20 October 2003

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Non- Executive Director Liabilities

Liabilities of non-executive directors - an Equitable outcome?

In a judgment with significant implications for British
boardrooms, the Commercial Court has ruled that Equitable
Life, the troubled life assurance mutual, can proceed with
its £3.3 billion claim against nine of its former non-executive
directors.

The dismissal of the directors’ application to strike out the
claims on the basis that they had “no real prospect of success”
has left them facing ruin; the costs of a full trial to take place
are estimated to be over £30 million.

Equitable can, then, proceed with its claim that the
non-executives were negligent over the implementation of a
policy in the 1990s of reducing bonuses for guaranteed
annuity rate (“GAR”) policyholders that ultimately led to the
society’s near collapse. The GAR policies, sold when interest
rates were high in the ‘70s and ‘80s, operated to guarantee
annuities at a time when it looked unlikely the guarantees
would be needed. Following the fall in interest rates in the
nineties, however, the cost of fulfilling its commitments left
Equitable facing liabilities of £1.5 billion leading the board to
cap the bonuses payable. In 2000, the House of Lords ruled
that this strategy was unlawful and Equitable was forced to
honour its pledges.

The ensuing scrabble has seen legal actions against the
executive directors, the auditors and to the surprise of many,
some of the non-executives.
In response to the allegations that they should have acted
sooner in seeking advice as to the legality of the strategy,
hedged against risks and cut bonuses sooner as well as warning
policyholders, the non-executives argued that they behaved
reasonably and honourably, and that they relied on the executive
directors and followed advice.

Nevertheless, on 17th October, the Court allowed Equitable to
press on with its claims against the non-executives despite
warnings that this will create a climate in which will be
virtually impossible to recruit good quality independent
non-executives - identified as desirable in the recent Higgs
report on corporate governance.

For a more detailed review of the case summary, click/copy
and paste this link:


http://www.law-now.com/CS2000/internet/EN/co50law-now/co55archive/2003/e
quitablenonexecs.htm

For further information, please contact Maxine Cupitt at
maxine.cupitt@cmck.com or on +44 (0)20 7367 2865 or
Gabrielle Folliard at gabrielle.folliard@cmck.com or on
+44 (0)20 7367 2662.

Are you a director and aware of your duties, liabilities and
responsibilities? Visit http://www/law-now.com/directors
to find out more...





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