Dowling v Minister for Finance

• Jurisdiction: Ireland
• Judge: Ms. Justice Iseult O'Malley
• Judgment Date: 31 July 2017
• Neutral Citation: [2017] IEHC 520
• Court: High Court
• Docket Number: [Record No. 2011/239 MCA]
• Date: 31 July 2017

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

AND

PERMANENT TSB PLC

NOTICE PARTIES

[2017] IEHC 520

O'Malley Iseult J.

[Record No. 2011/239 MCA]

THE HIGH COURT

Banking & Finance – Practice & Procedures – S.9 and s.11 of the Credit Institutions (Stabilisation) Act, 2010 – Reference of Issues to Court of Justice of European Union – Art. 267 of Treaty on the Functioning of the European Union – Right of shareholders – Test for setting aside a Direction Order – Council Directive 77/91/EEC

Facts: The applicants sought an order pursuant to s.11 of the Credit Institutions (Stabilisation) Act, 2010 to set aside the direction order of the respondent/Minister on the ground that it was unreasonable and vitiated by an error of law. The case was referred to the Court of Justice of European Union ('CJEU') that had delivered its judgment in conformity with the respondent's decision.

Ms. Justice Iseult O'Malley dismissed the applicants' application. The Court observed that the decision taken by the respondent was just and proportionate. The Court noted that the shareholders must have borne the risk of their investments, especially where the State aid was granted. The Court held that the direction order issued by the respondent was reasonable as it was evident from the documents that the bank was unable to pay its debt, which would have led to the failure of the bank and ultimately impacted the Irish economy.

JUDGMENT of Ms. Justice Iseult O'Malley delivered the 31st day of July 2017

Introduction

1 This is the second substantive judgment delivered by me in these proceedings, and should be read in conjunction with the first ( Dowling & Others v. The Minister for Finance [2014] IEHC 418).

2 The issues in the case arise out of the making of a direction order in respect of Irish Life and Permanent Group Holdings plc by the High Court, in July 2011, pursuant to the provisions of the Credit Institutions (Stabilisation) Act, 2010. Under that Act, the Minister for Finance may, if he or she considers it necessary to secure the achievement of a purpose of the Act, make a 'proposed order' proposing that a credit institution covered by the Act be directed to take or refrain from taking a specified action or actions. Having done that, and having complied with the procedural requirements of the Act as to consultation with the Governor of the Central Bank and notification to and receipt of submissions from the institution concerned, the Minister may make an ex parte application to the High Court for an order in the terms proposed. The court shall make the order if it is satisfied that the procedural requirements of the Act have been complied with and that the opinion of the Minister (that the proposed order is necessary to secure the achievement of a purpose of the Act) is reasonable and is not vitiated by any error of law. As is made clear in the first judgment, the effects of a direction order can be extremely wide-ranging, and there is no doubt but that they were radical in this case.

3 The application for the Direction Order in this case is described in paragraphs 29.1 to 29.22 of the first judgment. The purposes for which the application was made, by reference to the statutory purposes, are summarised at paragraphs 30.1 to 30.13. The details of the order required are set out in paragraphs 31.1 to 31.4.

4 The applicants seek an order pursuant to s.11 of the Act to set aside the Direction Order. To succeed, they must establish that there was non-compliance with the requirements of s.7, or that the opinion of the respondent Minister as to the necessity for a direction order was unreasonable or was vitiated by an error of law.

5 The substantive hearing in this case took place over a number of weeks in 2014. A lengthy written judgment was delivered on the 15th August, 2014, (hereafter 'the first judgment'). A number of findings of fact are set out in it, as are the considered rulings on many of the legal issues. However, for the reasons explained in the judgment I decided that it was necessary to refer certain issues to the Court of Justice of the European Union for preliminary ruling pursuant to Article 267 of the Treaty on the Functioning of the European Union. Specifically, the reference was necessary to my final decision because it was not clear to me whether or not the situation was definitively governed by certain judgments of the Court of Justice concerning the rights of shareholders under the provisions of Council Directive 77/91/EEC.

6 The order for the reference was made on the 2nd December, 2014. The CJEU delivered its ruling on the 8th November, 2016, (see Dowling v. Minister for Finance C-41/15). A further hearing was subsequently held in this Court to afford the parties an opportunity to make submissions.

7 It must be made clear at the outset of this judgment that it is concerned, firstly, with the application of the ruling given by the CJEU and secondly, where necessary, with the resolution of certain arguments that were not dealt with in the first judgment because, depending on the content of that ruling, they might not have fallen to be determined. It is not intended to embark upon new legal arguments that may have occurred to the parties, or to reopen any findings already made. That would not, save perhaps in exceptional circumstances, be possible.

Findings in the first judgment

8 The circumstances surrounding the making of the Order and the relevant provisions of the Act are described in considerable detail in the first judgment. It is not necessary to repeat the evidence here. However, it will be helpful to set out the findings made, since they formed the basis for the reference to the CJEU. As set out in paragraph 41.2 of the first judgment, they are as follows:

(i) From 2008 onwards, ILP along with other Irish banks became increasingly reliant upon State and EU financial support. As time went by and the financial turmoil of those years did not resolve, the efforts of the Irish Government to support the banks did not succeed in convincing the markets of either the banks' viability or the State's capacity to continue supporting them.

(ii) By late 2010 it was apparent that there was a serious threat to the financial stability of the State, in significant part due to the State's commitments to the banks.

(iii) The State's guarantees in respect of ILP amounted to €26 billion.

(iv) In entering in to the Programme for Support in November 2010, the Irish State entered into binding legal commitments to the European Commission, the European Central Bank and the International Monetary Fund, including a commitment to recapitalise viable Irish banks.

(v) As part of the Programme, the Central Bank committed itself to carry out a Prudential Capital Assessment Review (PCAR) and a Prudential Liquidity Assessment Review (PLAR) and to determine the capital needs of the banks on the basis of the results.

(vi) The PCAR and PLAR results were published on 31st March, 2011.

(vii) The State was legally committed to ensure recapitalisation in line with the reviews by the 31st July, 2011.

(viii) The Governor of the Central Bank then directed ILP to raise regulatory capital in the sum of €4 billion. This direction was binding on ILP and was not the subject of any legal challenge. The direction was made by the Central Bank in its capacity as independent regulator.

(ix) On the balance of probabilities, the required capital could not have been raised from private investors.

(x) On the balance of probabilities, the required capital could not have been raised from existing shareholders.

(xi) On the balance of probabilities, failure to recapitalise by the deadline would have led to a failure of the Bank, whether by reason of a run on the Bank by depositors, revocation of its licence, a call for repayment of the various Notes, a cessation of funding under the ELA scheme or a combination of some or all of these possibilities.

(xii) The failure of ILP would, as a matter of probability, have resulted in a complete loss of value to the shareholders.

(xiii) The failure of ILP would, as a matter of probability, have had extreme, adverse consequences for the Irish State, whether by reason of a run on the Bank and subsequent calls on the State guarantee of up to c. €26 billion, the contagion effects in relation to the other banks, a full or partial withdrawal of funding to the State under the Programme for Support for non-compliance with its terms, sanctions imposed under the Treaty, or a combination of some or all of these possibilities.

(xiv) The adverse consequences for the State would, as a matter of probability, have worsened the threat to the financial stability of other Member States and of the European Union.

(xv) The decisions by the State to invest in the recapitalisation was made in fulfilment of its legal obligations and in the interests of the State's financial system, the citizens of the State and the citizens of the European Union.

(xvi) The State decided to recapitalise ILP by way of a subscription by the Minister for Finance for ordinary shares in the sum of €2.3 billion, contingent capital in the sum of €0.4 billion, and a 'stand by' investment of €1.1 billion. The price to be paid per share was €0.06345, a discount of 10% to the middle market price on 23rd June, 2011. The calculation of the number...