Only patience of banks lies between developer and disaster

ANALYSIS:The Carroll case holds potential dangers for the Government's rescue plan and Nama, writes COLM KEENA.

THE CASE which was admitted to the Commercial Court yesterday and listed for hearing on July 17th, involving developer Liam Carroll, has the potential to create significant difficulties for the Government’s rescue plans for Irish banking.

In what is understood to be the first case of its kind, an Irish bank is seeking to call in the personal guarantee of one of our formerly super-rich developers.

Carroll and his huge range of companies are believed to have debts of well in excess of €1 billion, with the main banks involved understood to be AIB and Bank of Scotland (Ireland).

He owns a diverse range of properties and development land, but their value has fallen hugely in recent times. Development is on hold, and only the forbearance of the banks is believed to be lying between Carroll and disaster.

The banks are believed to be holding back out of self-interest. If one of them was to move against any major property developer and put all or part of its business into receivership, it could have repercussions throughout the property and banking sectors.

Any firesales of land and property could set a value for such assets and crystallise losses generally. Such a fall would directly hit the banks by making their loan books look even more weak than they now appear, thereby increasing the size of the hole the Government finds itself having to fill with taxpayers’ money.

Earlier this year, AIB and Bank of Scotland are believed to have funded a plan whereby Carroll settled with his unsecured creditors, paying them off at a discount, so as to get rid of their ability to seek to have any of his companies placed into liquidation or receivership. The banks saw it as in their interest to put good money after bad, because the alternative was the whole house coming tumbling down.

Now Irish Nationwide, one of the bank’s benefiting from a Government guarantee and with State-appointed directors on its board, is now seeking to get €60 million from Carroll arising from a personal guarantee. He is known to have conducted a lot of business in his own name and to have given personal guarantees in the course of his business affairs.

He was not alone.

Nationwide’s action involves the possibility at least that Carroll would be ordered to pay the money, would be unable to raise it and would be declared bankrupt. That in turn could see his companies go into receivership.

One source yesterday said the Nama agency being developed by the Government would not be able to deal with companies in receivership or liquidation.

He said liquidators/receivers would have to operate under company law and would be obliged to sell assets in an effort to raise funds for creditors.

Another source said a receiver could decide to hold back on any sale while hoping the property market would revive. However if a receiver believed an asset sale, even at a low price, could result in raising funds needed by whomever appointed the receiver, he or she would go ahead. A receiver acting for a creditor would have a different motive to Nama.

The Nationwide action may put pressure on Carroll’s main bankers to back a settlement in order to prevent any doomsday scenario. A spokesman for Nationwide said he had no comment to make on case.

Of course, Carroll may win the case and be able to pay any debts owed, but there is no denying that the stakes are very high indeed.

The case also serves to focus attention on an issue known to be of concern to officials in the Department of Finance.

Bankers may feel it is in their interest to back developers who are in deep difficulty, in the hope that in time the market will lift and the huge potential losses that are out there as a result of reckless lending, will be lessened.

The difficulty is that the gamble may not pay off and the greater bill that will be created will have to be picked up by the already heavily-burdened exchequer.

The Carroll case also highlights another aspect of the whole property boom scenario.

Many property developers dealt personally with aspects of their business, including the purchase of land. A person who bought land, then sold it on at a profit, had to pay 20 per cent capital gains tax.

However, if the business was conducted by way of a corporate vehicle, the company had to pay 12.5 per cent tax on its profits and the shareholder had to pay 41 per cent tax on income from the company.

Now that everything has gone pear-shaped, they find themselves with personal rather than corporate liabilities and are facing the threat of bankruptcy.