R (Land and Others) v Executive Counsel of the Joint Disciplinary Scheme
| Jurisdiction | England & Wales |
| Judge | Mr Justice Stanley Burnton,MR JUSTICE STANLEY BURNTON |
| Judgment Date | 15 October 2002 |
| Neutral Citation | [2002] EWHC 2086 (Admin) |
| Court | Queen's Bench Division (Administrative Court) |
| Docket Number | CO/3526/2002 |
| Date | 15 October 2002 |
[2002] EWHC 2086 (Admin)
IN THE HIGH COURT OF JUSTICE
QUEENS BENCH DIVISION
ADMINISTRATIVE COURT
The Honourable Mr Justice Stanley Burnton
CO/3526/2002
Mark Hapgood QC, Tim Dutton QC and Mark Simpson
(instructed by Barlow Lyde & Gilbert) for the Claimants
The Hon Michael Beloff QC, Jonathan Evans and Edward Sawyer
(instructed by Stephenson Harwood) for the Defendant
Introduction
In these proceedings the Claimants, the partners of the well-known firm of accountants Ernst & Young ("E&Y"), seek an order staying the investigation by the Executive Counsel of the Accountants' Joint Disciplinary Scheme ("JDS") into their work as auditors of the Equitable Life Assurance Society and its subsidiary undertakings until after the conclusion of the civil proceedings instituted by Equitable Life against them, on the ground that the continuation of that investigation gives rise to a real risk of serious prejudice to them. The prejudice alleged by E&Y is prejudice in that litigation, in the JDS investigation itself and any subsequent Disciplinary Tribunal proceedings, and to the private and professional lives of the partners and personnel who were involved in the audits and regulatory work of the firm for Equitable Life. E&Y contend that this prejudice outweighs the public interest in the present continuation of the investigation.
Background: (a) Equitable Life
The situation of Equitable Life and the losses incurred by its policyholders were consequences of the decision of the House of Lords in Equitable Life Assurance Society v Hyman [2002] 1 AC 408, given on 20 July 2000. The House of Lords decided not only that the directors of the Society were not entitled to declare a reduced final bonus to holders of pension policies who chose to exercise their guaranteed annuity options as against those who chose not to do so, but also that the directors could not lawfully declare different final bonuses to holders of policies containing such an option as compared with holders of policies which did not include a guaranteed annuity option. It was the second of these decisions, which according to the evidence before me had not been anticipated by the leading counsel advising the Society, and was the more controversial, that led to the financial difficulties of the Society, to its decision in December 2000 to close its doors to new business, to the sale of many of its realisable assets, and to the substantial reduction in the sums paid and payable by it to its policyholders.
Endowment and pension policies form a great part, and often the greatest part, of the savings of many people. Equitable Life was the oldest mutual life assurance company and its policies constituted the savings of many thousands of policyholders. The problems at Equitable Life and the reasons for it are indisputably of great public concern.
E&Y were the auditors of Equitable Life from August 1990 to May 2001. As such they audited and reported on its annual accounts under the Companies Act 1985. In addition, they had responsibilities in respect of the regulatory reporting of the Society.
(b) Investigations relating to Equitable Life
In addition to the JDS investigation, there have been or are current a number of relevant investigations relating to Equitable Life:
(a) In November 2000, the Financial Reporting Review Panel ("FRRP") considered whether to open a formal enquiry into the provision for, and disclosures relating to, guaranteed annuities in the report and audited accounts of Equitable Life for the year ended 31 December 1999. The FRRP examines apparent departures from the accounting requirements of the Companies Act 1985, including applicable accounting standards, and may seek an order from the court to remedy them. Following correspondence between Equitable Life and the FRRP covering the audit years 1998 to 2000, the FRRP notified the Society, in June 2001, that it did not propose to open a formal enquiry and did not plan to pursue its enquiries any further.
(b) The Institute of Actuaries appointed a Committee of Inquiry to consider the implications for actuaries of the closure of Equitable Life to new business. The Committee, chaired by Mr Roger Corley, a past president of the Institute, reported in September 2001. Their report contains a number of recommendations which "focus on how actuaries can contribute to improved decision making processes in Life companies …."
(c) On 16 October 2001, the Financial Services Authority published its report on the Review of the Regulation of Equitable Life from 1 January 1999 to 8 December 2000.
(d) There has been an investigation by the Parliamentary Select Committee on Treasury. E&Y submitted written evidence to the Committee. The Select Committee published an interim report raising a number of concerns, including concerns as to the auditing arrangements for the statutory accounts and the regulatory returns of life offices. In October 2001 the Government responded to the interim report in a letter from the Economic Secretary to the Treasury, Ruth Kelly MP. In relation to the concerns expressed by the Select Committee as to the auditing arrangements for life offices, Ms Kelly stated:
"…the FSA review considered the framework of the regulatory returns required from life offices and made a number of recommendations regarding both content and format. The FSA are taking forward these recommendations."
(e) On 31 August 2001, the Government announced an independent inquiry into Equitable Life, to be conducted by Lord Penrose. Its terms of reference are:
"To enquire into the circumstances leading to the current situation of the Equitable Life Assurance Society, taking account of relevant life market background; identify any lessons to be learnt for the conduct, administration and regulation of life assurance business; and give a report thereon to Treasury Ministers."
The Penrose Inquiry is non-statutory, but the Government has stated that it will consider making the Inquiry statutory if necessary. E&Y has provided information to the Inquiry and intends to continue to do so.
The JMU investigations
The Joint Monitoring Unit of the ICAEW examined E&Y's fitness to continue to hold an audit registration in the year after the problems in Equitable came to light. While it did not examine the audit of Equitable Life specifically, it saw no reason not to continue E&Y's audit registration.
Litigation against E&Y
There are civil proceedings against E&Y arising out of Equitable Life in two jurisdictions: before the Commercial Court in London, and in Greece.
(a) Greece
The Greek proceedings were begun in November 2001 by a relatively small number of policyholders resident in Greece against Equitable Life itself, a Greek company that was presumably either an insurance broker or the local agent of Equitable Life, N.M. Rothschild and Sons (C.I.) Ltd, registered in Guernsey, and E&Y. In August 2002 the claimants discontinued their claim against E&Y. However, Equitable Life has now issued a claim for contribution against E&Y. The original claim was drafted in broad terms. As against E&Y, it was alleged that they deliberately approved audited financial statements of Equitable Life for 1989 and subsequent years knowing that they were misleading, and that in the audit of the 1999 accounts they negligently failed to take into account the lack of coverage of a reinsurance contract in the event that the Society lost the Hyman litigation. The grounds for these allegations are not set out in the claim. The contribution claim of Equitable Life was served without a translation into English shortly before the hearing before me, and had not been translated by the end of the hearing.
(b) The Commercial Court proceedings
The Commercial Court proceedings against E&Y were foreshadowed by Herbert Smith, the solicitors acting for Equitable Life, in a letter dated 18 December 2001. At that stage, the Society was only "considering" bringing a claim against E&Y, but following correspondence between Herbert Smith and E&Y's solicitors, it issued proceedings on 3 April 2002 and served its Particulars of Claim on 15 April 2002. Complaint is made as to E&Y's audits of the accounts of Equitable Life for 3 years, 1997, 1998 and 1999. The principal damages claim is, unusually, based on the contention that if those audits had been competently carried out, the directors of Equitable Life would have sold the Society for a much greater sum than has in fact been realised. More conventionally, it is claimed that if competent audits had been carried out, the Society would have declared smaller bonuses than it in fact did. The damages claimed vary from £0.8 billion to £2.6 billion plus interest, depending on the breach of duty established and the date of the hypothetical sale of the Society. There is in addition a claim in respect of alleged Guernsey tax liabilities, but it is discrete and relatively minor in terms of factual scope and amount claimed, and for present purposes may be ignored. E&Y served their Defence, denying liability, on 28 June 2002, and Equitable Life served its Reply on 22 July 2002.
In July 2002, E&Y issued an application under CPR Part 3.4 to strike out Equitable Life's Particulars of Claim on the grounds that it discloses no reasonable grounds for bringing the claim, and for summary judgment under CPR Part 24 on the ground that Equitable Life's major claims against them, i.e., the claims other than the Guernsey tax liability...
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