Paddy McKillen and a number of companies, substantially controlled by Mr McKillen, borrowed approximately €2.1 billion from two Irish banks.
The loans were used by Mr McKillen and companies controlled by him to make a series of diversified property investments in Ireland and abroad. Of those properties 96% are apparently rented, primarily to high quality tenants on long leases.
The National Asset Management Agency (NAMA) and the legislative scheme in relation to the acquisition by NAMA of certain loans and related rights, referred to as “bank assets” in the terminology of NAMA, is set out in the National Asset Management Agency Act 2009.
The two Irish banks from which Mr McKillen had borrowed are participating institutions in the NAMA legislative scheme. In this context, NAMA was due to acquire Mr McKillen’s loans from these banks. However, the actual decision to acquire these loans was taken before NAMA was established pursuant to the NAMA Act.
In Dellway and Ors. v National Asset Management Agency & Ors., Mr McKillen sought to have a purported decision of NAMA to acquire these loans overturned. The matter was originally heard by a divisional sitting (3 Judges rather than 1) of the High Court, which delivered its judgment on 1 November 2011. The High Court refused the application by Mr McKillen to overturn the decision of NAMA which lead to the appeal to the Supreme Court.
The Supreme Court Appeal
Mr McKillen based his appeal of the High Courtdecision on the following five grounds:
the decision of NAMA to acquire the loans was invalid;
NAMA failed to take particular or specific matters into consideration;
that the scheme set out in the NAMA Act was unlawful, on the grounds that it is contrary to the law of the European Union governing State aid;
that section 69 of the NAMA Act, which sets out the scope of the loans and ancillary rights which can be considered “eligible bank assets” that NAMA can acquire, is unconstitutional; and
Mr McKillen should be afforded the right to be heard (i.e. a right to make submissions/representation to NAMA) prior to NAMA acquiring the loans.
The appeal was heard by a seven judge Supreme Court.
On 3 February 2011, the Supreme Court delivered judgments in relation to issues (1) and (3). It was decided that issue (2) was did not need to considered further. On 12 April 2011, the Court delivered judgments on issues (4) and (5).
In summary the rulings of the Supreme Court on the five issues are as follows:
in law, there was no decision of NAMA to acquire the loans and any purported decision is void. The Court reasoned that the decision was taken before NAMA was established pursuant to the NAMA Act and the NAMA Act does not allow for for the post establishment ratification of pre-establishment decisions;
the issue of whether NAMA failed to take particular or specific matters into consideration is moot (i.e. does not need to be further considered) due to the decision at 1 above;
the NAMA scheme is not unlawful, as being a contrary to the State aid rules;
section 69 of the NAMA Act is not unconstitutional. It is to be read as incorporating a right for persons to judicially review any decision by NAMA to acquire bank assets; and
Mr McKillen and other borrowers have the right to fair procedures including the right to be heard in respect of NAMA’s exercise of its discretion to acquire bank assets.
Mr McKillen’s assertion that the decision of NAMA to acquire the loans was unlawful succeeded, albeit on procedural grounds. As such, it remains open to NAMA to commence anew the decision process in relation to the acquisition of the McKillen loans. However, in so doing, NAMA will have to allow Mr McKillen to make representations in relation to the proposed acquisition of the loans.
Additionally, following the rulings of the Court, it would now appear clear that where a borrower feels that the process has not been carried out in accordance with fair procedures it is open to the borrower to seek judicial review of such a decision.
While the judgments given in relation to the right to make representations sought to limit their application to the particular circumstances of Mr McKillen and did not address the issue of decisions by NAMA other than those to acquire Mr McKillen’s loans, it appears that any decision of NAMA which has the potential to significantly affect a person’s rights (including rights arising from contract) may effectively require NAMA to allow the person(s) affected to make representations.
During arguments, the State had asserted that Mr McKillen had no right to fair procedures in the acquisition of his loans. It might be noted that the judgments expressed the view that the acquisition of loans by NAMA was not equivalent to a contractual assignment of rights by a lender to a third party, as NAMA obtains rights and remedies by statute which are not available to the original lender, including, for instance a right to seek vesting orders (which the Court likened to foreclosure, a remedy which has been abolished in Ireland). Accordingly the acquisition by NAMA has the potential to significantly affect the rights of a borrower.
Writing in 1942, Roscoe Pound referred to the principle of hearing the other side as: “the first principle of judicial justice” and noted: “That checks are particularly needed with respect to administrative adjudication is made clear by certain tendencies which may be seen in administrative action… ”.
There is little scope for dispute that the right to be heard applies in judicial and quasi-judicial proceedings, where there is no real emergency to justify the abrogation of this right. However, there is an ill defined boundary between situations where the right arises and those where it does not. In most common law jurisdictions it appears that legislature and administrative bodies, asserting the interests of efficiency at times encroach on this boundary. Equally where they believe the encroachment is too great the courts periodically redraw it, asserting the primacy of the rule of law in the protection of the rights of persons.
In this case it appears that the State had sought to shift the balance further than the Supreme Court found acceptable. The Court held Mr McKillen had the right to be heard in relation to any decision to acquire his loans, leaving open the extent of the rights that would be found to arise in respect of a borrower with little or no equity.
In allowing borrowers to make representations, the Court did not set out a specific procedure or manner in which the right to make representations must be dealt with by NAMA (procedural fairness being described as “infinitely flexible”, by Fennelly J, quoting de Smith). This is left to NAMA’s discretion, with an indication that written submissions may suffice, albeit on condition that the process is fair.
In relation to the business of NAMA, the bulk of loans in excess of €20 million have already been transferred. As such the borrowers in these cases will not have the opportunity to make representations before acquisition of bank assets to which they are a party. They may however be able to seek a judicial review of the decision to acquire.
As of 15 April 2011, it would appear that loans of less than €20 million will not now be acquired by NAMA. This had been an IMF/ECB/EU Commission bail out requirement. This is a timely revision of the bailout terms, as otherwise NAMA would have had to allow borrowers an opportunity to make representations which would have rendered the NAMA acquisition process more cumbersome than it already is.
In respect of the constitutional issue, it is clear that borrowers whose loans are acquired by NAMA have a right to judicially review the decision, despite the provisions of section 103 of the NAMA Act.
The judgments in respect of the entitlement to fair procedures may impact on public bodies in general where they exercise of discretionary powers, which can impact on the rights of persons (including legal persons).