Minister for Finance Brian Lenihan said it would have been "galling" to have paid €40 million in bonuses to AIB staff at a time when the Government was asking everyone in the country to make sacrifices.

Mr Lenihan said this morning he had written to AIB yesterday informing it that further investment by the taxpayer was conditional on the non-payment of any bonuses, no matter when they may have been earned.

He said using taxpayers' funding to pay the bonuses was "unacceptable".

"I wrote to AIB saying it needed money from taxpayers if it were to survive as a bank and I was totally opposed to these bonuses. The letter was a supervening event. I’m not using taxpayers' money to pay these bonuses," he said.

However, Taoiseach Brian Cowen, speaking during Leaders’ Questions, confirmed that 91 AIB employees had begun legal proceedings in the Circuit or High Court in October and the first case was scheduled for November.

Asked why he didn't move more quickly on the issue Mr Lenihan said it is "not an easy country, legally speaking".

"I had to look at issues very carefully. I looked at taxing them but that would not have worked as you cannot tax retrospectively. The conclusion arrived at by me was that it would be possible to write a letter that would change the circumstances, change the context that the payments were being made and provide the board of Allied Irish banks with a reason why they should not make these payments," he said.

Mr Lenihan said no bonuses had been paid to anyone in any financial institution in 2009 and 2010. He said difficulties had arisen with pre-existing bonuses agreed on before 2009. He said a few pre-existing bonsues had been paid in Anglo but none had been paid in Bank of Ireland.

Mr Lenihan also told RTÉ's Morning Ireland today, he had "great confidence" in AIB's executive chairman David Hodgkinson.

An expert in employment and benefits law warned however that the Government needed to introduce legislation to ensure the bonuses were not paid.

Ian O'Herlihy, of Mason Hayes & Curran solicitors, said if other AIB employees “go in to the courts on the coat-tails of John Foy, the courts are going to make an order to pay them. Legislation is needed urgently.”

The board of AIB held an emergency meeting yesterday evening after receiving Mr Lenihan's letter and decided not to pay the controversial bonuses, dating back to 2008, to 2,400 employees.

In his letter, Mr Lenihan said the financial difficulties of the bank were clearly a “supervening event” which was not contemplated at the time the bonus payments to staff were agreed.

AIB said last week it was contractually obliged to pay the bonuses withheld from capital markets staff under the terms of the bank guarantee for the unit’s profitable performance in 2008 after an employee won a test case.

The High Court had ordered the bank to pay €160,000 to trader John Foy, who was one of about 90 staff who had taken legal action against the bank over the bonuses. Mr Foy will be paid his bonus in spite of the intervention last night by Mr Lenihan. The Minister said the award to Mr Foy would stand as the Attorney General had advised that the “dishonouring of the judgment by the board was not permissible”.

However, none of the other staff eligible for the bonuses are now to be paid.

In a statement issued after its meeting, the AIB board accepted that without State support that has been provided, the bank could not have survived. It also conceded that it would continue to have to rely on the State for support for some time into the future.

Mr Lenihan, in his letter, informed AIB executive chairman David Hodgkinson that he was extremely unhappy about the prospect of substantial sums being paid in bonuses to AIB staff.

He said that they were referable to a time when the State had to provide financial support to AIB to enable it to survive.

“As AIB could not be in a position to pay without State support, past, present and to come, I believe that this condition is reasonable and proportionate,” he said.

Mr Lenihan, in a later briefing last night, said that he would be bringing legislation to the Dáil tomorrow to give statutory backing to the decision.

The change will be made as an amendment to the Credit Institutions (Stabilisation) Bill, which will enshrine the memorandum of understanding with the European Union and International Monetary Fund into Irish law.

Mr Lenihan conceded that no course of action was “totally free from legal risk”, and acknowledged a challenge to the intervention was possible.

“The legal context has changed,” Mr Lenihan said. “The advice of the [Attorney General is] that it was lawful to write the letter.”

He also defended the bank’s decision not to enter a defence in the case taken by Mr Foy, saying that a sworn defence was required in relation to a debt and AIB was not in a position to swear a defence as the employees had entitlements to bonuses under their contracts.

Fine Gael said the Government had caved in to pressure and described the episode as a debacle.

Deputy leader James Reilly said it was a crisis of the Government’s own making that could easily have been avoided. “Brian Lenihan has finally responded to public outrage and Opposition pressure on the obscenity of AIB bonuses,” he said.

Labour TD Pat Rabbitte described the move as a “U-turn” by the Government and the board of AIB.

“However, this is yet another case where the Government and the board of a State-funded bank have had to be shamed into reversing a decision that was patently unjustifiable.

“What this episode has shown is that the Government is not exercising the degree of supervision of the banks that the present crisis requires and that there is still little or no change in the governance culture in the banks,” Mr Rabbitte said.

Earlier, senior Government and Opposition figures had condemned the payment of the bonuses, which were due to be paid on Friday.