Equitable and E&Y set for court battle

EQUITABLE Life and its former auditors Ernst & Young are hurtling towards a £2.05bn legal battle next month over alleged professional negligence. The case is due to begin in the High Court on 11 April. In the absence of an 11th-hour settlement, it will be the largest action of its kind in English legal history.

At stake in what promises to be a bruising encounter is the reputation - and possibly the survival - of the accountancy firm. Also on the line are the personal fortunes of 450 former and current partners at E&Y.

Equitable is also suing 15 of its own former executive and non-executive directors for £1.7bn over their handling of the financial debacle that brought Britain's oldest mutual assurance society to its knees. The cases will be heard together during a trial timetabled to run until Christmas.

Equitable says: 'This is not about vindictiveness. We have a duty to act in the interests of our policyholders.' E&Y says it has done nothing wrong and 'does not expect to lose'.

Equitable was brought to the brink of collapse because of its handling of Guaranteed Annuity Rates. These pledged to pay a set return but became ruinously expensive when interest rates fell. Today, the firm, a mere shadow of its former self, is run from a small office near St Paul's Cathedral in the City of London.

Across the River Thames towards Tower Bridge is the shimmering glass and steel edifice of its adversary. Equitable accuses E&Y of negligence and failing in its duty as auditor in 1999 and 2000 because the accountant signed off the accounts without warning of the impending disaster.

E&Y's legal head Victoria Cochrane says the amount for damages claimed by Equitable is 'ridiculous'. She adds: 'We don't accept we should have put the worst-case scenario in the accounts. This was a classic case of bad luck but that's not allowed any more. You have to have someone to blame.'

To pin the blame on E&Y, the insurer will need to prove that its board would have acted differently if E&Y had flagged up the dangers. Equitable claims that if it had been warned, it could have sought a buyer to bail it out, or that it would have cut back policyholder payouts sooner to balance its books.

The insurer's new management is also suing former directors who include Peter Sedgwick, a former leading light of investment bank Schroders, David Wilson, chairman of housebuilder Wilson Bowden, and Jennie Page, former chief executive of the Millennium Dome. If Mr Justice Langley finds against them it will send tremors through boardrooms around the country.

The total cost of the trial for all parties is likely to hit £100m. Equitable has spent around £30m and has made provision for losing - and having to pay its opponents' costs - in its accounts. Any win would go into the investment pot for its 750,000 policyholders.

Vanni Treves, Equitable's chairman, says: 'We do not want to ruin E&Y or take the livelihoods of its partners and their families - unless we have to.' He says Equitable will still listen to a 'serious and substantial' settlement offer. But he adds that time is running short.