AIB in U-turn over bonuses as Lenihan warns bank over funds

ALLIED IRISH Banks has backed down from paying €40 million in bonuses to executives following a Government warning that it would not provide billions of euro in funding to the bank if it did so.

Minister for Finance Brian Lenihan wrote to AIB yesterday evening informing it that the provision of further State funding was conditional on the non-payment of any bonuses, no matter when they may have been earned.

The board of the bank subsequently held an emergency meeting 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 the 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.