Healy O'Connor

AIB Subordinated Bondholders Case in the Commercial Court

The State is paying a six-figure sum towards legal fees incurred by an investment firm following the withdrawal of its Commercial Court case against the Minister for Finance over plans to inflict losses on AIB subordinated bondholders.

The firm, Abadi Co, representing subordinated bondholders in AIB, withdrew the challenge to a court order secured last April by the Minister, Michael Noonan, as part of an effort to achieve some burden-sharing by bondholders in AIB. Abadi withdrew the action in a surprise move as the hearing of the action was about to start.

The Minister said no financial incentive was made or offered to Abadi under the agreement to withdraw the action “other than a payment in respect of their legal costs”.

The Department of Finance and Abadi refused to comment on how much was paid. It is understood that it amounts to a six-figure sum.

Mr Noonan said Abadi’s withdrawal vindicated his view that the challenge was unfounded and that the State was proceeding in “a legally robust and fair manner to deal with a crisis that should not be borne entirely by the Irish State and the Irish taxpayer”.

Abadi said it had withdrawn the action as AIB launched a coercive buyback of subordinated debt during the case on May 11th that would have wiped out its investment before the end of the action. The company said it had been treated unfairly.

AIB’s liability management exercise offered to buy back subordinated debt for as little as 10 cent in the euro – under a tender deadline of June 13th – to raise up to €2 billion towards the €13.3 billion AIB must raise by the end of July.

The subordinated liability order secured by the Government in April, which Abadi had sought to challenge, also had the potential to wipe out the investments of AIB subordinated bondholders.

The company accused the State of delaying its case, which was the subject of a separate court hearing over the discovery of documents from the Department of Finance.

“By issuing the coercive LME with a deadline for acceptance in the middle of the trial and by delaying various aspects of its case, the Minister was effectively denying access to justice in the initial proceedings,” the firm’s president, Carlos Abadi, said.

The court was unlikely to rule in Abadi’s case against the liability order before the buyback which could have wiped out its investment if it didn’t accept it and make the case a moot exercise, he said.

“We could not justify continuing to commit vast financial and time resources to pursuing a judgment that would ultimately have been of academic interest only.”

Mr Abadi said proceeding with the case would have required a “gigantic” undertaking for damages in relief for the “unlawfulness” of the debt buyback or bond repayments at “near-zero value”.

“The case evolved into a fight of altogether different proportions,” he said.

Abadi Co Securities has agreed to participate in the AIB debt buyback.

A separate challenge against the April court order by the Cayman Islands-registered Aurelius Capital Management is proceeding on Tuesday as discovery issues had to be resolved.

Brian Murray SC, for the Minister, said there was an issue whether, irrespective of the outcome of the Aurelius case, the April liability order would still be effective for a series of bonds.

Mr Justice Cooke said it seemed the April order related to 18 sets of subordinated debt while the Aurelius bonds fell into just one of those categories, raising an issue whether Aurelius had legal standing to challenge the other elements of the liability order.

(The Irish Times, Saturday 4th June 2011)

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