Pari Passu, meet Supervening Event
The AIB bonus payment row may be shaking loose some of the practices of the calcified Irish legal-political complex. The government at first appeared to be in its standard legal paralysis mode when it comes to doing something it doesn’t want to do — claiming that legal advice meant it had no ability to revisit the bonuses which were earned before the guarantee. But as the basic economics of pumping billions into a bank while 40 million walks out the door came into view, all of a sudden the Minister goes into creative barrister mode –
The financial difficulties of the bank were clearly a supervening event which was not contemplated at the time of any agreement in relation to bonus payments. You will be fully aware of the extent to which State support, in a variety of forms has already been provided, and of the fact that without such support AIB could not have survived until now. I am sure you are also conscious, as I am, of the urgent need for further support, on an enormous scale. Without such support, these bonuses clearly could not be paid. Furthermore the bank could not have continued to operate without this financial support and the employees claiming the bonuses would almost certainly have had their employment contracts terminated.
Think about it: the bank made some financial commitments in the past, but got into difficulties that were not contemplated at that time, the state is now putting in money but without the state money, the previous commitments would have gotten a Hasta la Vista, Baby, so they can’t complain about being made to take less now.
Those are the senior unsecured bondholders in Irish banks, up till now told they rank equally with depositors and can’t be touched. Now that we have the principle that the government can pick and choose among creditors when it puts in new money, can’t we find some lawyers to work on the details for the bonds?
UPDATE: The Irish Times Carol Coulter lays out the legal case and the two elements — implied terms in the contract that the bonuses would come from from the company’s own resources, and a public interest defence that comes with public money — are exactly the arguments that could apply to the bondholders.