to investment and were approved by the Commission at that level. Germany had applied a similar discount to its recapitalisation plan in October 2008, again with Commission approval.

22.16 Mr Moran also calculates that the 10% discount in fact made very little difference to the shareholders. Even without it, they would still have been diluted to less than 1%.

22.17 An annex to the Commission Communication on State aid to financial institutions, intended as practical guidance, refers to the difficulties in current conditions of forecasting future cash flows. It says that

      “The most noticeable factor, therefore, is the quoted market price of ordinary shares. For non-quoted banks, as there is no quoted share price, Member States should come to an appropriate market-based approach, such as full valuation…”
22.18 The measure was deemed by the Commission to be “appropriate” because
      • The injection of equity capital was “the single most efficient and straightforward measure to shore up one bank’s capital”, while the contingent capital notes ensured that the additional capital would be injected only if a capital deficiency or a non-viability event occurred.

      • The PCAR exercise would keep Ireland in line with industry-wide standards.

      • A strong capitalisation of ILP was necessary for it to able to

            “absorb expected and to some extent unexpected losses, engage in the necessary deleveraging process and convince private investors of its long-term viability to restart the flow of private funding towards the Irish banking system.”
      • The amount of recapitalisation was the result of the PCAR/PLAR exercise, aimed at fulfilling these objectives.
22.19 To be considered “necessary”, the capital injection had to be of the minimum amount needed to fulfil the objective. On this issue, the Commission’s opinion was that this criterion was met because:
      • The amount involved stemmed directly from the PCAR/PLAR exercise and was the amount required by the Central Bank. The Commission noted
            “It is true that the capital will be provided ex ante for the deleveraging plan to cover the losses that will be realised in the period until 31 December 2013, so that IL&P might temporarily have capital in excess of its immediate requirements. However the amount of capital needed has been established in the context of the Programme in order to allow IL&P to absorb expected and unexpected losses and achieve the deleveraging target of 122.5% LTD as required under the Programme. The proposed amount of recapitalisation is then limited to the minimum to meet such requirements.”
      • The sale of the Irish Life business and the LME (the liability management exercise concerning the subordinated debt holders) would limit the amount of State aid needed, since the maximum capital contribution would be extracted from the debt holders while the company would contribute to the cost of its own rescue by the sale of part of its activity.

      • The price to be paid per share - €0.063 - was considered to be “very significant”, because of the level of dilution of existing shareholders. It was noted to be a discount of 10% to the share price of the 23rd June, 2011, but also that it represented a discount of 85% on the share price of the last day before the publication of the PCAR/PLAR results.

      • It was further noted that the contingent capital notes would be converted into ordinary shares only if the core tier 1 capital ratio of the bank fell below 8.25%, while the minimum regulatory capital requirement was 10.5%. Thus, conversion into equity would occur only if the bank was “in clear financial distress”.

      • ILP was to pay fees for the placing.

      • The Commission noted that it was “very unlikely” that the State would recoup its investment in the medium or long term, in view of the uncertainty regarding ILP’s future profitability and funding issues. Although there would be a 10% p.a. payment for the contingent capital instruments, the market for such instruments was unclear. However, the Commission concluded that

            “IL&P is in a very distressed financial situation and is unable to pay the remuneration required for distressed banks…The recapitalisation measure is a crucial element in the complete overhaul of the entire Irish banking system. IL&P is one of the largest financial institutions in Ireland, with a nationwide presence and a large market share of current account holders, depositors and investors. IL&P will have to go through an equally far-reaching and in-depth restructuring process….Consequently it is justified that a very low remuneration is paid for the measure.”
22.20 Finally, the Commission found the proposed measure to be “proportionate” because of the following features:
      • The shareholders would be diluted to less than 1% - this was “very material” and the burden-sharing with ordinary shareholders was “close to maximum”.

      • The maximum burden-sharing would be extracted from the subordinated bondholders through the LME.

      • The restructuring plan to be submitted by ILP would reflect the “massive” aid injected into it, and the lack of appropriate remuneration for that aid.

      • Sufficient “behavioural” measures (to do with corporate governance, remuneration issues etc.) had been adopted to address the distortion of competition caused by the aid during the rescue period.

22.21 It may be worth noting that the Commission was aware of the provisions of the Act, and referred in passing to the fact that they might be invoked by the Minister in the event that the company did not voluntarily agree to the proposals.

22.22 Mr Skoczylas says, and it is accepted by the Minister, that this decision turned on the applicable criteria for State aid only and should not be taken as an assessment of the overall legality of the measure. Further, it must not be seen as amounting to a derogation from the provisions of the Second Company Law Directive. However, the Minister and the notice parties make a number of submissions as to the importance of the decision.

22.23 The first is that as a matter of European Union law, the State was permitted to inject capital into ILP only in a manner conforming with the State aid rules, and it is the Commission which bears the initial responsibility of assessing compliance with those rules.

22.24 The other relates to the concept of “burden-sharing”. This is said to be a key feature of permissible State aid. In essence, there can be no question of the State using this process to improve or even to maintain the position of shareholders. On the contrary, it is a fundamental principle that the shareholders should bear the initial burden, followed by the subordinated debt holders. The respondents make the point that this is the same as the core principle in Irish company law that creditors come first and shareholders come last, in the event of a failure of the company.

22.25 The applicants submit that burden-sharing is a concept applicable to the relationship between the funder and the recipient institution, and not to the shareholders of the institution.

SECTION F

23. The Extraordinary General Meeting, 20th July 2011
23.1 The notification of the EGM was accompanied by a letter from the company chairman, Mr Alan Cook. The results of the PCAR and PLAR exercises, and the consequent requirement made by the Central Bank that €2.9bn of the total gross capital requirement be achieved by the 31st July were noted. Mr Cook went on

23.2 The letter referred to the following facts: -
      • The bank’s loan to deposit ratio at the 30thApril, 2011 was 218%, significantly behind the new prudential target of 122.5%.

      • As of that date, residential tracker mortgages accounted for €16.7bn (65%) of the bank’s Irish mortgage book and €7.1bn (98%) of the UK mortgage book.

      • Debt markets were closed to the bank. Without participation in the ELG scheme it would have been unable to raise debt in 2010 and would not have been able to maintain its retail and corporate deposits with balances above those guaranteed under the Deposit Guarantee Scheme.

      • The bank was increasingly reliant on funding from the ECB and the Central Bank. At the 30th April, 2011 the total from those sources was €13.1bn, representing 30% of the bank’s total funding.

      • The bank had liabilities of €18.5bn guaranteed under the ELG scheme.

23.3 The views of the directors (not including the two directors nominated by the Government, who, being “related parties,” abstained) were summarised in the following paragraphs: -
      “As expressed in our announcement on 31March 2011, the capital requirements outlined in the FMPR were more than the Directors had considered necessary even in a stressed scenario. As indicated earlier, a significant factor in this difference is that in conducting the PCAR 2011, the Central Bank used a broader framework involving a number of new and additional features (such as deleveraging and buffer capital) and revised methods and assumptions to be used in the calculation of loan losses, which were not part of any of the Central Bank’s previous prudential capital assessments.

      While it is disappointing to have to bring these Proposals to Shareholders, the Board, having taken legal and financial advice and following discussions with the State in relation to the capital requirements of the Group, nonetheless believes them to be in the best interests of the Company and the Shareholders as a whole, given the lack of alternative options available, for the following reasons:


        • The Bank requires the Remaining Capital Requirement of 3.8 billion, of which 2.9 billion is required no later than 31 July 2011, in order to meet the capital levels set by the Central Bank and without this capital would no longer be able to operate its banking business and would have to cease operations. If this were to occur, it is expected that the group would have to be wound up with the loss of any remaining Shareholder value;

        • The Directors do not believe that there is currently an alternative source to meet the Remaining Capital Requirement other than the combination of the Liability Management Exercise, the possible disposal of the Irish Life Group and the State investment on the terms and structure currently being offered…

        • ...should the State Investment not be approved by Shareholders, it is the Director’s view that the Remaining Capital Requirement of 3.8 billion would have to met by the Irish State as a result of the Minister using his powers under the Stabilisation Act on terms which may be less favourable to Shareholders than those outlined in this Circular. The other alternative to the State Investment would be full nationalisation, which may result in the loss of any remaining Shareholder value.


      The Board believes therefore that the State Investment is the only viable alternative for the Company and the Shareholders as a whole in the present circumstances and, given the risk of further value destruction in the event that the proposals are not implemented, recommends that Shareholders vote in favour of the Resolutions…”
23.4 Details of a Placing Agreement with the Minister and the National Treasury Management Agency were provided, along with an explanation of the consequences of that agreement in relation to matters such as the necessary waiver of the Takeover Rules and the delisting of the company from the Irish and UK official lists.

23.5 The resolutions to be put before the EGM were:

      1. (a) To increase the company’s authorised share capital by 22,400,000,000 by the creation of 70,000,000,000 new ordinary shares of 0.32 each to facilitate the State investment and to issue any Ordinary Shares following any conversion of any Contingent Capital notes. This represented an increase of approximately 17,500% of the authorised ordinary share capital.

      (b) To grant the directors authority to allot relevant securities, to allow them to issue and allot ordinary shares without further approval from the shareholders.

      (c) To approve the State investment for the purposes of the Listing Rules - this was necessary because the Irish Government and government-related entities were “related parties” under those rules.

      2. To approve the whitewash waiver of the obligation of the Minister to make a mandatory offer under Rule 9 of the Takeover Rules.

      3. (a) To reduce the nominal value of the shares, which at that time was €0.32 per Ordinary Share.

      (b) To adopt new articles of association and amend the Memorandum.

      (c) To give authority to the directors to allot shares on a non pre-emptive basis - this was necessary to disapply the normal pre-emption rights in relation to the issue of Ordinary Shares under the State investment plan.

      (d) To de-list from the Official Lists and from trading on the regulated market of the Irish Stock Exchange and the main market of the London Stock Exchange. It was proposed that the company should seek admission to the Enterprise Securities Market.

23.6 After threats of legal action the company also agreed to table four resolutions put forward by shareholders. In summary, these were:
      1. To revoke the authority of the directors to allot shares in the capital of the company.

      2. To appoint a leading global investment bank and a leading corporate law firm to carry out a review of recapitalisation options and to undertake a comprehensive search for investors.

      3. To instruct the directors to contact the Central Bank, the Minister for Finance, the EU authorities, the IMF and the European Central Bank to ask them to review the planned recapitalisation and extend the deadline for its completion.

      4. To appoint Mr Skoczylas as an additional director.

23.7 The resolutions put forward by the shareholders were passed and the board resolutions were defeated.

23.8 Mr Skoczylas and other deponents have engaged each other in argument as to the extent of the support for his views shown by the EGM votes. It does not seem to me to be particularly relevant whether or not he had the support only of the majority of a minority of shareholders - as a matter of law, the resolutions were either passed or not passed. Even if it were to be assumed (and I do not see any reason why it should be) that all of those shareholders who did not vote supported one side or the other, that could not make any legal difference.

24. Correspondence between the company and the Minister
24.1 Immediately after the EGM the chairman of the company, Mr Cook, wrote to the Minster to inform him of the result of the EGM and to make representations as mandated by the meeting. He referred to meetings with the Minister or his officials over the previous two and a half months and proposals made on behalf of the company which had not been accepted. The concerns of the company were stated to be:

24.2 Mr Cook also referred to the proposal made by the board that
      • The placing price of the shares should be in the range of 30-75 cents.

      • There should be a pre-emption cover claw-back for existing shareholders.

      • €1.4 billion of the capital should be by way of B shares to allow for a targeted buy-back in the event that the losses projected by PCAR 2011 did not materialise and the business thus turned out to be over-capitalised.

24.3 Mr Cook’s letter was responded to on the following day by Mr Moran on behalf of the Minister. Mr Moran acknowledged that concerns and suggestions had been raised at previous meetings.

24.4 He made three general points as follows:

      • The recapitalisation requirement had been imposed by the Central Bank in its capacity as independent Regulator and had to be complied with.

      • The timing of the recapitalisation was dictated not only by the Central Bank but also by the External Partners and the European Council Implementing Decision, as amended.

      • ILP did not have any viable alternative source of capital investment.

24.5 Mr Moran requested Mr Cook to revert urgently if the position in respect of this last point had changed.

24.6 Mr Moran then went on to consider the specific issues raised by Mr Cook and responded to the following effect:

      • It was not practical to offer a pre-emption element to the State investment, given the low level of shareholder support anticipated by the board itself for such a proposal.

      • ILP had already consented to a direction order made by the High Court on the 9th June, 2011 in relation to the sale of Irish Life.

      • The issue price for the new shares had been the subject of negotiation between the company and the Minister. The Minister had initially proposed a price of 1 cent per share - this was raised to a 10% discount to market price. On this topic Mr Moran said

            “The issue price fairly reflects the circumstances and nature of IL&P and of the State’s investment. There was never any reality to an issue price of 30 to 75 cents as suggested in your letter of yesterday, particularly given the market price at which IL&P’s shares were trading at the relevant time. This range was a multiple of the market price at the time (and remains even more so now).”
      • On the proposal in relation to Class B shares, Mr Moran said
            “It would not be prudent for the State to agree to a capped upside in respect of its capital injection into IL&P by way of the use of B shares as suggested in your letter of yesterday, in circumstances where it is the State (and by consequence, the taxpayer) that is undertaking the greatest risk in the recapitalisation of IL&P to meet the requirements of the Central Bank, as Regulator, and of the External Partners.”
24.7 Mr Moran also noted the fact that the board had in its Circular recommended the terms of the State investment to shareholders.

24.8 He concluded that there was no option but to proceed with the recapitalisation by the 31st July 2011.

24.9 In his affidavit Mr Cook has said that, following the EGM, ILPGH and ILP faced

        “…an extremely serious situation”.
24. 10 He says that “it” (apparently with reference to ILP) had at the 30th June 2011 retail deposits of €13.089 billion and corporate deposits of €5.57 billion. It was in “serious breach” of its liquidity ratios. It was covered by the ELG for €17.776 billion, and had borrowings with the ECB of €12.607 billion. It also had ELA of €2.111 billion with the Central Bank.

24.11 There was now a period of six days to comply with the Central Bank recapitalisation requirement. Mr Cook avers that the resolution authorising the company to seek potential investors could not be complied with in this time - this is not in dispute - and that in any event this was not a realistic proposal. The bank had been unable to find any private investor willing to invest the necessary capital.

24.12 Mr Cook’s evidence as to what would happen if the bank was not recapitalised within that time are dealt with elsewhere in the judgment.

25. Submissions made to the Minister on behalf of shareholders
25.1 After the EGM a number of individual and corporate shareholders made written submissions to the Minister, directly and/or through solicitors.

25.2 The shareholders argued that ILP was not insolvent. They were also of the view that the recent bank stress test imposed artificially high capital requirements and would make ILP “the most over-capitalised bank in the world”.

25.3 The Minister’s response was that the recapitalisation was necessitated by, inter alia, the Programme for Support and the Implementing Decisions, which imposed an obligation to carry it out by the 31st July (subject to adjustment in relation to the expected asset sale). The obligation arose on foot of the PCAR and PLAR exercises carried out in 2011 and the Central Bank’s determination thereon, which had not been challenged at that time.

25.4 The shareholders further contended that the proposal involved a contribution on their part of between €1.3 billion and €1.7 billion (because of the proposed sale of Irish Life), representing 33% to 44% of the proposed €4 billion capital requirement. They argued that they were therefore entitled to hold a stake of that order after the State investment.

25.5 The response to this argument was that it implied a market capitalisation of €3.6 to €4 billion after the contribution of €2.3 billion by the State. However, the market value of ILPGH as of the 28thFebruary, 2011 was only about €271 million.

25.6 Further, it was denied that the shareholders of ILPGH could be said to be contributing €1.7 billion in capital, since they were not the owners of Irish Life. That company was owned by ILP and not by the shareholders of ILPGH. Their claim would, it was argued, deliver to the ILPGH shareholders unwarranted windfall gains at the expense of the taxpayer or of any new investor.

25.7 The shareholders also believed that not enough had been done to explore other options and in particular that there had been no proper search for alternative, private investors and no proper consideration of raising capital from the shareholders.

25.8 The Minister’s response to this was that he believed that State investment was the only viable option. There was no credible or substantial private sector interest in ILP. While the Minister would have had no objection to allowing shareholders to invest in ILPGH on the same terms as the State by way of open offer or rights issue, the company had decided not to proceed on that path.

25.9 A case was made on behalf of the shareholders that the State investment amounted to an unlawful and unconstitutional expropriation of their property rights. This was not accepted.

SECTION G

26. The Credit Institutions (Stabilisation) Act, 2010
26.1 The Act applies to institutions to which financial support has been given. It was passed into law on the 21st December, 2010 and ceased to have effect on the 31st December, 2012, having been replaced by the Central Bank and Credit Institutions Resolution Act, 2011.

26.2 The long title of the Act is as follows:

26.3 The preamble contains the following recitals:
      “[21st December, 2010]

      Whereas there is a serious disturbance in the economy of the state;

      And whereas measures are necessary to address a unique and unprecedented economic crisis which has led to difficult economic circumstances and severe disruption to the economy;

      And whereas there is a continuing serious threat to the stability of certain credit institutions in the State, and to the financial system generally;

      And whereas it is necessary, in the public interest, to maintain the stability of those credit institutions and the financial system in the state;

      And whereas it is necessary, in the interests of the common good, to continue the process of reorganisation, preservation and restoration of the financial position of Anglo Irish Bank Corporation limited begun with the Anglo Irish Bank Corporation Act 2009;

      And whereas the functions and powers conferred by this Act are necessary to secure financial stability and to effect a reorganisation of certain credit institutions;

      And whereas it is necessary to amend the European Communities (Reorganisation and Winding-up of Credit Institutions) Regulations 2004 (S.I. No. 198 of 2004) to implement Directive 2001/24/EC of the European Parliament and of the Council of 4 April 2001 to preserve or restore the financial position of certain credit institutions;

      And whereas the considerable financial support provided by the State to certain credit institutions has helped those institutions to meet their financial and regulatory obligations;

      And whereas the State wishes to provide for the performance of the functions conferred by this Act in order to achieve the financial stabilisation of those credit institutions and their restructuring (consistently with the state aid rules of the European Union) in the context of the national recovery plan 2011—2014 and the European Union/International Monetary Fund programme of financial support for Ireland;

      And whereas the common good requires permanent or temporary interference with the rights, including property rights, of persons who may be affected by the performance of those functions;

      And whereas the urgent reorganisation of certain credit institutions is of systemic importance to the State;

      And whereas it is necessary to maintain public confidence in, and enhance, the protection of deposits in credit institutions generally;

      And whereas it is desirable to promote and facilitate investment by persons other than the state in credit institutions to reduce their reliance upon State support;

      And whereas because certain credit institutions in the State are parties to contracts and other arrangements governed by the law of a state other than the State;

      be it therefore enacted by the Oireachtas as follows:”

26.4 Section 4 of the Act describes its purposes, in so far as they are relevant to these proceedings, as follows:
      a) To address the serious and continuing disruption to the economy and the financial system and the continuing serious threat to the stability of certain credit institutions in the State and the financial system generally

      b) To implement the reorganisation of credit institutions in the State to achieve the financial stabilisation of those credit institutions and their restructuring (consistently with the state aid rules of the European Union) in the context of the National Recovery Plan 2011-2014 and the European Union/International Monetary Fund Programme of Financial Support for Ireland

      c) Omitted

      d) Omitted

      e) To protect the interests of depositors in credit institutions

      f) To address the compelling need -


        (i) to facilitate the availability of credit in the economy of the State

        (ii) to protect the State’s interest in respect of the guarantees given by the State under the Act of 2008 and to support the steps taken by the Government in that regard

        (iii) to protect the interests of taxpayers

        (iv) to restore confidence in the banking sector and to underpin Government support measures in relation to that sector

        (v) to align the activities of the relevant institutions and the duties and responsibilities of their officers and employees with the public interest and the other purposes of this Act


      g) To preserve or restore the financial position of a relevant institution, and

      h) To empower the Court to impose reorganisation measures through orders made in reliance on the CIWUD Directive.]

26.5 Section 7 provides for the making by the Minister of “Proposed Direction Orders”.
      7.— (1) Subject to subsections (2) and (4), the Minister may make a proposed direction order proposing that a relevant institution be directed to take (within a specified period) or refrain from taking (during a specified period) any action, including, in particular, and without limiting the generality of the foregoing, any one or more of the following:

      (a) notwithstanding any statutory or contractual pre-emption rights, the listing rules of a regulated market or the rules of any other market on which the shares of the relevant institution may be traded from time to time, issuing shares to the Minister or to another person nominated by the Minister on terms and conditions that the Minister specifies in the proposed direction order at a consideration that the Minister sets;

      (b) applying for the de-listing of the relevant institution’s shares, or the suspension of their listing, on a regulated market, or to change the listing of the relevant institution’s shares from a regulated market to another multi-lateral trading facility;

      (c) increasing the authorised share capital (including by the creation of new classes of shares) of the relevant institution to permit it to issue shares to the Minister or to any other person nominated by the Minister;

      (d) making a specified alteration to the relevant institution’s memorandum of association and articles of association (including, without prejudice to the generality of the foregoing, the alteration of the rights of shareholders or any class of shareholders);

      (e) disposing, on specified terms and conditions, of a specified asset or liability or a specified part of the relevant institution’s undertaking.

      (2) The Minister may make a proposed direction order only if the Minister, having consulted with the Governor, is of the opinion that making a direction order in the terms of the proposed direction order is necessary to secure the achievement of a purpose of this Act specified in the proposed direction order.

      (3) If the Minister makes a proposed direction order in relation to a relevant institution and the intention of it or part of it is the preservation or restoration of the financial position of a credit institution, the Minister shall declare in the proposed direction order that the proposed direction order or part is made with that intention, in accordance with the CIWUD Directive.

      (4) Unless the relevant institution concerned consents to the making of a direction order in the terms of the proposed direction order, or exceptional circumstances (within the meaning of subsection (5)) exist, the Minister shall also, before making a proposed direction order—

      (a) deliver a written notice to the relevant institution setting out the terms of the proposed direction order, accompanied by a summary of the reasons why the Minister is of the opinion that a direction order in the terms of the proposed direction order is necessary,

      (b) afford the relevant institution 48 hours, or a shorter period on which the Minister and the relevant institution agree, in which to make written submissions to the Minister, and

      (c) consider any submissions made under paragraph (b).

      (5) omitted

26.6 Direction Orders are dealt with in s.9 of the Act, which is here set out in full.
      9.— (1) As soon as may be after completion in relation to a proposed direction order of the procedures required by section 7 , the Minister shall apply ex parte to the Court for an order (in this Act called a “direction order”) in the terms of the relevant proposed direction order.

      (2) The Court, when hearing an ex parte application under subsection (1), shall, if satisfied that the requirements of section 7 have been complied with and that the opinion of the Minister under that section was reasonable and was not vitiated by any error of law, make a direction order in the terms of the proposed direction order (or those terms as varied after consideration of any submission referred to in section 7 (4)(c)).

      (3) If in a proposed direction order the Minister has declared the intention of preserving or restoring the financial position of a credit institution, and the Court is satisfied that the Minister made the proposed direction order or part of it with that intention, the Court shall declare in the relevant direction order that the direction order or the relevant part of it is a reorganisation measure for the purposes of the CIWUD Directive.

      (4) A report prepared by the Bank (whether or not prepared specifically for the purpose of the application) in relation to matters within the Governor’s or the Bank’s responsibilities, including the financial position of the relevant institution, is admissible in evidence at the hearing of the application.

      (5) The Court may make a direction order in terms varied or amended from those in the proposed direction order only if the Court is satisfied that—

      (a) there has been non-compliance with any of the requirements of section 7 or that the opinion of the Minister under section 7 (2) was unreasonable or vitiated by an error of law,

      (b) it would be appropriate to do so, having regard to any report referred to in subsection (4), and

      (c) to do so is necessary for the purpose specified in the proposed direction order or any other purpose of this Act.

      (6) The Court may give a direction, as it thinks appropriate, in relation to the publication of a direction order.

      (7) Subject to subsection (8), a direction order has effect—

      (a) if an application is made under section 11, in accordance with that section, and

      (b) if no such application is made, 5 working days after the making of the order.

      (8) The Court shall order that a direction order or a term of a direction order has effect immediately where the Court is satisfied that the purpose of the order or term is—

      (a) to ensure the immediate and effective issuance of additional share capital in the relevant institution concerned by issuing shares to the Minister or his or her nominee—

      (i) to prevent or remedy an imminent breach of the regulatory capital requirements applicable to the relevant institution, or

      (ii) to enable the relevant institution immediately to meet regulatory capital targets set by the Bank,

      (b) to address an imminent threat to the financial stability of the relevant institution concerned, or

      (c) to address an imminent threat to the stability of the financial system in the State.

      (9) The Court may order in a direction order that action taken by a relevant institution in accordance with section 8 shall be taken to have been taken in compliance with the direction order.

26.7 Section 11 provides that the relevant institution in question, or any member thereof, may apply to the court to have the direction order set aside. (At the relevant time, the application to set aside had to be made within five days - this has since been extended to fourteen.) The Court may set the order aside
      “Only if it is of the opinion that there has been non-compliance with any of the requirements of section 7 or that the opinion of the Minister under section 7(2) was unreasonable or vitiated by an error of law.”
26.8 If the Court finds that any of these legal flaws has been established, it has power to vary the direction order rather than set it aside.

26.9 Neither s.11 nor any other provision of the Act expressly purports to oust the judicial review jurisdiction of the High Court. However, s.63 imposes a time limit of 14 days for the bringing of the application for leave. Section 63(3) provides that a person will not be entitled to apply for judicial review of a decision made under the Act if he or she was entitled to make an application under s.11 but did not do so, or if he or she made such an application but was not successful.

26.10 Section 47 provides for the inclusion in a direction order of a provision to the effect that any power exercisable by the members of the relevant company in general meeting may instead be exercised by the Minister.

26.11 Section 52 provides as follows:

      “Any order made under this Act that is declared to have been made with the intention of preserving or restoring the financial position of a credit institution is intended to have effect in accordance with the CIWUD Directive and any law giving effect to it.”
26.12 Section 53 provides, in summary, that the Act and any order made under it are to have effect notwithstanding any provision of the Companies Acts; any rule of law or equity; any code of practice made under any enactment; the listing rules of any market upon which shares in the relevant institution may be traded; the memorandum and articles of association and any agreement to which the institution is a party, except to any extent to which the Act expressly provides otherwise.

26.13 Section 61 of the Act has been referred to as a “switch off” provision. In very brief summary, where the exercise of a power under the Act might otherwise have the effect of giving rise to rights or liabilities under relevant agreements, whether governed by the law of this State or otherwise, by virtue of this section no such rights or liabilities will arise. The effect of this is to ensure that, for example, if the making of a direction order were to be otherwise construed as a contractual event of default on the part of the relevant institution, it could not give rise to liability.

26.14 The Act provides that where relevant, the direction order shall declare that the measure is a reorganisation measure within the meaning of the Credit Institutions Winding-Up Directive (“CIWUD”). This directive empowers the Member States to define by their own laws what amounts to a reorganisation measure. Such a measure is then automatically recognised in other Member States. This, crucially, affects the rights of creditors to enforce their entitlements throughout the Union.

SECTION H

27. The Proposed Direction Order
27.1 The Proposed Direction Order, signed by the Minister on the 25th July, 2011, contained the following recitals in Paragraph 2:

27.2 Paragraph 3 stated that the intention of the Proposed Direction Order was
      “the preservation or restoration of the financial position of ILP”.
27.3 Paragraph 7 described the purposes of paragraphs 8.1, 8.2, 8.3(a), 8.3(b), 8.9 and 9 of the Proposed Direction Order as being
      “to ensure the immediate and effective issuance of additional share capital in ILPGH by issuing shares to the Minister:

        a) to prevent or remedy an imminent breach of the regulatory capital requirements applicable to ILP; and/or

        b) to enable ILP immediately to meet its regulatory capital targets set by the Central Bank of Ireland…; and/or


      to address and imminent threat to the financial stability of ILPGH and ILP; and/or

      to address an imminent threat to the stability of the financial system in the State.”


28. Compliance with s.7 of the Act
28.1 Section 7 of the Act requires the Minister, before making a proposed direction order, to consult with the Governor of the Central Bank (s. 7(2)) and, in the absence of certain exceptional circumstances not relevant here, to give an opportunity to the relevant institution to make written submissions on the proposal (s. 7(4)).

28.2 On the 19th July, 2011 the Minister wrote to the Governor of the Central Bank to inform him that he was considering the making of a Proposed Direction Order in respect of ILPGH and ILP. The Minister noted that the Governor was very familiar with the circumstances.

28.3 Reference was made to the fact that the EGM was being held on the following day, and that the indications were that it was very unlikely that shareholder approval of the proposed State investment would be forthcoming. In those circumstances, the Minister said that he was of the opinion that the Proposed Direction Order would be necessary to capitalise ILP by the 31st July.

28.4 The letter continues:

      “I am of the opinion that the making of a Proposed Direction Order is necessary to secure the achievement of the purposes of the Act set out in Sections 4(a), 4(b), 4(e), 4(f), 4(g) and 4(h) in the case of ILP because, amongst other things:

      • It is necessary to meet the additional capital requirements of ILP, arising under PCAR 2011 and PLAR 2011, as published by the Central Bank on 31 March 2011;

      • As set out in the Central Bank’s letter dated 31 March 2011 to ILP in relation to the additional capital requirements, under Section 11(1)(b)(v) of the Central Bank Act, 1981, a failure by ILP to, inter alia, maintain sufficient own funds would form grounds for the revocation of the licence of ILP to conduct banking business in the State, therefore the State investment is necessary to avoid this;

      • If ILP is not put on a stable footing, there is a real risk of a loss of market and customer confidence in ILP which could lead to a run on deposits;

      • Pursuant to the Programme of Financial Support for Ireland (the “Programme for Support”) as announced on 29 November 2010 and updated on 17/18 May 2011 and the Council Implementing Decisions on the granting of European Union Financial Assistance to Ireland (Implementing Decisions 2011/77/EU and 2011/326/EU), the State is obliged to ensure that ILP’s capital needs have been fully met by 31 July 2011 (subject to appropriate adjustment for expected asset sales). If the State does not comply with the Council Implementing Decisions and the Programme for Support, the European Commission, the International Monetary Fund and the Central Bank are entitled to discontinue their funding of the State;

      • The State Investment is necessary to preserve and/or restore the financial position of ILP.”

28.5 A copy of the proposed direction order was attached to the letter.

28.6 The Minister noted in his letter that it was the view of the Central Bank that it was

      “essential in present conditions that ILPGH, as a systemically important credit institution, the stability of which is essential to the maintenance of financial stability in the banking sector in Ireland, participates in the proposed measures which are estimated to be a maximum of €3.8 billion in capital terms.”
28.7 On the 20th July, after the EGM, the Minister wrote to the Governor to update him and to confirm that he remained of the opinion that a direction order in the terms of the proposed direction order was necessary. He was, however, now of the further opinion that it would be necessary to direct ILPGH not to proceed with the resolutions which the shareholders had passed.

28.8 The Governor replied on the 21st July to the effect that the Programme of Support required the timely completion of recapitalisation measures and that the deadline of the 31st July was “enshrined” in the Memorandum of Economic and Financial Policies. He went on:

      “The Central Bank considers these additional capital requirements are essential to strengthen the capital position of ILP, the stability of which is essential to the maintenance of financial stability in the banking sector of Ireland.

      It is clear that ILP will not be able to raise a sufficient amount of capital required through private sources within the timeframe required and therefore ILP is reliant upon the State to provide the necessary capital in order to comply with the Central Bank requirements.

      In the context therefore of a situation where the shareholders of Irish Life & Permanent Group Holdings plc have not approved the recapitalisation prescribed by the Central Bank and required under the MEFP, I am satisfied that your proposal of a direction order in the terms of your letter of 19 July 2011 would, through achieving the required recapitalisation of ILP, achieve the purposes of the Credit Institutions (Stabilisation) Act 2010 cited in paragraph 2 of the Proposed Direction Order.”

28.9 The Minister also wrote to the chairman of the board of ILPGH, enclosing a copy of the proposed direction order and a summary of the reasons for his opinion that a direction order was necessary. Mr Cook replied on the same day, stating that their submissions were contained in the letter of the 20th July and that no further time was required.

28.10 Mr Moran has averred that this correspondence was considered by the Minister prior to the making of the proposed direction order and that the letter of the 20th July was considered as a submission made for the purposes of s.7(4).

SECTION I

29. The application for the direction order
29.1 The grounding affidavit for the application was sworn by John A. Moran, who was at the time the Second Secretary in the banking division of the Department of Finance.

29.2 The purpose of the application was stated to be the recapitalisation of ILP by the 31st July, 2011 as required by (i) the Central Bank of Ireland; (ii) the Commission of the European Union and the International Monetary Fund, in consultation with the European Central Bank; and (iii) the Council of the European Union. It was stated that the capital required by ILP amounted to €4 billion, of which €2.9 billion had to be generated by the 31st July. The State was obliged to ensure that the recapitalisation was carried out and had agreed to subscribe €2.7 billion for certain securities in the ILPGH Group. This was described as “the Principal State Investment”.

29.3 It should be noted that provision was also being made for a “Standby” State investment of up to €1.1 billion, in the event that the proposed asset sales were not successful. Ultimately, this was used when the Minister purchased Irish Life for €1.3 billion in 2012. This came about after the failure of a private sale process.

29.4 Mr. Moran recited the fact that the approval of the shareholders had been sought and refused at the EGM on the 20th July, 2011.

29.5 The affidavit set out the background to ILP’s difficulties, already referred to, and the fact that debt markets were closed to it. It was participating in the Credit Institutions (Eligible Liabilities Guarantee) Scheme, which had been established by the Minister in 2009. The scheme provided liquidity and other support to Irish financial institutions. ILP was said to be reliant upon it to raise term debt and to maintain its retail and corporate deposits above the threshold of the deposit protection scheme operated in accordance with domestic and EU statutory requirements relating to the Deposit Guarantee Scheme. As of the 30th June, 2011 ILP had €17.8 billion of deposits and bonds guaranteed under the ELG scheme and an additional €9.3 billion of deposits guaranteed under the Deposit Guarantee Scheme.

29.6 In total therefore the sum guaranteed by the State (excluding the European Central Bank and emergency liquidity assistance funding provided by the Central Bank) was €27.1 billion.

29.7 According to Mr Moran, ILP’s funding position was more precarious than most other credit institutions because it had a loan to deposit ratio significantly higher than others. At the 30th June, 2011 this stood at 228%. Although this was an improvement in its position since a high of 271% at the end of 2009, the Central Bank had determined that it was necessary for ILP to deleverage its loan book by €15.7 billion by 2013. If this was done, ILP could reach a more sustainable loan to deposit ratio of 122.5% by that year.

29.8 More than 60% of ILP’s Irish mortgage book was made up of tracker mortgages priced off the ECB funding rate. Without access to ECB funding at a lower than market rate, the tracker mortgage loan book would be unprofitable.

29.9 The bank’s UK business, which was primarily involved in the buy-to-let market, had been closed to new business since March 2008.

29.10 Meanwhile, ILP had €255 million of senior debt due to mature prior to the 31st December, 2011.

29.11 Mr Moran set out the financial support measures that had been put in place by the State to stabilise the financial system, also referred to earlier in the judgment.

29.12 The proposed investment by the State was to be, for the greater part, by way of €2.3 billion for equity, pricing the shares at a 10% discount to the market price on the 23rd June, 2011. A further €0.4 billion was to be paid by the Minister in return for the issue Contingent Capital Notes, to be retained by the company and invested in debt securities. These notes would be convertible to ordinary shares in the event of certain contingencies arising.

29.13 Mr Moran averred that the Minister would have preferred to see the required capital raised from private sources rather than by the application of public funds, in order to reduce the overall cost to the taxpayer. However, he believed, and had been advised by the National Treasury Management Agency, that private capital was currently unavailable to ILP and that parties other than the State would not invest in it

29.14 Mr Moran quoted portions of the Circular sent by the Board to the shareholders recommending the terms of the State investment.

29.15 He referred to the correspondence from and on behalf of shareholders, suggesting that there might be private sector and shareholder interest in recapitalising ILPGH, and exhibited the entirety of the correspondence. It was averred that the Minister was not aware of any credible and substantial private sector alternatives. The bank had confirmed to the Minister that no interest had been expressed since the 31st March, 2011.

29.16 Explaining the decision to price the equity investment at a discount of 10% of the market price, Mr Moran said that the advice given by Goldman Sachs was that for all placements over €50 million since 2007, where more than 20% of the equity was sold, the average discount was 9.6%. The European Commission had approved a 10% discount and ILPGH had agreed to a placing at that price.

29.17 The Placing Agreement put before the EGM by the board had been rejected and it was proposed by the Minister that the direction order should provide that the company was to enter into such an agreement (similar, but not identical, to the one previously agreed between the board and the Minister).

29.18 Mr Moran exhibited the correspondence with the Governor of the Central Bank. He also exhibited a report from the Banking Supervision Division of that institution, dated the 22nd July, for the purposes of s.9 (4) of the Act.

29.19 In the report it was stated inter alia that

      “…the recapitalisation deadline of the 31st of July 2011 was set in order to provide the banks with a reasonable timeframe to commence with the capital restructuring plan and at the same time avoid eroding market confidence in the PCAR exercise. No significant deferral of that obligation could be countenanced and any such deferral would require definitive alternative capital plans. No such plan exists for ILP, other than the planned disposal of the Irish Life business.”
29.20 It was also noted that ILP had a “significant” portion of funding maturing over the coming three months, with the majority of the funding rolling on a short-term basis.
      “ILP is significantly dependent on Eurosystem and ELA funding to satisfy its liquidity needs. The exceptional degree of reliance on Central Bank funding is not conducive to the proper and orderly regulation of the banking sector or the stability of the financial system. As of the 8th July 2011 over 35% of ILP’s total funding base is provided through Eurosystem and ELA funding. ILP continues to face significant funding issues, the need to significantly increase deposits, to raise other forms of stable funding and to raise funds at cost to ensure its business is profitable. It has no ability to address any of these funding issues itself as it is unable to access capital markets and therefore any reduction in its loan-to-deposit ratio must come from reducing the asset side of its balance sheet…

      It is unrealistic to assume that ILP will be able to return to the wholesale market in the short term due to its current financial state and its current credit rating. The ability of ILP to meet the additional capital requirement under the PCAR is critical for ILP to have continued access to its funding sources; both from an ability to have continued access to the ECB and Central Bank and also for the retention of depositors.”

29.21 It was the view of the Bank that a failure to engage in the recapitalisation plan
      “…would risk financial stability through loss of depositor confidence in the bank.”
29.22 Since it could not raise the capital itself, it required the State injection.
      “On balance the proposed action by the Minister in the recapitalisation of ILP contributes to the State’s efforts in addressing the serious and continuing disruption to the economy and the financial system. Seen as part of the overall strategy for the banking system, aside from the context of the EU, ECB and IMF programme, the proposed order can be expected to stabilise ILP’s financial position and that of the financial system and further protect the interests of the depositors in the covered institutions.”

30. The Purposes of the order
30.1 The purpose of the direction order was stated to be
      “to ensure that the Principal State investment is completed according to a specified timeline, under controlled conditions, so as to enable the preservation and restoration of ILPGH and ILP and in order to comply with the requirements of the External Partners by 31 July 2011 set out in the Council Implementing Decisions and in the Programme for Support and of the Central Bank and to ensure that the balance of the State Investment can be made (if required) under Court directed, specified and controlled conditions.”
30.2 Mr Moran then referred to the purposes of the Act as invoked by the Minister and discussed their relationship to the proposed direction order. His comments are summarised here in the order of the provisions.

30.3 Section 4(a) - addressing the serious and continuing disruption to the economy and the financial system:

      The purpose of the State Investment and the development of the restructuring plan for ILP was to restore stability to ILPGH and ILP, thereby reducing the “serious threat” they posed to the financial system generally and to avoid creating uncertainty about ILP’s future which could result in a run on deposits. The State was placed by the Programme for Support and the Implementing decisions under “imperative obligations” to restructure ILP, which included making the investment by the 31st July. The direction order would be a vital step in this process.
30.4 Section 4(b) - the reorganisation of credit institutions in the State to achieve the financial stabilisation of those institutions and their restructuring in the context of the Programme for Support:
      The direction order was necessary in order to comply with the Programme for Support and the Implementing Decisions.
30.5 Section 4(e) - protecting the depositors in credit institutions:
      The terms and conditions of deposits, and the legal status of depositors, would be unaffected by the investment. Further, they would be in a better position if ILP maintained a sustainable business, with ongoing cash flow to repay depositors as they withdrew money, than if it continued to lose market and customer confidence with the resulting possibility of a run. Although they had the protection of the State guarantee, this would require the State to find up to €15.6 billion in funds.
30.6 Section 4(f) - the compelling need to protect the State’s interests in respect of the guarantees given by the State under the Act and to support the steps taken by the Government in that regard, to restore confidence in the banking sector and to underpin Government support measures in relation to that sector.
      The direction order would confer the protection of s.61 of the Act and the CIWUD directive, ensuring that State guaranteed bonds issued by ILP would be safeguarded during the State Investment process.
30.7 Section 4(g) - to preserve and restore the financial position of a relevant institution.
      The direction order was necessary for the carrying out of the recapitalisation plan, which itself was necessary to preserve and/or restore the financial position of ILP. Without it there was the possibility that ILP’s banking licence would be revoked, that there might be a run on deposits, or that it would be wound up. These events would have an adverse impact on the bank, the State and the shareholders.
30.8 Mr Moran also suggested that it was possible that, if the State investment was made without a direction order and the protections pursuant to s.61 and the CIWUD Directive that it conferred, such an investment might be regarded as an event of default by the counterparties to some of ILP’s derivative agreements. ILP and the Minister did not consider this view to be correct but there was a risk of damage arising from the possibility of termination of these agreements. Most of them were governed by laws other than the laws of Ireland and it was therefore critical that that the protection of CIWUD and s.61 of the Act should apply.
      “Absent the benefit of protections derived from the Act, and Section 61 in particular, it would be impossible to structure the State Investment.”
30.9 Under the heading “Necessity for the Direction Order” Mr Moran dealt firstly with the possible consequences if the order sought was not made. In summary, he said that these consequences were potentially catastrophic for ILP, for the banking system as a whole and for the State.

30.10 As far as ILP was concerned, breach of the recapitalisation deadline would create uncertainty as to its future. This would have an adverse effect on its business and on its reputation for solvency, potentially leading to a run on deposits such as had happened in the case of UK bank Northern Rock. Such a run would ultimately result in ILP having to cease trading and wind up on an insolvent basis.

30.11 Even if this scenario did not come about, the bank would not be able to secure funding. ILP was already drawing down substantial amounts of ELA funding, collateralised in part by the ELG scheme. If it breached its regulatory requirements it would not be able to access debt markets, since it could not give the necessary undertakings relating to those requirements. The Central Bank might not, in its discretion, provide further ELA funds. Failure to comply with a requirement imposed by the Central Bank, which that body considered to be essential, could lead to sanctions including suspension of the business or revocation of the banking licence. On this point, Mr Moran said

      “From both a regulatory and reputational perspective, it would be regarded as inconceivable that the Irish authorities would allow ILP to operate in continuing breach of its regulatory capital requirements.”
30.12 Another possible issue arising from a failure to meet the requirement was said to be the obligation of the Central Bank to notify other Central Banks in Europe of the occurrence of an emergency situation, potentially jeopardising the financial system. This would be likely to undermine confidence in the Irish banking system as a whole.

30.13 Furthermore, the State was legally obliged to recapitalise ILP on foot of the Programme for Support and the Implementing Decisions. If it failed to do so it could be subject to a range of sanctions, including the withholding of instalments or the withdrawal of funding altogether. There would also be the risk of imposition of penalties pursuant to Art. 260 of the Treaty for the Functioning of the European Union.

31. The details of the order sought
31.1 Mr Moran’s affidavit went through the proposed direction order in detail, commenting on the perceived necessity for each provision. The salient parts are set out here.

31.2 His observations on the obligations imposed on ILPGH are summarised as follows:

31.3 The obligations imposed on ILP are then summarised. It was required to
      • Enter into the placing agreement, the note purchase agreement and an agency deed in relation to the contingent capital notes.

      • Issue those notes in favour of the Minister in consideration of the subscription by the Minister of €400 million and take consequential administrative steps. The notes were to be subordinated unsecured tier 2 debt instruments, with a maturity of five years and one day, which would convert or be exchanged into ordinary shares in ILPGH if certain events occurred. In the event of such conversion, the ordinary shares to be issued would count as core tier 1 capital.

      • Discharge the subscription fees to the extent that ILPGH did not do so.

31.4 ILPGH was then to
      • Apply to the Irish Stock Exchange and the UK authorities for cancellation of the admission of its ordinary shares from their respective regulated markets, and to apply to the Irish Stock Exchange for the admission of the shares to the Enterprise Securities Market. These steps were necessary because the Minister would own in excess of 99% of the shares, while the Irish and UK stock market rules require at least 25% of shares to be in public hands. The proposed admission to the ESM would mean that ILPGH would continue to be subject to regulatory oversight. The ESM was a market for small or emerging companies, and although it was expected that the market for ILPGH shares would not be liquid, it would maintain a “trading platform” for the existing shareholders.

      • On the subscription by the Minister of €1.1 billion, to issue ordinary shares of EUR0.031 each in the capital of ILPGH to the Minister at a price of €0.06345 per ordinary share. Further subscriptions by the Minister would be made under the terms of the placing agreement if the sale of Irish Life and the LME did not raise sufficient capital for ILP to meet the requirement of €4 billion.

      • On the conversion of the contingent capital notes, to issue ordinary shares to the then holder of such notes.

      • Notwithstanding the resolutions passed by the shareholders at the EGM, not to proceed with or revoke any appointment of additional financial and legal advisers in relation to alternative capitalisation options and not to proceed with or to withdraw any request to extend the 31st July deadline. It was stated that to permit these steps to be taken would create uncertainty in the market and for customers, and could be interpreted as meaning that the State investment would not be completed as required. In relation to extending the deadline, Mr Moran said that he was not aware of any reason why either the Central Bank or the External Partners would amend a deadline which had been “extensively” negotiated and which had been committed to as recently as the 14th July, when the External Partners most recent review had taken place. It had been observed in that review that the Programme remained on track and that the Irish authorities were continuing to implement it.


SECTION J

32. Alternative means of raising capital

1) Private investors
32.1 The applicants have argued that the possibility of raising capital from private investors was not adequately explored.

32.2 Mr Alan Cook, the chairman of the company, refers to the receipt by the company of the FMPR on the 31st March 2011 and the requirement that it raise €4 billion within the following four months. He says that it proved impossible to raise that amount “or indeed any additional money” from the private markets.

32.3 Mr Cook says that for many years before 2011 the bank had ensured that it kept in contact with institutional investors or institutions that they believed to be potential investors in the group. As a result the senior management and the Investor Relations Team “knew well all the large shareholders and all potential or former large shareholders.” In April 2011 they consulted with Deutsche Bank AG (London Branch) and with Davy, the company’s corporate broker, with a view to finding out whether there was a reasonable chance that any investors would be interested in and have the resources to invest up to 4 billion. Mr Cook described Davy as the market leader in relation to dealing in Irish equities and sourcing institutional investor demand for Irish companies. Deutsche Bank provided international perspective.

32.4 Deutsche Bank advised that prudent investors would not make such an investment for a variety of reasons to do with the company itself, the difficulties besetting the financial sector in Ireland and the general economic situation of the country (including factors affecting the ability of borrowers to meet their mortgage payments). The reasons specific to ILP were as follows:

      • It was relying on State guarantees for up to 40% of its funding.

      • No dividend could be paid while its liabilities were guaranteed by the State. (This was a condition of the State support.)

      • 65% of its mortgages in Ireland and 98% of its mortgages in the UK were loss-making trackers.

      • The €4 billion would be applied, not to expand the business of the bank but to cover its losses.

      • The company was the only Irish bank whose future was not clear after the PCAR/PLAR results (i.e. it was not designated as a “pillar bank” and was not merged with another bank).

32.5 In general, equity investors were looking for non-banking businesses.

32.6 Mr Cook points to the efforts to sell Irish Life as an illustration of the difficulties faced by the company in attracting investment in July 2011. The life business was “extremely successful” and was valued at between €1.1 billion and €1.3 billion, while the bank had at that time a market value of €19 million. Fifty-one potential purchasers for the life business were identified, while no potential purchaser was identified for the bank. However, when preparing for an IPO of this business on foot of a direction order made by the High Court on the 9thJune, 2011 it was found that investors were not prepared to buy shares in Irish Life at a price reflecting its value and the sale process came to a stop in November, 2011. This was because of Ireland’s financial state, uncertainty about the Eurozone and the fact that Irish Life was part of a group with a bank in serious financial difficulties.

32.7 Mr Murphy points out that it would have been in the commercial interests of Davy and Deutsche Bank to have found a private investor. However, it became clear the company’s market value, the sectoral uncertainty and the entry by Ireland into the Programme for Support precluded interest from investors.

32.8 In these circumstances, Davy and Deutsche Bank advised that there was no prospect of private investors investing in Group Holdings to help the bank to meet the regulatory funding requirements.

32.9 Ms McHugh says that after the publication of the PCAR/PLAR results, any potential investor would have asked themselves whether, after the disposal of Irish Life and the other necessary steps to be taken by the company, an injection of €2.3 billion in equity and €0.4 billion in contingent capital would result in a market value of the equity in ILPGH of greater than €2.3 billion. If not, they would have no rational reason for making the investment.

32.10 Drawing on his experience of this area Mr Skoczylas says that the finding of private investors on the scale required involves a lengthy and complex process, and that the company would have had to engage in such a process in an active manner rather than expecting to be approached by investors.

32.11 Professor Azarmi agrees with Mr Skoczylas’s description of the appropriate process for selling a stake in a business such as this. He avers that the established practice is that sellers must approach potential buyers and engage with them proactively. It is his opinion that, in the absence of such a process, statements to the effect that no investors were available are only speculation. He points to successful fund-raising efforts by Bank of Ireland in July and October 2011 and by ILP in August and November 2011 as evidence of the fact that investors were making large investments in Irish banks around the time of the direction order.

32.12 Professor Azarmi accepts the reality of the financial crisis but says that in that context, the important thing from the point of view of an investor is not the fact that a business is losing money but whether there is the possibility of a high rate of return for the risk taken.

32.13 Mr Murphy agrees that investors regularly invest in companies that are losing money, but says that this would be in a context where the money would be used to grow the business. The risk involved in circumstances where the money was being used to cover losses was a different proposition, and any private investor would, he says, have required stricter terms from the bank and at least the same shareholding as that obtained by the Minister to reflect that risk.

32.14 Mr Cook says that there was no reality to the proposal that the shareholders should have been given until the 20th August to hire an investment bank and start a search for investors. The bank could not change the date by which the capital had to be raised.

32.15 He further says that at no stage has Mr Skoczylas, or any of the applicants, identified any investor prepared to make a ”meaningful” contribution, which he considers would have to be in the order of 5% of the €2.7bn required (about €135m).

32.16 Mr Moran has stated that it would in fact have been the preferred option of the Minister if ILP could have met the recapitalisation requirements by raising private capital. Further, he states that he personally would have been “more than willing” to assist in such a process, as he did in the case of the sale of a Government stake in Bank of Ireland to a private consortium. However he has averred that in his opinion there were no private investors available to invest in ILP in July, 2011. He says that the negative sentiment of the market in relation to Ireland and its financial sector generally, and the issues affecting ILP in particular, meant that no party other than the State was prepared to make such an investment. The factors affecting ILP in particular are identified as the large tracker mortgage book and high loan-to-deposit ratio; reliance on ECB and ELA funding; the high quantum of capital required; and the uncertain outcome of the EU restructuring plan process.

32.17 He says that as Head of Banking in the Department of Finance he had many meetings with investors who were potentially interested in investing in the Irish banking sector because they aware of the recapitalisation and restructuring plans for that sector. There was interest in Bank of Ireland, and indeed in Irish Life as a stand-alone entity, but none in ILP.

32.18 Mr Moran also says, in summary, that ILP did not have either the time or the money to engage in the search for private investment. The preparation of a prospectus could, he says, have taken two or three months, while the deadline for the recapitalisation requirement was the 31st July. The requirements of the Programme of Support and FMPR would thus not have been met. Amendment of the Programme would have required the consent of, inter alia, all of the EU Member States and the IMF to be obtained within 10 days. He does not believe that such consent would have been forthcoming.

32.19 He estimated, by means of a comparison with the costs incurred by Bank of Ireland when undertaking similar exercises in 2010 and 2011 that a fully underwritten rights issue would have cost multiples of the then market value of ILP (€19 million).

32.20 In concluding on this topic, Mr Moran says:

      “However, the most obvious practical problem in terms of investing in ILP in 2011 is that it was almost certainly guaranteed to lose money. It is difficult to comprehend how an investor, who requires a commercial return, would have invested any amount (still less 2.7 billion) in a company where losses on that investment were virtually assured. The overarching reality, as it has in fact turned out to be the case, was that an investment in ILP at any price sufficient to meet regulatory capital requirements would have lost money.”

2) The shareholders
32.21 This section deals with the submissions made as to the practicalities of the proposition that capital could have been raised from the shareholders. The legal position as to the right of pre-emption, and whether it can lawfully be dispensed with, is a separate issue.

32.22 It is submitted by the applicants that the shareholders should have been given an opportunity to subscribe for new shares by way of a rights issue.

32.23 The Minister and the notice parties submit that there was and is no reality to this.

32.24 In the period between the announcement of the 2011 PCAR/PLAR results and the 23rd June, 2011 the market price of ILP shares averaged at 0.1193 per share, suggesting a market value of the existing equity of €33 million. However, in the month prior to the 23rd June, 2011 the average market price of a share was 0.0864, equivalent to a market value of the equity in the company of €23.9 million.

32.25 On the 23rd June, the market value was, according to Mr Moran, €19 million.

32.26 In these circumstances, the opinion of the Minister’s deponents is that it would not have been conceivable that shareholders would have been willing, in sufficient numbers or with sufficient resources, to invest 2.3 billion in the company. This would have required, on average, a contribution from each shareholder of approximately 120 times the value of his or her investment. On this basis, according to Mr Moran, the applicants would have been required to invest €5.7 million between them, with €4.3 million coming from Scotchstone. This would have been 42.9 times the net assets of Scotchstone as set out in its audited accounts.

32.27 Mr Cook refers to a letter written by Mr Skoczylas to the Minister, and copied to the board of the company, on the 24th May in which Mr Skoczylas said

      “If the Irish Authorities and the IL&P Board expressed any interest in a constructive dialogue in this regard then - while we are of course not in a position to make any offers - we are happy to appropriately reach out to a select group of leading international investors who we believe may seriously entertain this opportunity under certain conditions…”
32.28 Mr Cook interprets this paragraph as meaning that the shareholders represented by Mr Skoczylas would not have been in a position to make any sort of offers and that if there had been a rights issue they would not have taken up any new shares. This may be overstating matters - the reference to not being in a position to make offers appears to relate to the possible contact with international investors.

32.29 In July 2011 there were approximately 135,000 shareholders in total. Based on the June 23rd figures, 134,000 of them had a shareholding worth less than €500, with the average value being €32. To take up their full rights in a pre-emptive offer would have cost an average of €3,812 per person.

SECTION K

33. The “False Market” Issue
33.1 The applicants contend that the Minister created a “false market” in ILP shares in the months preceding the application for the direction order, such that the share price was depressed to a value far below the true value of the company.

33.2 According to Professor Azarmi the term is both a legal and an economic term, referring to

33.3 Professor Azarmi notes the relatively steady decline of the ILPGH share price over the period of time during which capital markets worldwide were suffering from the financial crisis. He further notes that the decline was exacerbated by the particular situation in Ireland and that ILPGH showed the same pattern of decline as Bank of Ireland and AIB. However, there were “unusual significant movements” in the ILPGH share price at the end of March and the beginning of April 2011. He describes the following sequence:
      • On the 28th March, 2011 the share price was stable during the day’s trading at about 74 cents.

      • On the 29th March rumours started circulating about a possible takeover by the State and dilution of the shareholding. The share price closed that day at 40.5 cents.

      • On the 30th March the share price was suspended on the stock exchange until the 1st April.

      • On the 31st March the €4 billion capital requirement was imposed. The Minister made a statement referring to the likelihood that the government would acquire a majority stake.

      • On the 1st April trading was reopened and the price dropped to 11 cents, before recovering to 16.7 at the close.

33.4 Dr Azarmi says that the dramatic collapse in the share price was caused by the rumours and the Minister’s announcement, and not by any inherent changes in the business or the market over these few days. The capital requirement was not, he says, an inherent change in the business but rather
      “a unique imposition of a drastically new business paradigm”.
33.5 In these circumstances the fall of the share price was artificial and the normal functioning of the markets was distorted. Dr Azarmi believes that the situation was exacerbated by the absence of any announcement to the effect that pre-emption or takeover rights would be afforded to the shareholders.

33.6 On behalf of the Minister, it is said that the market cannot be described as false if it was based on clear, verified information such as that contained in the FMPR and associated documents. The EGM circular gave to the shareholders relevant and accurate information as to the rationale for the proposed investment by the Minister and the risks to shareholders if the EGM resolutions were not approved. It is noted that the company was obliged both by legislation and by the rules of the Irish and London Stock Exchanges to disclose price sensitive information to the shareholders. When such information is disclosed the market reacts by adjusting the price.

33.7 In any event, it is argued that the share price had already fallen by 67.3% in the year to the end of 2010, before the publication of FMPR. (The company ended that year with a market value of €300 million.) That Report disclosed to the market the fact that ILP was required to raise €4 billion of capital, which would have to be done by the sale of Irish Life and the raising of new equity capital.

33.8 Ms McHugh has given an analysis of the investor view of ILPGH before and after the 2011 PCAR/PLAR process. She says that during 2010 the management of ILPGH “adopted a relatively quiet profile”.

      “…apart from reminding the market that their problems were not (in their view) as bad as those of some other Irish banks, their communications did not convey any acute concern about the viability of ILP…After the Central Bank confirmed in late November 2010 that a 12% capital target would require ILP to raise approximately 100 million in new capital, the Group Chief Executive of ILPGH was quoted as saying that “this further review confirmed the capital strength at the Group and its unique position in the Irish financial marketplace”. This message was repeated by ILPGH senior management when the 2010 full year results were released in early March 2011. However, the share price continued to drift downwards during this time, and by late March 2011, shareholders’ equity had a market value of approximately 200 million.”
33.9 Referring to the market value of €300 million at the end of 2010, Ms McHugh notes that at that point the group had assets of over €40 billion. In these circumstances the market could not be described as basing its views on a detailed analysis of the balance sheet
      “…but rather [it was] betting on whether or not some party would intervene to put the group on a more sustainable financial footing and do so in a manner that left some value for the existing equity holders.”
33.10 After the results of PCAR/PLAR were announced, the Group Chief Executive described them as “extremely disappointing” and acknowledged that they would have “major implications” for the group and for shareholders. According to Ms McHugh the value of the shareholders’ equity fell to less than 50 million immediately after publication. It continued to fall thereafter.

33.11 Ms McHugh states that she believes that the loss of value in the equity of ILPGH happened during the decade before 2011. Decisions taken in relation to its participation in the Irish mortgage market, its exposure in the UK buy-to-let market and its reliance on wholesale funding all left it vulnerable when the financial crisis developed.

33.12 Mr Moran says that ILP’s market capitalisation had traded well below the book value for a considerable period of time, as had been the case with AIB and Bank of Ireland. He comments that when this occurs, one of two things is happening - either the share is undervalued or the investors are sceptical of the book value.

      “The market was clearly unwilling to pay anywhere near the book value during that period.”
33.13 He considers that the likely explanation is that the market believed that the book value would inevitably decline
      “…as poor credit decisions adopted during the boom would lead to a massive rise in future provisions, a degradation of book value, and the potential for the company to require government support which could lead to a dilution of existing equity holders.”
33.14 Ms McHugh says that this could not be described as a “false market” - the market now had much more complete information about the company than it had previously.

33.15 Mr Cook has averred that management in the company believed that the specific falls in the share price in the first week of April were the result of doubts on the part of investors as to the bank’s ability to raise the required capital. More generally, he says that the price had declined over the previous years because of the global economic crisis, the recession in Ireland and the condition of the property market in the State.

SECTION L

34. The relative contributions of the Minister and the shareholders
34.1 Mr Skoczylas has maintained that the shareholders must be seen as having contributed 36% of the required capital, but they were left with only 0.8% of the shareholding. Putting it another way, he says that the Minister provided five times the amount of capital and got 130 times the existing number of shares.

34.2 It has been suggested that the recapitalisation could have been achieved in a fairer way. The method suggested by Mr Skoczylas in the course of the hearing was a split of the shares such that the existing shareholders would have got 7% and the Minister 93% of the equity.

34.3 Mr Moran says that the applicants’ calculation “defies common sense”. He says that if it were correct, and that 36% of the equity should be apportioned to the shareholders, the Minister would have been at an immediate loss of €816 million upon making the investment. This figure comes from the fact that on the 23rd June, 2011 (the day by reference to which the Minister’s price was fixed) the shares were worth 7 cents each and the market capitalisation was €19 million. The Minister’s contribution of €2.3 billion would bring this to €2.319 billion. 64% of that sum would be 1.484 billion.

34.4 In the alternative, if 64% of the equity was worth €2.3 billion after the State investment, then the shareholders’ hypothetical 36% would have to have been worth €1.3 billion. The last time ILPGH had been worth €1.3 billion was in November, 2009.

34.5 To attribute the sum of €1.3 billion to the shareholders would be to imply a share price 67 times the price on the 23rd June 2011.

34.6 The respondents also submit that the value put on the Minister’s holding by the applicants ignores the reality that the company has continued to lose money and its capital has been eroded accordingly. The total provision for credit losses, as of mid-2013 was €3.6 billion, which exceeded the (conservative) FMPR estimate of €3.4 billion by the end of 2013

34.7 It should perhaps also be noted that for European accounting purposes, €800 million of the €2.3 billion was immediately written off and added to the Government’s debt.

34.8 The concept of the share-splitting exercise is not accepted by the respondents. It is said that in the circumstances that would be to give the shareholders a gift. The calculation made by the Minister as to the number of shares to be allotted to him was based on the amount of money that had to be put into the company and the price to be paid (taking into account the discount). The shareholders ended up with the same number of shares that they had before the intervention, although obviously not the same percentage of the company.

34.9 Mr Cook agrees that none of the new capital was contributed by the shareholders. He says that the €1.1 billion from the sale of Irish Life was the result of the bank (not ILPGH and not the shareholders of ILPGH) converting an asset (shares in Irish Life) into another asset (cash). The LME was an exercise in reducing the bank’s debt to subordinated bond and note holders - the latter suffered losses of up to €1 billion. The contingent capital was coming from the Minister. The €243 was a dividend from the bank’s subsidiary.

SECTION M

35. Potential Consequences of the Failure to Recapitalise by the 31st July 2011
35.1 Mr Cook, the chairman of the bank and of the Group, avers that if the recapitalisation deadline imposed by the Central Bank had not been met, the bank would have failed. This was because the bank would have been obliged to announce to the market the fact that it had not met the deadline. The resulting loss of confidence on the part of depositors would in turn have caused a run on the bank and its immediate forced liquidation. As a separate problem, its licence could have been revoked, suspended or cancelled. This would, inter alia, have constituted an event of default in relation to €9 billion worth of Notes issued by the bank. The trustee for the Note holders would then have been likely to call for repayment, which would not have been possible.

35.2 On Mr Cook’s calculations, the liquidation of the bank would have left the State exposed in relation to

making a total of €26.12 billion.

35.3 He states that the holders of €8.1 billion of the Notes guaranteed under the ELG were other financial institutions in the EU and other financial markets. He also says that ILP was a member of the clearing and settlement system, and that difficulties experienced by one institution could result in difficulties in others.

35.4 Mr Cook concludes as follows:

      “The liquidation of the Bank would have had drastic consequences for the State having regard to its systemic importance to the economy, the extent of the liabilities which the State had by July 2011 guaranteed and the potential contagion risk for other financial institutions both in Ireland and in Europe if the Bank were to fail.”
35.5 Mr Montgomery refers to the assertion by Mr Cook that a failure to comply with the recapitalisation requirement could have led to the withdrawal of ILP’s banking licence. He assumes that this would have forced ILP to close its operations and begin liquidating its banking business and considers the possible impact on the Irish government.

35.6 According to ILP’s 2011 Half Year Report, as of 30th June, 2011 ILP had liabilities of €75,251 million compared with a book value of equity capital of €1,954 million. However, Mr Montgomery says the actual value of the equity capital was likely to be “substantially smaller” having regard to the fact that on the 30th June the market value of the company’s shares was €7.5 million. It was therefore likely that its assets would not meet its liabilities, including those guaranteed by the State.

      “The failure of a large bank like ILP would likely have had a broad impact on confidence within the Irish banking system. This would likely have contributed to a further downward spiral in Ireland, with bank losses, an economic slowdown, and government fiscal losses reinforcing one another.
35.7 Mr Montgomery refers to the fact that the recapitalisation of ILP was part of a series of measures agreed with the External Partners, to which the government was committed.
      “Failure to meet the requirements of the program could have delayed the release of the next tranche of financing under the program, and it may also have led to additional complications with other aspects of the program.”
35.8 Professor Lane says that in the spring and summer of 2011, various factors were intensifying the euro crisis. The Greek programme was proving inadequate and that State required further assistance. The markets had lost confidence in Portugal, which negotiated a programme in May 2011. There were increasing concerns about Spain and Italy. In these circumstances, he says that it was imperative for financial stability in the euro area and the Union as a whole that Ireland should successfully adhere to the timeline set down for the recapitalisation of its banks. A failure to implement the plan could have thrown into doubt the commitment of the Irish government in relation to the banks, thereby potentially causing difficulties with bank funders in other States. The fulfilment by Ireland of its Treaty obligations would have been called into question.

35.9 Professor Lane says that, more narrowly, there would have been serious dangers for Ireland. If the banks were undercapitalised, the ECB might have chosen to reduce its liquidity assistance. Speculation on this possibility might have triggered a faster exit of private funders. The banks would have been forced to deleverage rapidly, with disposals at “fire sale” prices. In such a scenario the government could not credibly have met its obligations under the guarantee schemes and sovereign debt default would have occurred.

35.10 If the funding under the Programme of Support were to be cancelled due to non-compliance with the terms, the government would not have been able to finance its fiscal deficit.

35.11 If the Eurosystem simply declined to rollover its liquidity funding to ILP, the bank would rapidly have been liquidated. If it was liquidated, the government would have been unlikely to have been able to meet fully its obligations under the guarantees and this could have triggered sovereign default.

35.12 All of the witnesses for the respondents are agreed that if the bank had been liquidated the shareholders would have received nothing.

35.13 The applicants argue, in essence, that all of the above amounts to nothing more than speculation. They consider it unlikely that the Central Bank would have revoked the licence of a solvent bank, and hold to the contention that it could have been possible to find alternative investors.

35.14 The court has been given some evidence as to developments affecting the finances of ILP since the making of the direction order and the recapitalisation. This is the subject of dispute between the parties. The applicants maintain that the realised losses have in fact been extremely small. The respondents say that the key figure is that relating to credit losses, or impairment provisions, which is in the region of €3.6 billion. The difference is explained by reference to the fact that there are many more mortgages in arrears than there have been foreclosures and the writing off of loans.

SECTION N

36. The duty of candour in an ex parte application
36.1 The applicants submit that the court has an inherent jurisdiction to set aside an order made on an ex parte application where it can be shown that there was a want of candour on the part of the person seeking the order. They say that this occurred in this instance and that the Court was not given appropriate information on the 26th July, 2011. Principally, the complaint is that the Court was not told that the proposals contained in the direction order were contrary to European Union law and in particular to the Second Company Law Directive.

36.2 The court directed the preparation of a transcript of the Digital Audio Recording from the day in question. It is clear therefrom that counsel acting on behalf of the Minister was careful to bring to the attention of the court the views of the shareholders as expressed in the correspondence referred to above. It must be noted that at that stage nobody had raised any issue on this area of law. I do not see that counsel can be blamed for not anticipating that it would subsequently become the ground of challenge. The duty of good faith which undoubtedly applies to ex parte applications does not extend to informing the court in all cases of every potential issue that could conceivably arise, whether counsel believes such issues to have substance or not. In this case, the application was made on foot of an Act passed by the Oireachtas. It was not for counsel acting on behalf of a Minister of the State to suggest to the Court that the Act might itself be legally infirm.

SECTION O

37. Summary of the Applicant’s Case
37.1 It is claimed by the applicants that the respondent Minister did not comply with the requirements of s. 7 of the Act, and further that his opinion that the direction order was necessary was, in itself, unreasonable and was vitiated by errors of law.

37.2 In relation to the requirements of s.7 of the Act, it is submitted that the Minister failed to engage in the appropriate degree of consultation with the Governor of the Central Bank and that such consultation as there was constituted merely a superficial and formal exchange.

37.3 It is maintained that the opinion of the Minister was unreasonable in that:

37.4 The opinion of the Minister is claimed to have been vitiated by errors of law in that: SECTION P

38. The test to be applied by the court on an application under s.11
38.1 The applicants rely upon aspects of the decision of Feeney J in his ruling on the locus standi issue in these proceedings (Dowling v Minister for Finance
[2012] IEHC 89).

38.2 In construing the use of the word “member” in s.11, Feeney J rejected a submission on the part of the Minister that it had to be given the same meaning as in the Companies Act 1963. He observed that

      “The 2010 Act, due to its unique, unprecedented and stringent provisions, is to be properly regarded as sui generis.”
38.3 He went on:
      “The 2010 Act deals with many matters outside company law and its declared purpose includes matters which are stated as being necessary to address a unique and unprecedented economic crisis and to deal with circumstances where the common good requires permanent or temporary interference with the rights including property rights of persons who may be affected by the performance of the Act. It is the unique and unprecedented nature and scope of the 2010 Act which leads this Court to the conclusion that no assistance can be gained by interpreting the word ‘member’ by reference to any other legislation.”
38.4 The applicants submit that on this basis, the word “unreasonable” should be given its ordinary, dictionary meaning and refer to the Collins English dictionary definition of “reasonable” as
      “1 sensible; 2 not making unfair demands; 3 logical; 4 moderate in price; 5 average”.
38.5 By the same token they say that “necessary” means
      “1 needed in order to obtain the desired result; 2 certain or unavoidable. Word origin: Latin necessarius: indispensable.”
38.6 However, the applicants contend that they should in any event succeed on the Wednesbury formulation.

38.7 The respondent submits that what the court is dealing with is not a judicial review per se “because there is no administrative decision which has affected the rights of the applicants which is being reviewed”. However, it is said that the legal characteristics of the review envisaged by the Act are closely analogous to those applicable to judicial review. It is also submitted that the terms used in the Act - “error of law” and “unreasonable” - have clear and well-known meanings.

38.8 The respondent relies significantly on the judgment of Peart J in Dowling v Minister for Finance [2012] IEHC 436. This is, the court is told, the only full judgment dealing with a challenge to any of the orders made under the Act to date. It concerned the direction order made in March 2012, which directed ILP to sell Irish Life to the Minister for the sum of €1.3 billion. The applicants in the case were all shareholders in ILPGH, and included the applicants in these proceedings. For the avoidance of confusion I shall refer to it as “the 2012 case”.

38.9 It has been submitted on behalf of the respondent that the judgment is, under Irish Trust Bank and Worldport criteria, binding on this court in respect of the legal issues, including the legal nature of the proceedings and the meaning to be attributed to the word “unreasonable” and “necessary”. However, I think that this submission is incorrect. The primary finding of Peart J was that the applicants did not have locus standi to make the application, because they were members of ILPGH only, not ILP, and the direction order was addressed to ILP. In those circumstances the remainder of his observations are strictly obiter, although of course the court will give them close attention.

38.10 Peart J’s analysis of the nature of the proceedings was set out in the following passage relied upon by the respondent:

      “[T]he application to set aside the Direction Order is a quasi-judicial review application, in as much as section 11 prescribes a basis on which this Court may interfere with the Direction Order already made which resonates with phrases familiar in a judicial review context, such as ‘unreasonable’, ‘vitiated by an error of law’ or where some statutory requirement has not been complied with. While not a judicial review as such, the Court must look at the reasonableness of the Minister’s opinion that a proposed direction order in the terms contained therein is necessary to achieve a purpose of the Act. It is worth noting also that before making the Direction Order in terms of the proposed direction order on the ex parte application, the Court must be satisfied that the opinion of the Minister that the making of the direction order is necessary to secure the achievement of a purpose of the Act ‘is reasonable’, and not vitiated by any error of law. In the present case, the President of the High Court was so satisfied, since he proceeded to grant the order. The application to set aside under Section 11 therefore comes before the Court against a background where there has already been a judicial conclusion that the opinion of the Minister is reasonable. Hence, Section 11(3) provides that a person who seeks to have that order set aside must satisfy the Court that the Minister’s opinion was unreasonable. The onus is upon that person on such an application to displace that conclusion, either by the adducing of further evidence, which if available on the ex parte application would have persuaded the judge to refuse to make the order, or by making legal submissions which if made on the ex parte application might have similarly persuaded the judge not to make the order, or by a combination of the two.”
38.11 Peart J considered that the word “unreasonable” was to be interpreted according to classic judicial review criteria as set out in Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223 and subsequent authorities including Keegan v Stardust Tribunal [1986] IR 642 - in this context, meaning that the opinion of the Minister must be one which flew in the face of plain reason and common sense and which no reasonable decision-maker in the Minister’s position would have made.

38.12 It is accepted that, as was made clear by the Supreme Court in Meadows v Minister for Justice, Equality and Law Reform [2010] 2 IR 701, the principle of proportionality informs considerations of reasonableness.

38.13 The respondent also relies upon the established principle of statutory interpretation that where the legislature uses a word which has particular meaning in the context of a particular branch of law, it should be presumed that that is the intended meaning unless a contrary intention appears.

38.14 It is agreed by the respondent that the word “necessary” is not a legal term of art and that the meaning attributed to it in cases of statutory construction varies according to context. It is submitted “as a matter of ordinary logic and language” the word does not mean “mathematically necessary”, “indispensable” or “objectively and absolutely unavoidable” but, given the context, should be read as meaning “reasonably required or expedient”.

38.15 Again, reliance is placed upon the judgment of Peart J in the 2012 case. Peart J considered the judgment of Lord Griffiths in Re An Inquiry under the Companies Securities (Insider Dealing) Act, 1985 [1988] 1 AC 660, where the following passage occurs:

      “Furthermore, whether a particular measure is necessary, although described as a question of fact for the purpose of s.10, involves the exercise of a judgment on the established facts. In the exercise of that judgment different people may come to different conclusions on the same facts….

      I doubt if it is possible to go further than to say that ‘necessary’ has a meaning that lies somewhere between ‘indispensable’ on the one hand and ‘useful’ or ‘expedient’ on the other, and leave it to the judge to decide towards which end of the scale of meaning he will place it on the facts of any particular case. The nearest paraphrase I can suggest is ‘really needed’.

38.16 The judgments of the Supreme Court in Dunnes Stores (Ireland) Ltd v Ryan [2002] 2 IR 60 were also cited by Peart J. At issue there was the opinion of the Minister for Enterprise and Employment that it was “necessary” to examine the books and documents of the company in order to determine whether an inspector should be appointed to conduct an investigation under the Companies Acts.

38.17 Herbert J (sitting as a judge of the Supreme Court) said

      “In my judgment, “necessary” is not used in any extreme or compelling sense in this subsection. In my judgment, it has the meaning of ‘reasonably required’ in contrast to merely optional. Again, it is important to emphasise that the question of whether it is or is not reasonably required is not a matter of objective proof, or an issue to be decided by the court. The determination is that of the second respondent alone and that decision may not be usurped by the court and may only be set aside on clear proof that it flies in the face of fundamental reason and common sense.”
38.18 Murray J held that
      “The word ‘necessary’ could not be read as an absolute condition precedent to the making of an application to the court for the appointment of an inspector, but as the practical necessity of obtaining sufficient information to justify the decisions which would be involved in making an application to the court, which could have damaging effects for the company in respect of which the application was made.”
38.19 Having regard to these authorities, Peart J held that they established that
      “the meaning to be given to the word ‘necessary’ when used in a statute is not that contended for by the applicants, namely absolute necessity because no alternative exists, but rather one with the inbuilt flexibility to ensure that a decision-maker may consider the requirement for necessity to be fulfilled where the proposed action or decision is one reasonably required to be taken in order to achieve the desired purpose of the particular decision under the relevant Act, or will reasonably facilitate the achievement of the objective, even where alternative actions or decisions are open and available to be taken.”
38.20 Peart J considered that if the applicants’ interpretation were to prevail, it could lead to an “absurd” situation where it would always be possible to show that a different option existed, and that therefore the Minister’s choice was not the “necessary” one.
      “My view is that whether or not a particular course of action is or is not necessary for the achievement of an objective of the Act is a matter for the Minister. It is a decision for the executive arm of government, and one which ought not be lightly interfered with by the Court. It is of course the case that such a decision may be reviewable, but where the decision is not manifestly irrational, unreasonable, capricious or arbitrary, or - to put it another way as is done in the jurisprudence in this area - where it is not a decision that no Minister acting reasonably would make, then this Court ought not to interfere.”
38.21 Referring to the materials put before the court by the applicants relating to the financial position of ILP, Peart J stated that
      “They cannot in my view speak to the reasonableness of the Minister’s opinion that the proposed direction order was “necessary” i.e. a reasonably expedient and/or advantageous method of achieving the sale of Irish Life to himself in all the circumstances - something which he considered was required in order to comply with the obligations of the State to the Troika and in order to comply with the Central Bank’s requirement by the 30th June 2012, given the suspension of the private sale process at the end of November 2011.”
38.22 For the court to reach conclusions based on such materials would be to carry out a merits-type review of the Minister’s opinion, which he considered was not its function under the Act.

38.23 In dealing with an appeal on interlocutory matters arising out these and related proceedings, members of the Supreme Court have commented to some extent on the nature of the application under s.11.

38.24 In the context of an appeal dealing with discovery and case management issues, (Dowling v Minister for Finance [2012] IESC 32 (24th May, 2012) Clarke J said

      “While it will ultimately be a matter for the trial judge (and only for this Court in the event of that there was an appeal) it is at least arguable that the reasonableness of the decision of the Minister must be considered on the basis of the application of a similar test to that which would be applied in judicial review proceedings in which context the only relevant materials would be those materials that were actually before the decision maker Minister on the facts of the case.”
38.25 In a separate appeal taken by the notice parties relating to their right to be joined in the proceedings, Fennelly J considered the issue of joinder in the context of the distinction between purely civil and private actions and those concerning issues of public law. He was of the view that the application to set aside, while not formally a judicial review, had
      “all or almost all of the indicia of an application for judicial review.”

      “The Direction Order, it is true, was technically made by the Court. However, in reality the Court was endorsing the proposed direction made by the Minister and it is the correctness of the Minister’s actions, not those of the Court, which are in issue.”

38.26 It must also be noted that Fennelly J had earlier said that
      “The context of the appeal calls for the exercise of caution. It is important to exercise restraint in expressing even tentative views about matters of law or fact which will fall to be decided by the High Court judge who will hear the case.”
38.27 It is clear therefore that the proper approach to this “extraordinary piece of legislation” has yet to be authoritatively decided.

38.28 The respondent has argued in his written submissions that this a case to which the concept of “curial deference” should be applied. In this regard a number of cases have been cited relating to judicial review of specialist administrative bodies. It is suggested that because the Minister had available to him expert advice “above and beyond that which might pertain to more day-to-day decision making”, the court should be particularly slow to intervene.

38.29 I do not consider that this particular approach is appropriate in these circumstances. It is apparent from the case-law that the concept of “curial deference” is applicable where a decision-making function in relation to a particular sphere has been given to a specialist body. The concept acknowledges that such bodies have an expertise not in the possession of a court tasked with reviewing their decisions. It is also important, to my mind, that these bodies are established with the objective of being impartial and independent of the political world. “Curial deference” is not generally applied to the ordinary decisions of Departments of State, where the relevant Minister may find himself or herself a respondent in judicial review proceedings as a matter of everyday life in these courts. The rationale for this may lie in the fact that the Minister is not required to have any personal expertise in the area of his or her portfolio, and is not required to accept the expert advice available to him or her.

38.30 At the hearing, this was accepted by Counsel but it was urged upon the court that nonetheless it should show a degree of deference in the light of the fact that the Oireachtas has charged the Minister with responsibility for making the vitally important and complex decisions in this area. It is not for the court to take this role upon itself.

38.31 I do accept that the instant case gives rise to issues not encountered in everyday judicial review proceedings. The court must have due regard to the fact that the Oireachtas enacted this legislation in the circumstances, and with the objectives, referred to in the preamble and in s.4 of the Act. Further, the court must accept that it is peculiarly the role of the executive branch to protect the interests of the State in matters not within the sphere of the other organs of State, and to make policy decisions in times of national crisis. The role of the judiciary, in upholding the Constitution and the laws of the State, is not thereby diminished but obviously the courts must respect the different functions of the executive.

38.32 With respect, I find that, regretfully, I cannot fully agree with the analysis of Peart J of the proper approach to be taken to the Act.

38.33 An application to set aside a direction order is undoubtedly in the nature of public law proceedings, and more akin to judicial review than to any other proceedings the courts are accustomed to. However, the court is dealing here with an Act unlike any other statute in force in the State. Amongst its most remarkable features is the fact that the Minister can bring about a permanent alteration in the legal rights of entities and persons, whether or not he or she has a dispute of a legal nature with such entities or persons, by making an ex parte application to the court. Pursuant to s.53, the order takes effect regardless of statute, common law, the rules of equity, codes of practice made under statutory authority and contracts that would otherwise be legally binding.

38.34 The respondents place reliance on the fact that the direction order must be made by the court. This is, obviously, more acceptable in legal terms than if the Minister could make the order directly. However, it would not be wise to exaggerate the significance of the court’s role under the Act. Our court system is in general based on the concept of adversarial proceedings, where an independent judge hears competing evidence and arguments on the issues and makes a decision in the light of thereof. The effect of an ex parte order is, accordingly, almost invariably short in duration and aimed at preventing an imminent state of affairs, the results of which might not be easily remedied. In terms of the precedential value to be attributed to it, such an order comes in low on the scale.

38.35 However it is also clear that the very nature of an order made under s.9 of the Act renders it unsuitable for the time-consuming procedures required in the normal inter partes litigation process.

38.36 I respectfully agree with the observation of Fennelly J, while acknowledging that he did not intend to be taken as ruling definitively on the issue, that the reality of the case is that it is the decision of the Minister that is in question and not that of the court.

38.37 It seems to me, therefore, that a unique and unprecedented statute may require the application of a sui generis test by the court. This test must take into account the role and responsibilities of the Minister in dealing with circumstances that threaten the financial stability and sovereignty of the State, while fulfilling the role of the courts in ensuring that the Constitution and its values are upheld.

38.38 In the application for the direction order the Minister certified to the court that in his opinion the proposed order was necessary for the achievement of the stated objectives of the Act. The issues for the court on this application to set aside the order are

      - Whether the procedural requirements set out in s.7 were complied with;

      - Whether the Minister’s opinion was unreasonable; and

      - Whether the Minister’s opinion was vitiated by errors of law.

38.39 In determining these issues it seems to me that the court should ask itself the three following questions:
      1. Whether the procedural requirements have been complied with.
      This is self-explanatory.

      2. Whether the opinion of the Minister that the order is “necessary” is reasonable.

38.40 In my view, having regard to the potential impact of the order on the legal rights of persons not given a right to appear and contest the application, and the removal of the relevant institution from the application of laws passed by the Oireachtas, many of which transpose European Union legislation, as well as the body of common law principles, the formulation of “reasonably expedient and/or advantageous” may be unduly deferential. In a context such as this I prefer the definition of “necessary” adopted by Lord Griffiths, cited above, as meaning “really needed.”

38.41 I agree with Peart J that there is no onus on the Minister to show that the proposed action is the sole method of achieving the statutory purpose. However, it is desirable that the evidence grounding the application should demonstrate that the order sought is the most reasonably practicable method in all the circumstances of the case. The court will of course be conscious that such applications may be made in circumstances of urgency, where the time available will not permit of exhaustive analysis. In such situations the court will have due regard to the role and responsibilities of the Minister as already described. It will also have regard to the fact that the Minister will have had access to expert advice in forming his opinion.

38.42 I agree with the respondents that the word “reasonable” and the concept of reasonableness should be given the legal interpretation familiar to the courts and the legislature. The test is that established in Wednesbury, Keegan and O’Keeffe, as considered by the Supreme Court in Meadows and includes considerations of proportionality.

38.43 The judgment of Costello J in Heaney v Ireland [1994] 3 I.R. 593, referred to by Denham J in Meadows, contains the following analytical framework, which I consider to be appropriate in this context:

      “The measure must be rationally connected to the objective, not be arbitrary or unfair or based on irrational considerations; must impair the right as little as possible; and must be such that the effects on rights are proportional to the objective.”
38.44 Heaney was concerned with a direct encroachment on constitutional rights, rather than a definition of reasonableness. However, the Act under consideration does potentially affect or wipe out property rights and in my view this is an appropriate standard to apply.

38.45 In an application to set aside an order, any evidence as to matters occurring after the order was made needs to be treated with caution. The Minister may be called upon to anticipate future events and seek to avert their consequences in circumstances where a definitive prediction will not be possible. The fact that an anticipated event does not ultimately occur does not of itself mean that the Minister’s opinion was unreasonable.

      3. Whether the opinion of the Minister is vitiated by any legal error. This may include errors relating to the interpretation of the Act itself and also Constitutional and European Union law issues.
38.46 The respondents submit, correctly in my view, that the use of the word “vitiated” implies that not every legal error will result in the setting aside of the order. The relevant considerations here will include the nature of the error and its consequences, which in turn will engage the question of proportionality and the existence of alternative remedies.

38.47 It is possible that the categories of error of law and unreasonableness may overlap.

38.48 In the differing circumstances arising in different cases the order of these questions may vary. In particular, I consider that where an application to set aside is based primarily on a claim that there has been an error of law such as could be considered sufficient to vitiate the opinion of the Minister, it would seem fruitless to embark upon a review of the reasonableness of the opinion before determining that claim.

39. Application of the test to this case
39.1 The first issue to be determined is whether the Minister complied with the requirements of s. 7(2).

39.2 In the view of the court the section was fully complied with. The company was in fact on notice of what the Minister wished to achieve from the time of the negotiation of the placing agreement, and was conscious of the possibility that he might utilise the provisions of the Act if his proposals were rejected by the EGM. The formal opportunity for further submissions was properly provided in the correspondence referred to above.

39.3 The Governor of the Central Bank was obviously intimately concerned in the process from an early stage. He determined the extent of the recapitalisation required in the first instance. He participated in the application for the approval of State aid, on foot of the plan that ultimately formed the basis for the proposed direction order. There is simply no ground upon which to find that his response to the formal notification from the Minister was not based on his considered view of the situation. The fact that he did not raise concerns about the European law issue now relied upon by the applicants does not invalidate the consultation process. The point of the process is to give him the opportunity to give his view on the merits of the proposal in the context of the statutory framework - he is not obliged to give a legal opinion.

39.4 In the circumstances of this case, it is necessary to move directly from this issue to that of the question of error of law. The central arguments made by the applicants relate to European Union legislation and the jurisprudence of the European Court of Justice. If they are correct in these arguments, there is no point in embarking upon a consideration of the concepts of reasonableness and necessity. I also consider that for the same reason there is little point in embarking upon an analysis of the question whether or not the measure adopted was sufficiently respectful of the Constitutionally-protected property rights of the applicants, since in the circumstances this is intimately associated with the concepts of reasonableness, proportionality and necessity.

39.5 For similar reasons it would not be of assistance to consider the applicability of the case-law of the European Court of Human Rights at this point.

SECTION Q

40. The Second Company Law Directive /The Greek Cases
40.1 The applicants rely on a series of preliminary rulings of the European Court of Justice (as it then was). This body of case law has been referred to as “the Greek Cases”.

40.2 The first of this line of cases was the case of Sindesmos Melon & Ors v The Greek State & Ors (C-381/89). The preliminary ruling of the Court concerned the interpretation of Articles 25(1) and 29(1) of the Second Company Directive, 77/91/EC which read as follows:

40.3 The court found that the safeguards in the directive may be relied upon by individuals against the public authorities before the national courts. The Court held that the provisions of the directive are to be interpreted as precluding the application of rules which allow an increase of capital to be decided upon by administrative measure, without any resolution being passed by a general meeting of shareholders. The provisions of the directive also preclude national rules which enable a decision to be taken, by administrative measure, that new shares are to be allotted without being offered on a pre-emptive basis to the shareholders in proportion to the capital represented by their shares. The court observed that
      “There is no provision, either in the EEC Treaty or in the Second Directive itself, which allows the Member States to derogate from Articles 25(1) and 29(1) of the Second Directive when there is a crisis. On the contrary, Article 17(1) of the directive expressly provides that in the case of a serious loss of the subscribed capital, a general meeting of shareholders must be called, within the period laid down by the laws of the Member States, to consider whether the company should be wound up or any other measures taken. That provision thus confirms the decision-making power of the general meeting provided for in Article 25(1), even where the company in question is experiencing serious financial difficulties, and does not allow any derogation whatsoever from the pre-emptive right provided for in Article 29(1).”
40.4 In the case of Karella and Karellas v Minister for Industry, Energy and Technology & OAE (C-19/90 and C-20/90), the plaintiffs were shareholders in a company called Klostiria Velka AE which, as a result of certain difficulties in the company, came under the administration of a body called Organismos Anasygkrotiseos Epicheiriseon, (OAE, translated as Business Reconstruction Organisation).

40.5 The OAE was a public sector body in the form of a limited liability company which purported to act in the public interest under the control of the State. The purpose of the OAE was to “contribute to the economic and social development of the country through the financial rejuvenation of undertakings … and through the establishment and operation of nationalised or mixed economy undertakings”. National law conferred certain powers on the OAE to achieve those objectives. The OAE was permitted by national law, during its provisional administration of a company, to increase the capital of the company concerned. This was subject to the approval of the Minister for Industry, Energy and Technology. The plaintiffs proceeded to bring actions for the annulment of the decree arguing that it was contrary to articles 25, 41(1) and 42 of the Second Directive. Those articles are reproduced below.

      Article 25

      1. Any increase in capital must be decided upon by the general meeting. Both this decision and the increase in the subscribed capital shall be published in the manner laid down by the laws of each Member State, in accordance with Article 3 of Directive 68/151/EEC.

      2. Nevertheless, the statutes or instrument of incorporation or the general meeting, the decision of which must be published in accordance with the rules referred to in paragraph 1, may authorize an increase in the subscribed capital up to a maximum amount which they shall fix with due regard for any maximum amount provided for by law. Where appropriate, the increase in the subscribed capital shall be decided on within the limits of the amount fixed, by the company body empowered to do so. The power of such body in this respect shall be for a maximum period of five years and may be renewed one or more times by the general meeting, each time for a period not exceeding five years.

      3. Where there are several classes of shares, the decision by the general meeting concerning the increase in capital referred to in paragraph 1 or the authorization to increase the capital referred to in paragraph 2, shall be subject to a separate vote at least for each class of shareholder whose rights are affected by the transaction.

      4. This Article shall apply to the issue of all securities which are convertible into shares or which carry the right to subscribe for shares, but not to the conversion of such securities, nor to the exercise of the right to subscribe.

      Article 41

      1. Member States may derogate from Article 9 (1), Article 19 (1) (a), first sentence, and (b) and from Articles 25, 26 and 29 to the extent that such derogations are necessary for the adoption or application of provisions designed to encourage the participation of employees, or other groups of persons defined by national law, in the capital of undertakings.

      Article 42

      For the purposes of the implementation of this Directive, the laws of the Member States shall ensure equal treatment to all shareholders who are in the same position.

40.6 The national court referred the case to the European Court of Justice for a preliminary ruling on the interpretation of certain aspects of the directive.

40.7 The Court found that the aspects of the Second Company Directive regarding the formation of public limited liability companies and the maintenance and alteration of their capital may be relied upon by individuals against public authorities before national courts. They held that any increase in capital must be decided upon in a general meeting and that the provisions providing for such are sufficiently precise that they were held to have direct effect. The Court held that Article 25 and article 41 (1) of the Directive precluded national rules which seek to allow an administrative action to increase the company capital. They observed that

      “ As far as the field of application of the Second Directive is concerned, it should be stated first of all that, in accordance with Article 54(3)(g) of the Treaty, it seeks to coordinate the safeguards which, for the protection of the interests of members and others, are required by Member States of companies and firms within the meaning of the second paragraph of Article 58 of the Treaty with a view to making such safeguards equivalent. Consequently, the aim of the Second Directive is to provide a minimum level of protection for shareholders in all the Member States.

      That objective would be seriously frustrated if the Member States were entitled to derogate from the provisions of the directive by maintaining in force rules - even rules categorized as special or exceptional - under which it is possible to decide by administrative measure, outside any decision by the general meeting of shareholders, to effect an increase in the company' s capital which would have the effect either of obliging the original shareholders to increase their contributions to the capital or of imposing on them the addition of new shareholders, thus reducing their involvement in the decision-taking power of the company.

      However, that observation does not signify that Community law prevents Member States from derogating from those provisions in any circumstances. The Community legislature has made specific provision for well-defined derogations and for procedures which may result in such derogations with the aim of safeguarding certain vital interests of the Member States which are liable to be affected in exceptional situations. Instances of this are Articles 19(2) and (3), Article 40(2), Article 41(2) and Article 43(2) of the directive.

      In this connection, it must be held that no derogating provision which would allow the Member States to derogate from Article 25(1) of the directive in crisis situations is provided for either in the EEC Treaty or in the Second Directive itself. On the contrary, Article 17(1) of the directive provides expressly that, in the case of a serious loss of the subscribed capital, a general meeting of shareholders must be called within the period laid down by the laws of the Member States to consider whether the company should be wound up or any other measures taken. Consequently, that provision confirms the principle laid down by Article 25(1) and applies even where the company concerned is undergoing serious financial difficulties.”

40.8 In Kerafina v The Greek State (C-134/91 and C -135/91), in a similar set of facts to Karella, the court reinforced the position set out in that case, that the Second Directive may be relied upon by individuals against the public authorities before national courts. The Court acknowledged the discretion conferred on the Commission by Article 93 of the Treaty (now Article 88) in relation to State aid. However, it held that such discretion does not permit the Commission to derogate from provisions of community law. Consequently, the Court found that a decision adopted under Article 93 of the Treaty does not allow a member state to maintain a national provision which is contrary to the Second Directive.

40.9 In the case of Pafitis & Ors v Trapeza Kentrikis Ellados AE & Ors (C-441/93), the Court held that national rules providing for an increase by an administrative measure of the capital of a bank which is in financial difficulty were impermissible. Mr Pafitis and fellow shareholders in Trapeza Kentrikis Ellados Bank challenged a decision whereby a temporary administrator to the bank had increased the capital to the bank in an effort to stabilise the conduct of its business. The statutes of the bank were amended in order to allow the temporary administrator to increase the bank’s capital without a general meeting of the shareholders. The temporary administrator had published a notice in the press inviting the shareholders to exercise their pre-emptive rights and participate in the increase within a 30 day period. The national court referred a number of questions on the interpretation of Articles 25 and 29 to the Court of Justice.

40.10 The Court considered that the objective of the Second Directive is to ensure a minimum level of protection for shareholders. They held that that objective would be frustrated if member states were permitted to derogate from the provisions of the directive by maintaining rules which allow for an administrative measure to be made—even in an exceptional situation by reason of debt burden—which increases the capital of the company in the absence of a meeting of its shareholders. The court emphasised that

      “…Article 25, which, in accordance with the objective of the Second Directive, provides a minimum level of protection for shareholders in all the Member States, applies, in the absence of any express exception, to credit institutions under the same conditions as to any other undertaking which is of special importance to the national economy and, by reason of its debt burden, is in exceptional circumstances.”
40.11 They also held that publication of an offer of subscription in daily newspapers does not constitute information given in writing to the shareholders of registered shares within the meaning of Article 29(3) of the Second Directive.

40.12 In rejecting the defendants’ argument that the lex specialis status of banking legislation is closely linked to the fact that supervisory rules are provisions dictated by the public interest, the court found as follows:

      “It is true that considerations concerning the need to protect the interests of savers and, more generally, the equilibrium of the savings system, require strict supervisory rules in order to ensure the continuing stability of the banking system.

      However, it does not follow that national rules of that kind must necessarily provide for measures which deprive the organs of a credit institution of the powers vested in them, as organs of a public limited liability company, by Article 25 of the Second Directive.

      The interests at issue can, as the Advocate General has rightly pointed out in point 18 of his Opinion, be given equal and appropriate protection by other means, such as for example the creation of a generalized system to guarantee deposits, which seek to achieve the same result but do not impede attainment of the objective pursued by the Second Directive of providing a minimum level of protection for shareholders in all the Member States.

      Accordingly, the Member States could, in the event of their supervisory rules for credit institutions not meeting the requirements laid down by the Second Directive, adopt the measures needed to bring them into line with those requirements within the prescribed period and establish a system which, whilst observing the provisions of the directive, protects the interests concerned.”

40.13 In Diamantis v The Greek State & OAE (C-373/97), the plaintiff was a shareholder in the company Plastika Kavalas AE which was placed under provisional administration by the OAE. He took an action in the national court seeking a declaration that alterations in the capital of the company (two increases and one reduction) were invalid on the ground that they were contrary to the provisions of the Second Directive. The Greek State argued that Mr. Diamantis was abusing his rights as a shareholder for a number of reasons, including his failure to exercise his pre-emption rights at the time of the first increase. The national court accepted that certain provisions in Greek domestic law could defeat rights arising under community law (in the Second Directive) in situations where there had been an abuse of rights. They considered, however, that issues of interpretation arose in respect of articles 25(1) and 29(1) of the Second Directive. Accordingly, they requested a preliminary ruling, primarily on the issue of whether a national provision which penalises abuse of rights may validly be relied on to defeat an action for a declaration that certain measures are invalid on the basis of a breach of a right conferred by Article 25 of the Second Directive.

40.14 The Court held that Community law cannot be relied on for abusive or fraudulent ends and it does not preclude the application by national courts of provisions of national law in order to assess the whether a right arising from community law is being exercised abusively. Such a national rule, however, must not prejudice the full and uniform application of community law in the member state. The court set out its ruling in the following terms:

      “Community law does not preclude national courts from applying a provision of national law which enables them to determine whether a right deriving from a Community law provision is being abused. However, in making that determination, it is not permissible to deem a shareholder relying on Article 25(1) of the Second Directive to be abusing his rights under that provision merely because he is a minority shareholder of a company subject to reorganisation measures, or has benefited from reorganisation of the company, or has not exercised his right of pre-emption, or was among the shareholders who asked for the company to be placed under the scheme applicable to companies in serious difficulties, or has allowed a certain period of time to elapse before bringing his action. In contrast, Community law does not preclude national courts from applying the provision of national law concerned if, of the remedies available for a situation that has arisen in breach of that provision, a shareholder has chosen a remedy that will cause such serious damage to the legitimate interests of others that it appears manifestly disproportionate.”
40.15 In the case of Kefalas & Ors v the Greek State 9C-367/96) the Court reemphasised the findings in Diamantis that national courts can apply provisions which seek to establish whether a right arising from community law is being exercised abusively. However, the court went on to specify that it is not open to national courts to alter the scope of such provisions or to compromise the objectives pursued by it. The court concluded as follows:
      “In the light of the foregoing, the reply to the questions referred must be that Community law does not preclude national courts from applying a provision of national law in order to assess whether a right arising from a provision of Community law is being exercised abusively. However, where such an assessment is made, a shareholder relying on Article 25(1) of the Second Directive cannot be deemed to be abusing the right arising from that provision merely because the increase in capital contested by him has resolved the financial difficulties threatening the existence of the company concerned and has clearly enured to his economic benefit, or because he has not exercised his preferential right under Article 29(1) of the Second Directive to acquire new shares issued on the increase in capital at issue.”
40.16 In Commission v Spain (C-338/06), the First Chamber of the Court of Justice declared that Spain, in domestic legislation entitled Royal Legislative Decree 1564/1989 (“LSA”), had failed to fulfil its obligations under Article 29 of the Second Directive. Article 29 reads as follows:
      Article 29

      1. Whenever the capital is increased by consideration in cash, the shares must be offered on a pre-emptive basis to shareholders in proportion to the capital represented by their shares.

      2. The laws of a Member State: (a) need not apply paragraph 1 above to shares which carry a limited right to participate in distributions within the meaning of Article 15 and/or in the company's assets in the event of liquidation ; or

      (b) may permit, where the subscribed capital of a company having several classes of shares carrying different rights with regard to voting, or participation in distributions within the meaning of Article 15 or in assets in the event of liquidation, is increased by issuing new shares in only one of these classes, the right of pre-emption of shareholders of the other classes to be exercised only after the exercise of this right by the shareholders of the class in which the new shares are being issued.

      3. Any offer of subscription on a pre-emptive basis and the period within which this right must be exercised shall be published in the national gazette appointed in accordance with Directive 68/151/EEC. However, the laws of a Member State need not provide for such publication where all a company's shares are registered. In such case, all the company's shareholders must be informed in writing. The right of pre-emption must be exercised within a period which shall not be less than 14 days from the date of publication of the offer or from the date of dispatch of the letters to the shareholders.

      4. The right of pre-emption may not be restricted or withdrawn by the statutes or instrument of incorporation. This may, however, be done by decision of the general meeting. The administrative or management body shall be required to present to such a meeting a written report indicating the reasons for restriction or withdrawal of the right of pre-emption, and justifying the proposed issue price. The general meeting shall act in accordance with the rules for a quorum and a majority laid down in Article 40. Its decision shall be published in the manner laid down by the laws of each Member State, in accordance with Article 3 of Directive 68/151/EEC.

      5. The laws of a Member State may provide that the statutes, the instrument of incorporation or the general meeting, acting in accordance with the rules for a quorum, a majority and publication set out in paragraph 4, may give the power to restrict or withdraw the right of pre-emption to the company body which is empowered to decide on an increase in subscribed capital within the limits of the authorized capital. This power may not be granted for a longer period than the power for which provision is made in Article 25 (2).

      6. Paragraphs 1 to 5 shall apply to the issue of all securities which are convertible into shares or which carry the right to subscribe for shares, but not to the conversion of such securities, nor to the exercise of the right to subscribe.

      7. The right of pre-emption is not excluded for the purposes of paragraphs 4 and 5 where, in accordance with the decision to increase the subscribed capital, shares are issued to banks or other financial institutions with a view to their being offered to shareholders of the company in accordance with paragraphs 1 and 3.

40.17 The Court found that Spain had, in contravention of Article 29 of the directive, granted a pre-emption right in respect of shares in the event of a capital increase by consideration in cash, not only to shareholders but also to holders of bonds convertible into shares. Article 29(1) and (6) of the directive requires new shares and convertible bonds to be offered on a pre-emptive basis to shareholders alone and only in so far as the shareholders have not exercised their right of pre-emption can those shares and bonds be offered to other purchasers, including, in particular, the holders of convertible bonds.

40.18 Finally, the Court held that Spain had failed to provide in its legislation that the shareholders’ meeting may decide to withdraw pre-emption rights in respect of bonds convertible into shares. The Court found in that respect, that national rules which make no express provision for the possibility of such withdrawal, would not be likely to create a situation which is sufficiently precise, clear and transparent in order to allow individuals to know the full extent of their rights and rely on them before the national courts. The court held as follows:

40.19 The applicants rely upon these cases for the proposition that the second Company Law Directive must be complied with, no matter what the circumstances, in the absence of any express provision for derogation. They say that no such derogation provision is to be found in any of the Treaty provisions. Further, they say that no implied derogation can be said to arise.

40.20 The respondents say that these cases must now be read in the light of the State’s obligations under Article 119 and 126, and Title VII of the TFEU generally, and the light of its obligations under the Programme for Support and the Implementing Decisions particularly.

40.21 The overarching submission is that the State was entitled as a matter of EU law to take necessary measures to defend the integrity of its own financial system, and was required as a matter of Treaty obligation to take the measures that it did in order to secure the safety of an institution of systemic importance for Ireland and the Union.

40.22 There was a specific, binding obligation to recapitalise ILP by the end of July 2011. On the evidence, this had to be done by direct State intervention and therefore it had to comply with the State aid rules. That, in turn, meant that the Minister had to take shares, at a price related to the market price. The shareholders having refused to agree to the proposal, it was necessary for the Minister to use his legal powers. It is submitted that EU law cannot apply to invalidate an order obtained for the purpose of fulfilling an EU legal obligation.

40.23 Specifically, it is submitted that the Second Company Law Directive could never render unlawful an act which a Member State has a legal obligation to take.

40.24 The respondents rely on Article 119(3) TFEU, which requires Member States to comply with the following guiding principles:

      “Stable prices, sound public finances and monetary conditions and a sustainable balance of payments”;
40.25 Article 120, which provides that
      “Member States shall conduct their economic policies with a view to contributing to the achievement of the objectives of the Union….”
and Article 126:
      “Member States shall avoid excessive government deficits.”
40.26 It is submitted that, in the light of the evidence as to the potential consequences for Ireland and the Union if the recapitalisation did not happen, these provisions required the State to take the measures it did and must take precedence over any legislative measure.

40.27 It is submitted that the Greek cases, and the provisions of the Directive concerned, are in fact about company governance, dealing with the powers reserved to the members on the one hand and the company’s administrative structures on the other (in the case of Ireland, the board of the company). The use of terms in the judgments such as “administration” or “administrative measure” are said to relate to the administrative bodies of the company, including a situation where the State had imposed an administrator on the company.

40.28 The respondents submit, further, that the judgments do not cover a situation where the action taken is on foot of an order of a competent court. In their view the intervention of the court is a difference of fundamental importance and one which is not contemplated by the Directive. They point to other situations in which a court can alter decisions made about company capital, including the powers of the High Court in a petition under s.205 of the Companies Act, without any suggestion being made that the Directive is engaged.

40.29 It is submitted that no derogation from the Second Company Law Directive is required, but that if it is, such derogation can be found in the legal obligation to do what the Minister did. This feature is said to be absent from the Greek cases.

40.30 It is submitted that, although the Court held in Pafitis that the Second Company Law Directive did apply to credit institutions, it also acknowledged the need to protect the interests of savers and more generally the equilibrium of the savings system in order to ensure the stability of the banking system. The argument here is that the Court did not exclude the possibility that those interests might have to be protected by measures that involve the creation of capital otherwise than through the general meeting. It is said that, on the facts of Pafitis the Court did not have to address, and did not address, the question of what should occur if a credit institution of systemic importance to the Union is at risk.

40.31 The respondents lay emphasis on the fact that the Greek cases were decided before the Credit Institutions Winding-Up Directive (“CIWUD”) came into force. The Directive empowers each Member State to decide for itself on the implementation of reorganisation measures in credit institutions, and provides for the recognition of such measures throughout the rest of the Member States. Reorganisation measures are measures intended to preserve or restore the financial situation of a credit institution and which could affect the pre-existing rights of third parties. It is contended by the respondents that the fact that Ireland can decide upon the content of a reorganisation means that it does not have to abide by the principles of the Company Law Directives.

40.32 The respondents rely on the above arguments in respect of the issues relating to the creation of capital, the renominalisation of shares and the pre-emption rights. In addition, they make separate submissions on the latter two issues.

40.33 Article 8 of the Second Company Law Directive, it is contended, does not support the proposition that the members of the company are the only persons authorised to alter nominal value. The point of the Article and, indeed, the equivalent in the Companies Act, 1963 is the protection of creditors, not shareholders. There is nothing in Article 8 to prevent the Oireachtas from amending the Companies Act so as to give responsibility for the setting of the nominal value of shares to a body other than the members in general meeting.

40.34 The respondents rely upon the judgment of the Court of Justice in the case of Pringle v The Government of Ireland (Case C-370/12), which concerned the compatibility with the TFEU of the establishment of the European Stability Mechanism. It is submitted that, in finding the ESM to be lawful, the Court confirmed that support could be provided to a Member State, even outside the provisions of the Treaty, provided that it is done in a way that complies with EU law. Such compliance necessitates that the support be conditional, and fully consistent with the measures of economic policy coordination provided for in the Treaty. The conditionality is said to be fundamental in order to avoid the creation of a disincentive for Member States to conduct a sound budgetary policy, and leading to a breach of Article 125 (the “no bailout” provision). It is submitted that the same considerations apply to assistance under the EFSM.

40.35 The respondents also rely upon the arguments summarised earlier in the judgment in respect of the significance of the Commission approval under the State aid rules.

40.36 Both parties have submitted a number of learned texts on the subject of the Greek cases. Considerations of time and space do not permit a full discussion of them but it can certainly be said that there is support both for the view that this body of jurisprudence prohibits breach of the Second Company Law Directive and for the view that the cases would be decided differently in the light of current circumstances and the existence of CIWUD.

SECTION R

41. Conclusion and findings
41.1 This court finds that it is not in a position to say definitively whether the Court of Justice would resile from, qualify or affirm the jurisprudence outlined above on the Directive. This being a central issue in the case, the determination of which is necessary to the decision of the court, I propose to seek a preliminary ruling from the Court of Justice pursuant to Article 267 of the Treaty.

41.2 For the purpose of this request the court makes the following findings of law and fact:


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