AIB wrote off £350,000 from Mr Haughey's overdraft of more than £1 million, the Moriarty tribunal was told yesterday.
A total of £750,000 was paid to the bank on behalf of Mr Haughey by his personal financier, the late Mr Des Traynor, in early 1980. Mr Haughey was Taoiseach at the time.
The remaining debt of £110,000 was to be interest-free and to be repaid by Mr Haughey "within a reasonable period of time". The tribunal has no evidence that this amount was repaid, although the bank did release the security documents to Mr Haughey.
Counsel for the tribunal, Mr John Coughlan SC, said: "The manner in which this indebtedness was treated by the bank warrants investigation in public."
Mr Haughey's relationship with AIB went back many years. He owed substantial amounts of money to the bank throughout the 1970s and "his indebtedness steadily grew".
By August 1979, Mr Haughey owed the bank well over £1 million, and discussions between him and the bank "reached what appears to have been a critical stage". A range of proposals and counter-proposals were put forward during 1979 and these will require further investigation by the tribunal.
Documents provided by AIB show that at one point Mr Haughey offered £400,000 in "full and final settlement", to be paid before the end of 1979. In conjunction with this, Mr Haughey offered the bank the possibility of a £10 million Middle Eastern deposit. The source of this account was not clear, although the bank documents referred to a Middle Eastern bank.
"Allied Irish Banks did not show any enthusiasm for this proposal," Mr Coughlan said.
Mr Haughey also indicated that he might obtain the money needed to pay off his indebtedness through certain land deals. At one stage, he said he might be able to provide £200,000 against his debt from a land deal in Baldoyle, north Co Dublin, although the details of this deal were not yet clear to the tribunal.
Mr Traynor appeared to have been very involved in the attempts to solve Mr Haughey's debt in September 1979. It was at this time that a scheme was proposed to enable realisation of part of Mr Haughey's lands at Abbeville under an arrangement involving the disposal of part of his lands to Mr Patrick Gallagher, or his group.
But by October 1979, under a different scheme proposed by Mr Traynor, part of the money required to clear the debt would be put up by Mr Gallagher and at least two other people.
AIB had indicated that it would be prepared to forgo £150,000 of the debt and Mr Kennedy, the regional manager, met Mr Traynor to discuss this on December 17th, 1979. The full debt at that time was £1.143 million.
Mr Traynor made it clear that for "political reasons" his previous proposals were not possible, as the parties involved "did not want their names being dragged into the political arena or into Dail Eireann".
In a fresh proposal, Mr Traynor suggested that Guinness & Mahon Bank would loan Mr Haughey £600,000, provided AIB would accept this as a final settlement.
"Mr Traynor was informed that this was unacceptable to the bank and that the continuing situation was a cause of embarrassment to the bank", Mr Coughlan said.
As the meeting broke up, Mr Kennedy said the most that AIB would be prepared to write off was £200,000. That was as far as it could go, "bearing in mind the questions which would be asked by their auditors", he said.
High-level contacts between Mr Traynor and AIB's chairman, Mr Niall Crowley, then began. By January 1980, it appeared that a settlement had been reached. Mr Patrick O'Keeffe, the bank's then deputy chief executive, was also involved in the discussions. Mr Haughey was then Taoiseach.
In a letter to Mr Haughey, Mr O'Keeffe proposed the following:
The debit balance on the accounts is agreed as £860,017, to be permanently reduced to £110,000 by mid-February 1980.
The remaining balance of the indebtedness, namely £110,000, is to be liquidated within a reasonable period of time by the introduction of funds arising from the disposal of any part of the property and lands known as Abbeville, it being understood that not less than 10 per cent of the proceeds of such disposal will be so introduced.
As soon the indebtedness has been permanently reduced to IR£110,000, as set out in point number one, the bank will release its charges on the residence and 248 acres known as Abbeville and hand the title documents relating thereto to Mr J.D. Traynor. At the same time, the associated letter of guarantee for IR£350,000 will be cancelled. The remaining items of security - comprised and in the main the deeds of Innisvickillaune, the deeds of a house on 13 acres in Co Sligo and a life policy for £1,000 - will be held by the bank as security, pending liquidation of the remaining indebtedness of £110,000.
It is to be further understood that, as part of the above arrangements, the remaining debit balance of £110,000 will outstand free of interest in the head office ledger of the bank at Bank Centre, Ballsbridge, Dublin, with no transactions, save for reductions in clearance.
According to documents obtained by the tribunal, a sum of £750,000 was paid in the form of three bank drafts drawn on Guinness & Mahon. The first draft for £600,000 was received on or around January 21st, 1980, and a draft for £100,000 was sent by Mr Traynor to Mr O'Keeffe 10 days later. A further draft for £50,000 was provided by Mr Traynor on February 10th, 1980.