Allied Irish Bank (NYSE: AIB) has bowed to government pressure and cancelled plans to shell out back-dated bonuses totaling 40-million euros to its executives. The bank’s board decided to abandon the payments after Ireland’s finance minister Brian Lenihan intervened by threatening to withhold state funding for the troubled lender.

AIB has already received 3.5-billion euros in bailout funding to absorb huge losses in connection with property loans -- and is scheduled to receive billions more.

"I appreciate that AIB was not in a position to put up a sworn defense in the High Court proceedings and that the Executive Chairman and the Board have acted with complete propriety in this matter," Lenihan stated.

AIB had earlier committed to paying the bonuses, citing that it was legally and contractually obliged to do so. Apparently, Lenihan’s maneuver has superseded those considerations.

"Previously the Board had received strong legal advice that it was obliged to pay these bonuses. However, the letter from the Minister conveys a decision by him to legislate which overtakes this obligation," AIB stated.

About 2,400 bank employees were scheduled to receive the bonuses related to work done in 2008.

In a statement, the bank declared that it "very much appreciates the support it has received to date from the State and the Irish taxpayers and acknowledges that it will continue to rely on this support for some time to come."

Moreover, AIB’s Executive Chairman, David Hodgkinson, who said the board is "relieved” not having to pay out the bonuses.

Some questions were raised about the legality of the government’s move against AIB’s board.

"The Attorney General has advised me that it was lawful for the Government to make this request," Lenihan said. "The letter of itself is a supervening event in the context of the intended capitalization of AIB. Legislation strengthens that position."

In addition, opposition leader in Ireland’s government are also wondering about the timing of the measure.

James Reilly, deputy leader of the Fine Gael party, said Lenihan had "belatedly and reluctantly caved in to public outrage and opposition pressure" over the bonuses.

"When the Government took a majority stake in AIB two years ago, it should have insisted that bonuses or increases in salaries could only be sanctioned by the minister,” Reilly said. "Because the Government failed to do so, AIB was free to award bonuses off its own bat. All the trauma and public anger of the last week could have been avoided, if only the Government had acted at the right time."