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Court rules in favour of Quinns

MARY CAROLAN

A significant Commercial Court ruling today means the family of bankrupt businessman Seán Quinn could avoid liability for loans of up to €2.34 billion if they prove claims Anglo Irish Bank made those loans to various Quinn companies for the unlawful purpose of supporting the bank's share price.

Legal sources believe the decision by Mr Justice Peter Charleton could have consequences for other cases.

Patricia Quinn and her five adult children are seeking to avoid liability for total loans of €2.34 billion, including €1.8 billion allegedly illegally made from September 2007 to fund margin calls on Contract for Difference positions built up by Seán Quinn snr in Anglo from 2005 through a Madeiras-registered company, Bazzely, owned but not controlled by the Quinn children.

Anglo denies the family's claims and also contends some €500 million in loans were unrelated to the alleged loans to fund margin calls.

Anglo - now Irish Bank Resolution Corporation - had asked the Commercial Court to rule, as a preliminary issue, that the family could not advance their claims the loans were unenforceable due to alleged illegality. If the family was prevented from making such claims, that would considerably shorten the full hearing of their case, it said.

A date for the full hearing has yet to be fixed but, in his decision yesterday, Mr Justice Charleton made suggestions aimed at reducing costs and length of that hearing. Legal sources believe the case will last several months and is likely to cost more than €30m.

In his key ruling, Mr Justice Charleton ruled the family are entitled to advance claims they can avoid liability for loans if they prove those loans were made for "wholesale" market manipulation in breach of Irish and European law.

There may also be a portion of "legitimate debt" involved, he added, a reference to Anglo's claim €500m loans are unrelated to the allegedly unlawful loans. That could result in a proper apportionment of legitimate and illegitimate debt at the end of this case if the Quinn family proved its claims, he noted.

He rejected Anglo's claims that the EC 2003 Market Abuse Directive and other laws "ring-fenced" matters to the extent the courts cannot prevent enforcement of an illegal contract.

It would be "contrary to public policy" if the family were to be shut out from responding to the "flagrant illegality" they allege against both Anglo and Sean Quinn Senior via such "horrific" transactions, as alleged, he said.

It may also be the case the Quinns had lost several hundred million euro in consequence of being engineered into purchasing Anglo shares which were worth what may potentially prove to be a fraction of the investment made on their behalf, he noted.

Anglo had caused "incalculable damage" to the Irish economy and, since it was nationalised its new management was trying to work through a litany of problems left by the prior controllers, including this case, the judge said.

The illegality alleged here was the "wholesale" manipulation of Anglo's share price to the detriment of the family via a CfD scheme about which, they claimed, they did not know or participate in. They claimed to have lost severely through this "chicanery" and the bank's appointment of a receiver arising from non-payment of the allegedly unlawful loans was unlawful.

The illegality defence rests ultimately on principles of public policy that courts will not assist a plaintiff guilty of illegal or grossly immoral conduct of which the courts should take notice, he said.

The bank had argued, if the family proved the loans were issued in breach of Market Abuse Regulations 2005 and the ban in Section 60 of the Companies Act on a company providing financial assistance to buy its own shares, the loans must stand with the family's only remedy being statutory penalties including a maximum €10m fine and/or 10 year jail term.

It also argued allowing a share transaction to be unwound would "cause chaos" in the marketplace but the judge rejected that argument. Illegality can be used to unwind a transaction or situation of "manifest wrong", he said.

While the maximum statutory penalties were dissuasive, the contrast with the funds involved here was "marked" and allowing the family seek orders voiding these loans as illegal contracts was not disproportionate. They were entitled to rely on "a general principle of illegality" in support of their bid to avoid liability.

In this case, what was beyond doubt was that false and misleading signals were given to the marketplace as to the value of Anglo shares, he added. A potential for massive injustice arose if those "engineered into loss through private and powerful entities setting aside the law for their own grossly selfish purposes" were deprived of a remedy.

If the Quinns were correct, the result of Anglo's enforcement of share charges would be the return to Anglo of several hundred million Euro spent by it on "market distortion" which allegedly deceived the family as to the value of shares in the bank.

The family claim they were unaware of the CfD strategy and the facts of the case entitle them to avoid share pledges and guarantees provided by them on foot of which the bank has sought to recover the loans and appointed a receiver. They also plead unconscionable conduct and negligence by the bank and allege undue influence was exercised on them to sign the various documents involved.