St Vincent's Healthcare Group used the State-funded hospital as collateral to develop the private facility and commercial car park.
The hospital chiefs, including the embattled chief executive Nicholas Jermyn, will be grilled on the alarming revelation about the hospital's activities by the Dail's Public Accounts Committee (PAC) in January.
The decision gave Bank of Ireland and Ulster Bank a claim over the tax-payer-funded public health facilities if the health group, which is owned by the Sisters of Charity, defaulted or was sold. The Health Service Executive (HSE) had to negotiate a side deal with the Bank of Ireland and the hospital group two years ago, securing an option to buy back the public hospital facilities, at full market value, in the event of closure or default.
Although the HSE has since secured taxpayers' interest in the public hospitals with further commitments, St Vincent's Healthcare Group executives will be questioned over the banks' lien over publicly funded hospitals by the PAC in January.
Simon Harris, the Fine Gael TD who has led questioning of St Vincent's Healthcare Group at the PAC, told the Sunday Independent: "I am appalled by this insight into the blurred lines in the public and private operations at St Vincent's. I have been raising questions for weeks about these issues, but (this) appears to confirm my worst fears. It is extremely worrying and certainly there are questions that must be explained to the PAC."
The hospital group is also under increasing scrutiny over the salaries the group pays to top executives and accusations that it has failed to comply with public sector pay rules.
The group again refused to disclose the top-up allowances paid to Mr Jermyn and two other senior staff members to the PAC last week and claims it is compliant. The group has been given three weeks to comply or lose its funding.
The Sunday Independent can disclose that Mr Jermyn is being paid at least €50,000 on top of a State-funded salary of €145,000.
Although the hospital group has refused to disclose his salary, the Department of Health has previously confirmed that his deputy, Bill Maher, was paid €195,000 at the time of his retirement. Sources said that Mr Jermyn earned considerably more than his deputy.
The hospital has also confirmed that Mr Jermyn was one of three employees who are also company directors who were paid €554,000 in 2011. The others are clinical consultants, one of whom is believed to have retired from full-time practice.
Simon Harris said: "It is breathtakingly arrogant of the St Vincent's Group to remain as the only Section 38 institution not to disclose what it is paying in top-ups to their senior staff."
Shane Ross, the independent TD and a vocal member of the PAC, said: "They have been nakedly arrogant, dismissive and the whole thing smacks of hubris."
A spokesman for St Vincent's Hospital Group said Mr Jermyn had one job as group CEO, was paid one salary and did not receive "top-ups".
The hospital's use of the State-funded facilities as collateral for bank loans for private facilities came to light in 2010 when the HSE looked for guarantees in relation to a grant it gave the hospital to build a new €34,000 Cystic Fibrosis unit.
The HSE sought security from the hospital in return for the funds, in line with a new policy. St Vincent's couldn't provide it because Bank of Ireland and Ulster Bank, which financed the private hospital and a car park, already had first call on all of the hospital's assets.
The charge was secured by the two banks over all the assets of St Vincent's Healthcare Group, which controls the public and private hospitals as well as St Michael's Hospital in Dun Laoghaire.
The Comptroller & Auditor General later concluded that St Vincent's Healthcare Group had "pledged publicly funded assets as security for bank finance for the development of its private hospital".
It noted that the situation was a "hazard" that arose when the State provided funding to private institutions.
"Their freedom to pursue their other objectives may be exercised in a way which does not protect the State's financial interest," it noted.
Financial regulations are now in place with all voluntary hospitals to ensure the situation cannot arise again. The HSE takes a charge over voluntary public hospitals in return for State funding.
In a separate controversy looming over St Vincent's Healthcare Group, Senator John Crown has met the Minister for Health James Reilly over his allegations that the hospital "covered up" an overcharging "fraud".
Mr Crown, an oncologist at St Vincent's, claimed last week that he had new information that the hospital deliberately charged the VHI for cancer medicines that were being provided free for patients on drug trials.
He accused the hospital of trying to cover up the overcharging "fraud", which he first brought to light in 2002.
Yesterday, St Vincent's Hospital Group was still waiting for information from Mr Crown about the "serious allegations".
In a statement, Prof Noel Whelan, chairman, said the "gravity of the allegations" made it "more urgent" that he supplied the group with the new information.
Maeve Sheehan and Daniel McConnell