JM Thorn 

17 August 2009

Whatever decision the courts ultimately take on the future of Liam Carroll’s property empire (he is currently awaiting the outcome of yet another bid to be protected from his creditors) the ongoing legal process has served the useful purpose laying bare the true state of the Irish property market and the scandalous nature of the Government’s efforts to bail out the banks and the developers.  The public examination of Carroll’s affairs has served to quantify the liabilities that the public are being asked to take and on the losses that could be incurred. 

The legal action came about as a result of Carroll’s Zoe group being unable to repay loan to the Dutch owned AAC bank. When demand letters were issued Carroll made an application to the Hugh Court for protection.  The court refused to extend protection and instead appointed an examiner to six companies in the Zoe group.  This process culminated in the Supreme Court last week with Carroll’s failed attempt to have the High Court judgement overturned.  ACC was granted a series of orders it was seeking to recover the €136m owed to it by the Zoe group.

While the ACC bank is relatively small player its decision to pursue Carroll has put a spotlight on the whole rotten structure of the Irish property market.  It has also made public some facts about the property sector that the Government, banks and developers would have preferred remain a secret.  This comes at a particularly sensitive time with the Government bringing forward its plans for a “bad bank” (NAMA) that would take the high risk loans from banks and transferred the liability to the state.  The claim made for this plan is that the value of the assets (largely property and land) on which these loans are secured while currently low will recover over time and thereby minimise any losses.  However, the examination of Carroll’s affairs by the courts has revealed such positive projections to be totally baseless. 

Liam Carroll is one of the biggest developers in the state and owes over €2.5 billion to the banks, Irish owned banks accounting for the baulk of this.  His Zoe group, which was the subject of the action, owed   €1.2 billion to eight banks including ACC.  Given the overall size of Carroll’s property empire, and the size of the part of it that was under scrutiny, it can be assumed that what was revealed about the state of his companies is a fairly accurate picture of the wider property sector.  Indeed, as most of their property is located in and around Dublin, Carroll’s companies are probably in a better state than those of most developers.

The argument that Carroll made to forestall his creditors, which is essentially the same as that made by the Government for NAMA, was that the value of his assets would rise in the near future and allow him to pay back his loans.  However, his business plan lacked any credibility.  How the fortunes of the Zoe companies could be transformed from insolvency and a deficit of more than €1 billion into a €290 million surplus in three years – and in a depressed property market – was never clearly established to the court’s satisfaction.  The judge dismissed the plan describing it as "fanciful", "lacking in reality" and containing "something artificial".
The Carroll case also highlighted the deliberately complex structure and financing of Irish property companies.  ACC bank successfully petitioned the High Court to appoint a liquidator to two of the companies within the Zoe group. The statutory duty of the liquidator is to sell the assets of the two companies to recover as much money as he can to repay creditors.  However, given the cross ownership and intermingling of debt across the Zoe group the assets will be difficult to unpick. Vantive Holdings and Jersey-registered Morston Investments sit at the apex of about 50 subsidiaries in the group. Documents lodged with the Companies’ Registration Office (CRO) show that, along with another Jersey-based vehicle, Stradbally Investments, Vantive is a shareholder in Peytor Developments and Villeer Developments.  In turn, Peytor is the sole shareholder in Parlez International and Carragh Enterprises. Along with this, Morston and Stradbally are the shareholders in Vantive.  The CRO records show that Vantive, Peytor, Villeer, Carragh and Parlez, all owe debts to a series of banks, which are secured against properties in the Castleforbes-Upper Sherriff Street area on the north side of Dublin’s docklands.

While Vantive and Morston have their own problems with respective deficits of €396 million and €361 million on liquidation, they also have colossal exposures on inter-company debts and guarantees across Carroll’s groups.  Companies throughout Carroll’s group owe €569.9 million to Vantive which has in turn guaranteed debts of €224.4 million between his companies.  There is heavy intermingling of debts across Carroll’s Zoe group and his other two groups, Dunloe and Orthanc. The three owe an estimated €2.8 billion.  This cross ownership and intermingling of debt creates the potential for a domino effect of defaults, liquidation and sell offs across his entire business.  Such a scenario would also have a major impact on the wider Irish property and banking sector as companies are liquidated and the fire sale of their assets pushes property values down even further. 

The Carroll case and its outworking also have implications for National Asset Management Agency (NAMA).  It has given us a clear picture of the likely financial state of the Irish property developers whose loans NAMA is supposed to purchase.  During the High Court case Carroll’s accounts admitted that, as of today, his Zoe group could only pay back about one-quarter (25 per cent) of the money it owes to the Irish banks.  If as predicted NAMA purchases loans for an average discount of one quarter (75 per cent of the original value of the loan), the public will be paying three times the amount that they could currently be sold to anyone else for.  The potential loss to the public would be greater than even the direst predictions so far – up to €45 billion if property values fail to recover! 

The Carroll case has also exposed the corrupt relationship between the banks, developers and politicians.  Despite the reality that Carroll’s business simply could not be saved, all the Irish banks involved actively supported this survival plan, allowing Carroll to continue rolling up interest and also taking the highly unusual step of providing the funds to pay off unsecured trade creditors. The banks were determined to maintain the illusion that Carroll could pay back the money he owed.  The prospect of the creation of a bad bank provided a big incentive for this.  With the finance minister signalling his determination to take a positive view of all loan purchases (emphasising their “long-term economic value”) participating banks were encouraged to maintain that loans such as Carroll’s were good just long enough for them to be sold to NAMA for far more than they will ever repay.  This manoeuvring by the banks only came into the public realm because the Dutch-owned ACC was left out of NAMA and so didn’t have any incentive to go along with the pretence over the value of Carroll’s loans.

It is not yet clear how the Carroll case will finally work itself out.  It is possible that the Irish owned banks involved in lending money to Carroll will pay off ACC and order the liquidators to go along with the ”fanciful” business plan.  They will hope to nurse the Carroll group long enough for it to be dumped on NAMA.   It is quite possible that NAMA will end up buying Caroll’s loans at a huge premium.  Given the secrecy surrounding the proposed purchasing process the Irish public will never know. 

However, with what has been revealed in the courts, there is wider recognition of how little the NAMA loans are actually worth. The Carroll case has served the useful purpose of exposing the corruption of the bankers and developers and their accommodation by the Government. It has strengthened public opinion in opposition to NAMA as the potential scale of the scandal begins to emerge.  The discontent over this and the wider austerity drive is finding expression among the grassroots of the Government parties, for example two Fianna Fail TDs resigning the whip and Green Party members calling for a special convention to discuss NAMA.  However, the Irish working class cannot rely on public opinion or parliamentary manoeuvres.  The Government parties are set on a course, one with which the opposition parties are largely in agreement, and are determined to keep to it.  With such unanimity among the political class public opinion isn’t really a factor.  Indeed, it has already been discounted.  As Frank O’Dywer, chair of the Irish Association of Investment Managers and key government adviser, has stated “the key audience is international financial markets”.  As the price to be paid by the Irish working class to please this audience escalates by the day the need to establish its political and orgainsational independence becomes ever more urgent. This is essential condition for building of an effective opposition movement