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Following
the Court of Appeal decision in July 2003 that Equitable had a real
prospect of succeeding in its claims for negligence against its auditors,
the Commercial Court also decided that it had a real prospect of succeeding
in claims for negligence against former non-executive directors responsible
for an invalid differential terminal bonus policy.
The background
to this case is well known and is the same as for the Court of Appeal
decision in July 2003. This was an application for summary judgment
by the non-executive directors of Equitable between 1993 and 2000 in
connection with Equitable's claims against them for negligence and breach
of fiduciary duty.
For many
years before June 1988, Equitable issued "with-profits" policies
that provided for guaranteed annuity rates ('GARs'). Equitable declared
annually two forms of bonuses. The power to declare bonuses was conferred
on the directors by the society's articles of association. After 1995,
the GARs exceeded current annuity rates ('CARs'). Equitable's board
responded by adopting a differential terminal bonus policy which allowed
them to reduce terminal bonuses to GAR policy holders in order to equalise
the annuities payable under GAR policies with those payable under non-GAR
policies.
In July
2000, the House of Lords had held, in Equitable Life Assurance Society
v Hyman, that a director's power under articles to apportion bonuses
was not to be used to devalue guaranteed rates and that differential
bonus rates were contrary to the terms of guaranteed annuity policies.
As is well known, this decision had disastrous consequences for Equitable,
which was exposed to liabilities of £1.5 billion.
In these
proceedings, Equitable is claiming that its former directors were negligent
and in breach of fiduciary duty in failing to take legal advice as to
the validity of the differential bonus rates before awarding differential
bonuses in 1996, 1997 and 1998 and, after legal advice had been taken,
in failing to reduce bonuses in 1999 and 2000. The applicants argued
that as non-executive directors they were entitled to rely on the wide
terms of the articles conferring the power to declare bonuses and on
the fact that Equitable's appointed actuary considered the differential
bonuses to be valid.
In giving
judgment, Langley J concluded clearly that Equitable's claims against
the non-executive directors, given that the differential bonus was specifically
drawn to the attention of the directors and discussed at a board meeting
in 1993, were not ones of which it could be said that they had no real
prospect of succeeding. The directors had knowledge which was relevant
to the continuation of the bonuses in 1996 and subsequent years. The
directors should have appreciated the extent to which guarantees had
been given and the growing gap between GARs and CARs and enquired how
it was to be addressed. Equitable had a real prospect of showing that
bonuses should have been cut when faced with a real risk of defeat in
Hyman and the very serious consequences which would follow. The Court
did not need to consider the claims for breach of fiduciary duty as
the claims in negligence were strong enough to defeat the application
for summary judgment. The Judge stressed, however, that his conclusion
should not be held to be in anyway conclusive as to the eventual outcome
of Equitable's application which had to be decided after a full trial
of the issues.
Note: this
case is interesting in the context of considering insured v. insured
exclusions in D&O policies.
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