(17 October 2003)


Case No: 2002 Folio 406

 [2003] EWHC 2263 (Comm)




Royal Courts of Justice

Strand, London, WC2A 2LL

Date: 17th October 2003

Before :


Between : 





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Applicant/ Defendants

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Mr I. Milligan QC, Mr R. Miles QC and Mr G. Morpuss (instructed by Messrs Herbert Smith) for the Claimant

Mr L. Rabinowitz QC and Mr R. Handyside (instructed by Messrs Allen & Overy) for the 2nd,8th,10th, 11th,12th  and 14th Defendants

Mr J. Sher QC, Mr H. Rajak and Ms C. Furze (instructed by Messrs Ince & Co) for the 15th Defendant

Hearing dates : 22nd to 26th September 2003

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Approved Judgment

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.

The Hon. Mr Justice Langley

Mr Justice Langley :


1.                  The applicants before the court were non-executive directors of the claimant Society (“Equitable”) at various times in the years 1993 to 2000. Equitable claims against each of the applicants for negligence and breach of fiduciary duty. The other named defendants in the proceedings were executive directors of Equitable at various times in the same years.

2.                  Each of the applicants seeks an order for summary judgment pursuant to CPR 24.2 against Equitable on the claims made against them. Each also seeks an order that they be excused from all liability to Equitable under section 727 of the Companies Act 1985 and that they be indemnified by Equitable against the costs of these proceedings under Article 67 of Equitable’s Articles of Association.

3.                  Mr Wilson, represented by Mr Jules Sher QC, also seeks the dismissal of Equitable’s claims against him under CPR 3.4(2). Mr Rabinowitz QC and Mr Handyside appeared for Messrs Davis, Price, Sclater, Sedgwick, Taylor and Tritton. Mr Martin and Ms Page appeared in person. They also relied upon CPR 3.4(2) in relation to one of Equitable’s claims shortly described as the “mis-selling” claim.

4.                  In the related proceedings by Equitable against Equitable’s auditors the auditors made applications to strike out the claims against them and for summary judgment. I ruled on those applications in two judgments dated 10 February 2003 and 15 April 2003. I granted the auditors substantial relief on their applications: [2002] EWHC 112 (Comm) and [2003] EWHC 804 (Comm). The Court of Appeal allowed Equitable’s appeal against my first decision [2003] EWCA Civ 1114 and permitted Equitable to pursue the full claims it had made against the auditors. The issues on the present applications and the claims made against the non-executive directors are different. The material rules and context are, however, the same and the summary of them is therefore derived from the judgments in the auditors’ proceedings.



5.                  It is right to note, and a matter of some complaint by the applicants, that the Particulars of Claim are currently in Draft Re-Amended form (the RAPOC), the proposed re-amendments being put forward to address some of the matters raised in the applications. Nonetheless, sensibly and rightly, it is the re-amended draft which it is accepted should be addressed on these applications.


6.                  Equitable is an unlimited liability company: a “mutual”. Its members (who share in the profits and losses) are the with-profits policyholders. Article 65 of its Articles of Association gave the directors power to distribute surplus to members by way of bonus. The extent of those powers and their proper exercise was the subject of the decision of the House of Lords in Equitable Life Assurance Society v Hyman [2002] 1AC 408.


7.                  For many years, until June 1988, Equitable issued with-profits policies which provided for guaranteed annuity rates (GARs). A GAR policy contained a guaranteed annuity option (GAO) which permitted the policyholder on retirement to choose to receive an annuity at a guaranteed rate rather than the current annuity rate (CAR) prevailing at the date of retirement. Even after June 1988 GAR policyholders remained entitled to pay recurrent single premiums into their policies and to obtain the benefit of the GAR in respect of those premiums.

8.                  Equitable declared annually two forms of bonuses. Reversionary bonuses were irrevocable in the sense that once declared they vested on 1 April and a policyholder was contractually entitled to the benefit of them on the maturity of the policy. Terminal (or final) bonuses, although “announced” annually, in the sense of being notified to policyholders, were only allotted when benefits were taken under a policy and, as Equitable’s literature made clear, there was no contractual right to the bonuses until then.

9.                  Reversionary bonuses are typically set at a rate referable to the expected return on medium or long dated gilts. Terminal bonuses were set at rates intended to ensure that the total benefits which a policyholder received on maturity reflected the smoothed value of the assets of Equitable attributable to the premiums paid by the policyholder. For the purposes of this judgment, even if inaccurately, I shall refer to a policyholder’s “asset share” as the sum assured together with the value of all bonuses both reversionary and terminal.

GARs exceed CARs.

10.              Between late October 1993 and mid-May 1994 GARs exceeded CARs for the first time. They did so again from and after mid-May 1995. The typical excess at 1 January in each year from 1994 to 2001 was 10%, -2%, 7%, 10%, 18%, 41% and 33%. Simply to illustrate the position with a crude example, if a policyholder’s “asset share” was £10,000 and the GAR was 10%, the annual pension would be £1000 whereas the CAR might be 8% giving an annual pension of £800.

11.              Equitable had an unusually high proportion of policies containing GAOs. When the Hyman litigation was commenced in January 1999 about 25% of the policies in force had GAOs.


12.              The Board of Equitable was alive to the potential problem created by GARs exceeding CARs. On 22 December 1993 the board resolved to address it by adopting a differential terminal bonus policy (“the DTBP”).

13.              In simple but I think sufficient terms the DTBP operated by adjusting terminal bonuses to equalise the annuities payable under GAR policies where the policyholder exercised the GAO with those payable under non-GAR policies and GAR policies where the policyholder chose not to exercise the GAO.

14.              Using the same crude example, if, before adjustment, a GAR policyholder’s asset share was £10,000 made up of the sum assured and reversionary bonuses of £7500 and terminal bonuses of £2500 then, if the GAO was exercised, the terminal bonus would be reduced from £2500 to £500 to give an annuity at the GAR of 10% on £8000 (£800) which would be the same as the annuity for other policyholders who would retain the full terminal bonus and so also receive £800 being 8% of £10,000.

15.              The DTBP was applied in each of the years 1993 to 1999. The directors of Equitable believed they were entitled to operate it because of the wide terms of the discretion provided for by Article 65 of Equitable’s Articles of Association. The House of Lords in Hyman decided that belief was wrong.

The Hyman Litigation.

16.              Complaints were made to Equitable by a number of GAR policyholders in about September 1998. Equitable initiated a test case to determine whether it had the right to declare differential terminal bonuses. Mr Hyman was the chosen defendant to represent all GAR policyholders. The proceedings were begun on 15 January 1999. On 9 September 1999 the Vice-Chancellor gave judgment in favour of Equitable. On 21 January 2000 the Court of Appeal, by a majority (Lord Woolf MR and Waller LJ; Morritt LJ dissenting) allowed an appeal by Mr Hyman and held that Equitable was not entitled to declare differential terminal bonuses. The House of Lords’ decision, dismissing Equitable’s further appeal, was published on 20 July 2000. The House of Lords also decided that Equitable was not entitled to allot differential bonuses to GAR and non-GAR policyholders as separate classes (“ring fencing”) thereby closing off a potential solution for Equitable which had found favour with Waller LJ in the Court of Appeal. In commercial terms the decision of the Court of Appeal, unlike the House of Lords, was not therefore necessarily unfavourable to Equitable.

The Aftermath.

17.              On 20 July itself, on the basis of advice that the decision in Hyman exposed Equitable to additional liabilities of some £1.5bn., the directors resolved that it was in the best interests of Equitable to put itself up for sale and to remove growth in policy values in respect of the first seven months of 2000.

18.              In the event no sale was achieved. Equitable stopped writing new business with effect from 8 December 2000.


19.              Equitable’s claims relate to the bonus declarations made in February of each year between 1996 and 2000. The DTBP was first adopted by the Board in December 1993 and it was applied to bonus declarations thereafter. No claim is made in respect of the decision in 1993 to adopt the DTBP nor in respect of the bonus declarations in 1994 and 1995 because any such claims would be statute-barred. Equitable does, however, rely in support of its claims in the later years against those directors who were on the Board in 1993 on what it alleges took place in 1993. It is said the knowledge acquired in 1993 is material to the conduct of those directors in later years.

20.              Equitable advances two causes of action: negligence and breach of fiduciary duty. The allegations of negligence are essentially two:

i)                    In 1996, 1997 and 1998 failing to take legal advice as to the validity of the DTBP before awarding differential terminal bonuses in February of each of those years; and

ii)                   In 1999 and 2000, after the problem was known and legal advice had been sought and given, failing to reduce bonuses and to ensure that existing and prospective policyholders were fully aware of the potential costs to Equitable in respect of GAOs should the Hyman litigation be “lost”.

21.              The case on causation for the years 1996 to 1998, again in summary, is that (i) the legal advice on the lawfulness of the DTBP obtained would have been to the same effect as the advice in fact received between 1998 and 2000; (ii) that advice would therefore have been strongly positive to the effect that the directors had a wide discretion under Article 65 but also that nonetheless there was a real risk that a court might conclude both that the DTBP was invalid and that the cost of GAOs could not be confined to GAO policyholders (ring-fencing); (iii) the advice would also have been to initiate a test case to determine the validity of the DTBP; (iv) the test case would have resulted in the same conclusion over the same time scale as did the Hyman litigation; and (v) in the meantime the Board should have taken precautions against the risk of losing by in 1996 “obtaining a hedge against the potential cost of the GARs if they had to be honoured in full” and in each year by reducing bonuses so as to build up reserves.

22.              Although a number of submissions were made on the damages claimed based on these allegations the real attack made by the applicants is on the case sought to be made by Equitable in negligence and causation and I do not think it necessary to set out in any detail the losses which Equitable claims to have suffered if it succeeds in its case. The sums claimed necessarily vary from year to year. In total they range from a maximum of £3.3 billion if the claim succeeds in respect of 1996 to a minimum of £0.8 billion if it succeeds only in respect of 2000. The figures can be found in paragraph 112 of the RAPOC dated 17 September 2003 in the claim against Mr Sclater.

23.              The claim for 1999 and 2000 also includes an allegation, based on an alleged negligent failure to inform policyholders of the potential costs of losing the Hyman litigation, that the directors are liable for damages for losses Equitable may suffer as a result of what have been called “mis-selling” claims. A number of such claims have been brought against Equitable in the Bristol Mercantile Court. The claim for 2000 (but not the previous years) also alleges that the Board should not acting reasonably have approved the DTBP that year following the decision of the Court of Appeal in January.

24.              The allegations of breach of fiduciary duty are based on the decision in Hyman. Equitable claims that the adoption of the DTBP in the years 1996 to 2000 was in breach of Equitable’s Articles of Association and amounted to the use by the directors of their discretion under Article 65 for an improper purpose.


25.              In terms of the dates of their appointment the applicants fall into two main categories.

26.              Category 1 is those who were members of the Board in late 1993 and early 1994 when the DTBP was first raised and then adopted. They are Mr Sclater, Mr Sedgwick, Mr Tritton and Mr Martin. Category 2 is those who joined the Board later and were members only in what Mr Sher called “the intermediate years”. They are Mr Davis, Mr Price, Mr Taylor, Mr Wilson and Ms Page. Mr Price was not a director until after the 1996 bonus declaration had been made. Mr Wilson and Mr Tritton also ceased to be directors after the 1999 bonus declaration but before the 2000 declaration. The other applicants were all directors at the time of the 2000 declaration.

27.              The applicants’ experience and qualifications varied. Each can be said to have been distinguished and experienced in their fields. None were actuaries. Only Mr Martin (a solicitor) had legal qualifications. Mr Wilson’s experience was in the residential and commercial building industry. Mr Davis, Mr Price, Mr Sclater (who was also President of Equitable from 1994 until February 2001), Mr Sedgwick and Mr Tritton all had what may be termed City financial or banking experience. Several of the applicants were also non-executive directors of other well-known public companies.


28.              During the course of the hearing a number of other people and organisations and the roles they played in events have been mentioned and it is convenient to refer to them here. Leading counsel who were instructed by Equitable once the validity of the DTBP was called in question were Lord Grabiner QC, Brian Green QC and, for the hearing in the House of Lords, Elizabeth Gloster QC. Equitable’s solicitors were Denton Wilde Sapte (“Dentons”).

29.              Equitable was required to have an “Appointed Actuary” whose role is set out in certain Guidance Notes. The position was filled by Mr Ranson from 1985. Mr Ranson was also appointed Managing Director of Equitable in 1991. Mr Ranson resigned both roles in 1997. Mr Headdon (who had been Mr Ranson’s assistant) replaced Mr Ranson as Appointed Actuary in 1997. Mr Nash, who is also a qualified actuary, was an executive director of Equitable from 1993 and Managing Director from 1997 to December 2000. Ernst & Young were the auditors of Equitable from 1990 to 2001.


30.              CPR rule 3.4(2)(a). The court may strike out a statement of case if it appears to the court that it discloses “no reasonable grounds for bringing the claim”. The focus is upon the claim as drafted, in this case the RAPOC. There may of course be reasonable grounds for bringing a claim which depends upon the resolution of disputed issues of fact in favour of the claimant or which raises novel or complex issues of law which would better be decided in an established context of fact or which are fact sensitive.

31.              CPR rule 24.2. The court may give summary judgment against a claimant on the whole or part of a claim if it considers that the claimant “has no real prospect of succeeding on the claim” and “there is no other compelling reason why the case or issue should be disposed of at a trial”.

32.              The words of the rule speak sufficiently for themselves. As Lord Hope said in Three Rivers District Council v Bank of England (No 3) [2001] UKHL16 at paragraph 92, the difference between the words of rule 24.2 and rule 3.4(2)(a) is elusive, but in many cases the practical effect of the two rules will be the same and, in more complex cases, attention to the overriding objective of dealing with the case justly is likely to be more important than a search for a precise meaning of the rules.

33.              The Court of Appeal, in the auditors’ proceedings, at paragraph 38 of the judgment, said that certain principles could be derived from the authorities in relation to applications for summary judgment in “complex” claims. The principles were:

“the overriding concern is the interests of justice. So far as facts are concerned, the simpler the case is the easier it is likely for a court to be able to take a view that the basis of a claim is fanciful or contradicted by all the documentary material on which it is founded. More complex cases are unlikely to be capable of being resolved in that way. There is a danger of injustice in seeking to try such cases summarily on the documents and thus without disclosure and oral evidence tested by cross-examination. It should not be done unless the court can be confident that all the relevant facts had already been satisfactorily investigated. The power of summary disposal is not intended for cases where there are issues which need to be investigated at trial.”

34.              It is perhaps no surprise in the light of that judgment that the applicants submit that with a modest degree of exposition and understanding this is not a “complex” claim and that insofar as relevant facts might be in issue they can either be assumed against them or cannot be gainsaid in the light of the evidence and documents. They also reminded me of Lord Hobhouse’s (dissenting) speech in the Three Rivers case, at pages 566-7 and 576. In the latter passage Lord Hobhouse noted that “doing justice includes bringing to a conclusion highly expensive and long drawn-out litigation procedures, inevitably complex, which have no real prospect of success”. In the context of claims of the magnitude of these claims understandably the point has been made, particularly by Mr Martin, that there is also a true unreality in pursuing individuals for such sums and an injustice in exposing them to the strain of litigation of this magnitude. Ms Page said she found herself in a “Kafkaesque nightmare”. But that has also to be seen in the context that the court has no evidence of the means of the applicants and each undertook for reward the duties which the law imposes on those accepting appointment as non-executive directors of a company such as Equitable. In those circumstances, if otherwise justified under the CPR, I think it must be a matter for the current board of Equitable and the members of Equitable to determine the justification and reality in terms of any significant recovery and the costs involved of pursuing these claims.


35.              There is a considerable measure of agreement about the duty owed in law by a non-executive director to a company. In expression it does not differ from the duty owed by an executive director but in application it may and usually will do so.

36.              In Re D’ Jan of London Limited [1993] BCLC 646 Hoffmann LJ said, at page 648,

“… the duty of care owed by a director at common law is accurately stated in sec. 214(4) of the Insolvency Act 1986. It is the conduct of:

… a reasonably diligent person having both-

(a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company, and

(b) the general knowledge, skill and experience that that director has.”

37.              Thus the first requirement is an objective test, the second looks to the actual knowledge, skill and experience of the director in question.

38.              But this test provides no answer to the question what are the “functions” of a non-executive director of a company such as Equitable? There may, of course, be specific “functions” undertaken by a non-executive director. Mr Sclater was “President” of Equitable. Other applicants were members of committees such as the Audit Committee or Investment Committee. For the purposes of this judgment, however, it is not suggested that such roles gave rise to any relevant special function and it is sufficient to consider the functions of the applicants in more general terms.

39.              Mr Milligan QC referred me to another general statement about the duties of directors which I find helpful as it both expresses what may be expected of a “reasonably diligent” director and acknowledges the obvious qualification that what the test requires must depend on the particular circumstances before the court. The reference is in the judgment of Morritt LJ in Re Barings Plc (No 5) [2000] 1 BCLC 523 at page 535 where the Court of Appeal approved the summary given by Jonathan Parker J at first instance in these terms:

“(i) Directors have, both collectively and individually, a continuing duty to acquire and maintain a sufficient knowledge and understanding of the company’s business to enable them properly to discharge their duties as directors.

(ii) Whilst directors are entitled (subject to the articles of association of the company) to delegate particular functions to those below them in the management chain, and to trust their competence and integrity to a reasonable extent, the exercise of the power of delegation does not absolve a director from the duty to supervise the discharge of the delegated functions.

(iii) No rule of universal application can be formulated as to the duty referred to in (ii) above. The extent of the duty, and the question whether it has been discharged, must depend on the facts of each particular case, including the director’s role in the management of the company.”

40.              These statements may be contrasted with the description of the duties of directors to be found in the judgment of Romer J in In Re City Equitable Fire Insurance Company Limited [1925] 1 Ch. 407 at pages 427 to 430 on which both Mr Rabinowitz and Mr Sher placed reliance. In particular they relied upon what Romer J said at page 429:

“In respect of all duties that, having regard to the exigencies of business, and the articles of association, may properly be left to some other official, a director is, in the absence of grounds for suspicion, justified in trusting that official to perform such duties honestly.”

41.              I do not think this statement does represent the modern law at least if (as the applicants were inclined to submit) it means unquestioning reliance upon others to do their job. It is well known that the role of non-executive directors in corporate governance has been the subject of some debate in recent years. For present purposes, as Mr Milligan submitted, it in any event suffices to say that the extent to which a non-executive director may reasonably rely on the executive directors and other professionals to perform their duties is one in which the law can fairly be said to be developing and is plainly “fact sensitive”. It is plainly arguable, I think, that a company may reasonably at least look to non-executive directors for independence of judgment and supervision of the executive management.


42.              I should note that Mr Sher, on behalf of Mr Wilson, raised two points of law which after a short discussion he sensibly accepted were not appropriate for disposal on an application of the present nature because they involved questions of some difficulty in an area where he submitted the law was uncertain and so would or at least would arguably better be determined only after a full trial. Mr Sher was anxious that the points should not be taken to have been determined against Mr Wilson should I decide to refuse his application and that is of course something I am happy to record without making any comments on their validity or otherwise. The points, quoting from Mr Sher’s skeleton argument, are that:

i)                    No claim lies against a director for exceeding his powers under the articles without more, i.e. without fault such as negligence or fraud; and

ii)                   Even if a claim in the absence of fault can lie, the nature of the claim can only be a claim to restore to Equitable any monies misapplied by the director in breach of his powers whereas the DTBP itself involved no such payment as “its very essence was that it reduced, not increased, payments out”.

43.              Mr Milligan for his part submitted that in law claims for compensation for breach of fiduciary duty required any loss claimed to satisfy no more than a “but for” test of causation rather than the common law test. He acknowledged, however, (rightly in my judgment) that there are powerful arguments and authority to the contrary especially so where the nature of the claim is better characterised as one for negligence: see Halsbury’s Laws of England, volume 9 at paragraph 1130 and the authority cited there. The point has potential relevance to some of the claims made on the basis of breach of fiduciary duty.


44.              Section 727 of the Companies Act 1985 provides (so far as material):

“(1) If in any proceedings for negligence, default, breach of duty or breach of trust against an officer of a company or a person employed by a company as auditor (whether he is or is not an officer of the company) it appears to the court hearing the case that that officer or person is or may be liable in respect of the negligence, default, breach of duty or breach of trust, but that he has acted honestly and reasonably, and that having regard to all the circumstances of the case (including those connected with his appointment) he ought fairly to be excused for the negligence, default, breach of duty or breach of trust, that court may relieve him, either wholly or partly, from his liability on such terms as it thinks fit.

(2) If any such officer or person as above-mentioned has reason to apprehend that any claim will or might be made against him in respect of any negligence, default, breach of duty or breach of trust, he may apply to the court for relief; and the court on the application has the same power to relieve him as under this section it would have had if it had been a court before which proceedings against that person for negligence, default, breach of duty or breach of trust had been brought.”

45.              In view of the conclusions I have reached I do not think it necessary to make more than a few summary comments on these provisions:

i)                    The Section undoubtedly contemplates by its wording that an officer of a company may be negligent and yet may act sufficiently “reasonably” to justify a court excusing him from liability.

ii)                   The Section also appears to contemplate the possibility of a court concluding that it should relieve an officer of liability without a full trial.

iii)                 Nonetheless in my judgment it would require a quite exceptional case for a court to conclude on an application of the present kind that it was appropriate to grant relief. The Court, as a minimum, would have to be satisfied that the officer had acted “reasonably” and that it was aware of “all the circumstances” which enabled a determination to be made whether and to what extent it would be fair to relieve the officer of liability. It must be highly improbable that such a state of mind could be achieved on an interlocutory application.


46.              There is also one submission of law upon which Mr Sher relied which is a discrete point applicable on the facts only to his client, Mr Wilson. Mr Wilson was not present at the special board meetings (required by Article 65) held in February of each year at which Equitable approved the bonus rates which had been discussed and agreed by the Board at an earlier meeting (usually held in January). So, submits Mr Sher, Mr Wilson was not responsible for the relevant decision in each year. The submission is fortified by the facts that (i) Mr Wilson was not a director when the DTBP was first approved; (ii) he has made a statement, which there is no reason to doubt, that until 1998 he was in fact unaware of the DTBP and (iii) it was only the papers for the February meetings in each year which contained the “statement of bonuses” which itself included the wording of the DTBP and (iv) the papers themselves were substantial, nothing was said or done to draw attention to the DTBP, and the special meetings were a formality at which attendance was expressly not expected or required.

47.              This is a formidable submission. Equitable’s pleaded response to it is that Mr Wilson did attend each of the meetings (in January and November 1995 and January 1997 and 1998) at which bonuses were discussed and agreed prior to the formal bonus award made in the years 1995 to 1998; that he did receive the papers in advance of each February special meeting, and that in each of those years Mr Wilson attended the subsequent board meetings in February at which the minutes of the earlier formal February meetings were approved. On that basis it is pleaded that Mr Wilson “concurred in and approved the board’s policy in relation to bonuses, and the formal board resolutions made at the February board meetings declaring such bonuses”.

48.              Mr Sher referred me to the decision of the Court of Appeal in In Re Lands Allotment Company [1894] 1 Ch 616. In that case the court contrasted the conduct of two directors (one of whom, Mr Brock, was also chairman) in determining their responsibility for an ultra vires investment made by the company. Neither was present at the meeting at which the investment had been approved. Attendance at a later meeting at which the minutes of that meeting were confirmed was held to be insufficient to make either director liable. On the other hand statements made by Mr Brock showing he had taken an active part in the decision to make the investment were sufficient to hold him responsible for it. However (see Lindley LJ at page 635) the other director had been “away on the sea” and “had nothing to do with the transaction at all” which was “past praying for” on his return. That cannot be said for Mr Wilson. He had at least the opportunity to read the statement of bonuses in each year (including the year preceding the first year for which it is sought to make him liable) and its application could have been questioned. That is not to say that these factors are necessarily conclusive or sufficient to distinguish the Lands Allotment decision, but I do think they are sufficient to conclude that on this discrete issue Equitable’s case is at least more than fanciful and one of which it cannot be said that it has “no real prospect of succeeding”.


49.              The basic facts in relation to the adoption and operation of the DTBP and the Hyman litigation are, I think, sufficiently clear not to be in dispute or seriously disputable. But it is submitted by Equitable that there are real and significant differences between the directors and Equitable on a number of significant matters.

50.              In this section of the judgment I propose to address both. I do so, however, having in mind the test to which these applications are subject.


51.              The bonus declaration process began in November 1993. Mr Nash and Mr Headdon prepared a bonus declaration paper for a board meeting on 24 November 1993. This paper made no mention of GAR policies or of plans to introduce the DTBP. The minutes of the November meeting record that the board agreed to the levels of distribution set out in the paper.

52.              On 29 November Mr Headdon wrote a note to Mr Ranson. The note records that GARs were exceeding CARs. It heralds the DTBP. It records that bonus rates were to be described in a way which “explicitly” allowed the cost of GARs to be met from the final bonus. But the note also refers to a possible approach which would draw “less attention” to the existence of GARs with the disadvantage that “clients might feel that we had been a bit underhand in ‘sneaking in’ this change”.

53.              A substantial package of papers was prepared for the next board meeting on 22 December 1993. Item 5(d) of the Agenda was “bonus rates with effect from 1.1.94”. Mr Ranson prepared a single page paper with his recommendations of a 12% rate for 1993 and a 10% rate for 1994. Attached to the paper were 6 pages entitled “Amendments to the Statement of Bonuses …” It was this Statement in which, for the first time, the DTBP was described. There was no mention of it in Mr Ranson’s paper nor was there any mention of GARs exceeding CARs. The description of the DTBP was to be by the insertion of a sentence at the end of Section B7 of the statement of bonuses reading:

“Where benefits are taken in annuity form and the contract guarantees minimum rates for annuity purchase, the amount of final bonus payable is reduced by the amount, if any, necessary such that the annuity secured by applying the appropriate guaranteed annuity rate to the cash fund value of the benefits, after that reduction, is equal to the annuity secured by applying the equivalent annuity rate in force at the time benefits are taken to the cash fund value of the benefits before such reduction.”

54.              The minutes of the board meeting record no discussion of the DTBP nor any explanation of it by Mr Ranson. The minutes do record that the board approved the changes in the statement of bonuses. The applicants who were present were Mr Sclater, Mr Sedgwick, Mr Tritton and Mr Martin.

55.              There is, however, an issue as to whether any and if so what discussion took place at the meeting on the DTBP. The directors have put forward varying recollections. No useful purpose would be served by rehearsing those recollections. In their skeleton argument (paragraph 15) counsel for Equitable set out Equitable’s case. It may or may not be established at the end of a trial but I do not think (nor did the applicants seriously submit) that it can be said to be a case which Equitable has no real prospect of establishing at such a trial. The case is that:

“(a) The DTBP was specifically drawn to the attention of the directors and discussed.

(b) Mr Ranson was asked to explain what the DTBP wording meant. He explained that it involved paying different levels of bonus to different policyholders, depending on whether or not they exercised their GAO.

(c) At least one of the directors was concerned that this might not be fair. He asked whether the DTBP:-

(i) infringed policyholders’ contractual rights; or

(ii) was contrary to policyholders’ reasonable expectations (PRE).

(d) The director (or directors) aired those concerns with his fellow directors.

(e) That was highly unusual, and was the only occasion between 1984 and 1998 when such concerns had been expressed at a board meeting in relation to a proposed policy.

(f) Mr Ranson dismissed the director’s concerns and said that there were no contractual or PRE issues.

(g) The non-executive directors accepted Mr Ranson’s assurances without question. They did not ask whether he had obtained legal advice as to whether the perceived unfairness of the DTBP infringed policyholders’ contractual rights or PRE.”

56.              Whilst made (if they were) in very different circumstances in early 1999, Mr Milligan also pointed to two notes of comments attributed to Mr Martin at that time questioning whether the board had really understood in 1993/4 what they were agreeing to in approving the DTBP. Mr Milligan also made the point that, again on the assumption that the facts were as alleged, plainly the board minutes were not a full record of everything that occurred which was of potential importance to the issues.

57.              In no doubt over-simple terms the “justification” for the DTBP was that it was intended to ensure equality or mutuality of treatment between all policyholders on the basis that the guarantee provided no more than a floor beneath which benefits could not be reduced and the final bonus (the rates of which were clearly stated in Equitable’s literature to be open to reconsideration at any time) could therefore be used to equalise benefits. The grievance of those with GAOs (when it was expressed) was that the DTBP effectively deprived the guarantees of any substantial value and left them no better placed than those without GAOs despite the increasing gap between GARs and CARs. Equitable was accused of reneging on the guarantees on the basis that they presupposed a lack of equality between those with GAOs and those without them.

58.              In this context I should also summarise the role of the Appointed Actuary on which the applicants understandably place reliance. It is expressly part of his responsibilities to advise on his interpretation of PRE and to have regard to matters such as guarantees in reporting on and making recommendations about the allocation of bonuses. Allegations that Mr Ranson and Mr Headdon were negligent in the discharge of those duties form a significant part of Equitable’s case against them.

1996 to 1998

59.              The process by which Equitable declared bonuses in each of these years was substantially the same. The Appointed Actuary prepared a paper addressing the overall approach to the declaration. The paper made no reference to the DTBP. The paper was discussed at a board meeting usually in November. A further paper would then be produced in December or January when the initial financial results were available. This paper would include recommendations on bonus rates. Again the paper made no reference to the DTBP. The board would then meet and approve the rates. In February a further paper would be prepared for the Special board meeting to be held in that month at which bonuses would be formally declared. The February paper would contain a valuation of Equitable’s assets and liabilities and explain the various recommendations for bonuses based upon the previous board discussions. It would conclude with a number of recommendations including a recommendation that final bonus entitlements be announced as described in the “statement of bonuses”. The statement of bonuses itself in each year formed part of the papers and the agenda for the Special board meeting. It covered some 20 pages and included the same wording that had been introduced in 1993/4 providing for the DTBP. The Special board meeting would approve the recommendations and the minutes of the Special meeting would be approved at the next meeting of the board.

60.              In none of the board meetings between December 1993 and September 1998 was the DTBP discussed or raised for discussion. In fact a number of concerns and complaints about the DTBP were raised by a member of Equitable’s actuarial staff and by some policyholders between 1993 and 1998. Those concerns and complaints were not, however, brought to the attention of the board.

61.              Attendance by the non-executive directors at the February Special board meetings was expressly said not to be necessary because (to quote from the letter enclosing the agenda and papers for the meeting in 1997) of “the major decisions concerning the surplus and bonus taken at the last Board meeting”. The letter also stated that “comments can be passed over the telephone if any Director so wishes”.

62.              It was in 1997 that Equitable was concerned with what may be termed “pensions mis-selling” complaints. That led to some criticisms by non-executive directors that the board had been too complacent and trusting of Mr Ranson and too slow to seek legal advice on the matter. Mr Milligan sought to draw analogies with the DTBP.

63.              With the exceptions of Mr Wilson and Ms Page, none of the applicants have provided any evidence about their actual recollection, for example, of what, if anything, they did believe or think about the DTBP or guarantees or whether there were any discussions about them during this period. Both Mr Wilson and Ms Page have said in terms that they were unaware of the DTBP until 1998.


64.              In September 1998 complaints by some policyholders about the DTBP were brought to the attention of the board. Equitable took legal advice. There was much debate in the course of the hearing about the strength of that advice. The advice itself is fully documented. At the risk of over-simplification but in the context of these applications I think it realistic to assume Equitable might establish at a trial that:

i)                    Throughout the process, including the period between the decisions in the Court of Appeal and the House of Lords in Hyman, the legal advice was strongly positive;

ii)                   The “test” case which became the Hyman case was begun by Equitable because a legal analysis and decision was considered a preferable route to a ruling by the PIA Ombudsman. At first the advice was to avoid litigation but once, by December 1998, it was clear that the concerns and press comment could not be contained, the advice changed;

iii)                 It was appreciated that whatever the strength of the advice litigation carried a real risk of an adverse outcome;

iv)                 There was a real concern that, whatever the outcome, Equitable would be criticised for failures of communication with policyholders about the DTBP and its effect.

65.              The advice the board received from the executives (including Mr Headdon) and others was that:

i)                    The commercial cost of meeting the guarantees, assuming the DTBP was valid, was unlikely to exceed £50m;

ii)                   If the DTBP was invalid and ring-fencing was not permissible the cost would be of the order of £1.5bn;

iii)                 Not paying annual bonuses in 1999 would create £350million of additional free assets in that year but would have a very damaging effect on goodwill and so on new business and the confidence of policyholders;

iv)                 Equitable should continue with the DTBP and declare a reversionary bonus of 5% (it was 6.5% in 1998) in each of the years 1999 and 2000.

66.              I should also note that:

i)                    Following the decision of the Court of Appeal the directors were told by Dentons (inaccurately Mr Milligan submitted) that the Court of Appeal had agreed that Equitable could maintain its current approach to bonuses pending the decision of the House of Lords;

ii)                   The effect on Equitable if it were to lose Hyman was known to be very serious. Mr Martin described it as “betting the farm on the outcome”;

iii)                 Mr Martin wrote a number of letters in 2000 and 2002 on which Mr Milligan relied to submit that they showed that the non-executive directors had serious concerns about the DTBP, the lack of information provided to policyholders, and the prospects of winning Hyman. Mr Milligan also submitted that the letters showed that in and after 1998 the non-executive directors had allowed their concerns to be disregarded and debate about them to be stifled. In my judgment these submissions have sufficient substance that they cannot be dismissed as fanciful and so the applications must be addressed on the basis that they may be established at a trial;

iv)                 Although advice was sought both from the legal team and public relations consultants as to what should be said to policyholders about guarantees, the DTBP and the Hyman proceedings, I have not been shown any document in which the consequences of losing the litigation were spelt out in a way which would have alerted existing or potential policyholders to the effect on them and Equitable if the GARs had to be applied to the “asset share” of all policyholders with GAOs. Nor is it clear to me whether or not that was a subject which was before Equitable’s various advisers for their consideration and advice. The thrust of what was addressed was why Equitable had taken proceedings and why it would win them;

v)                  There is evidence that had Equitable’s legal advisers been asked for advice on the validity of the DTBP before it was introduced in 1994 that advice would have been as strongly positive as it in fact was in 1998 and 1999. But Dentons’ advice would also have included strong advice that Equitable “should promptly make clear to policyholders exactly what the board had decided to do in the light of the fact that GARs had started to exceed CARs and that the Society should keep a watch on policyholders’ reactions since there might well be trouble from GAR policyholders ….”

67.              I do not think it necessary to say more about the four claims against Equitable in the Bristol Mercantile Court in which the pleadings are before the court than to note that:

i)                    The thrust of the claims is that negligent advice was provided to the claimants by salesmen leading to the claimants placing substantial funds with Equitable;

ii)                   Many of the allegations are of no apparent relevance to the present issues, for example in relation to matters such as investment policy and taxation;

iii)                 Some of the allegations, however, are to the effect that the claimant was told that the Hyman litigation was not a problem, Equitable was financially sound and strong and even that losing the Hyman case would only cost Equitable some £50m;

iv)                 Equitable is defending the claims and, although it was submitted that the defence is inconsistent with the case Equitable seeks to make in the present proceedings, I do not think it is or at least to the extent it may be that it is impermissibly so.

68.              Finally a further submission of inconsistency arises from the terms of Equitable’s claim against E&Y. The claims against E&Y are made only in respect of the audits for the three years ending on 31 December 1997 to 1999. In respect of the 1997 audit (completed in March 1998) part of Equitable’s case is that had E&Y advised (as it is said they should) that the accounts should contain a provision of £0.9bn in respect of GAO liabilities Equitable would have been able “to achieve a managed sale of the Society’s business and assets … at a time when it still had a substantial value to third parties.” It is alleged that such a sale “would have completed in about September 1998”. On that basis at that time it is alleged that Equitable would have been worth some £3.4 bn. In Schedule 2 to the claim Equitable seeks to explain why for a sale in September 1998 in contrast to a sale in September 2000 no adjustment to the price would have been made “in respect of the potential cost of GAOs”. The explanation is that there would have been “significant buyer demand, lower awareness in the industry of the implications of GAOs, and … lower cost of GAOs at the end of 1997 (as interest rates were higher at that time)”. In contrast, it is said, by September 2000 the Hyman proceedings and outcome would have made it necessary to put a cap on the GAO cost to achieve a sale. I was also reminded by Mr Rabinowitz of some exchanges between Mr Milligan and myself in the course of the E&Y application that Equitable’s thesis was that the September 1998 buyer would have been “ignorant of the Hyman problem” and “there was no great perception that guaranteed annuities were going to give rise to some insuperable problem not only in the society but in other life companies, that is not the way that it was looked at that stage”.

69.              If that was so, submitted Ms Page, (supported by Mr Rabinowitz and Mr Sher) how could it reasonably be said of her that she should have spotted and raised a problem of which the industry had such low awareness that a purchaser willing to pay billions of pounds for Equitable would not have spotted.


Equitable’s Case on Negligence

70.              As I have said, no claim is made in respect of 1993/4 because any claim would be statute barred. The relevance, if any, of the events is said to be the knowledge then acquired which should have led to concerns about the continuation of the DTBP in 1996 and succeeding years. Equitable, on the basis of the facts it alleges (see paragraph 55) submits that it cannot be said that its case that it was negligent to approve the DTBP has no real prospect success. The questions raised, it is submitted, were more legal than actuarial and to accept without more the assurances of an actuary was negligent. Legal advice should have been sought. The non-executive directors had a duty to understand what was proposed. If made clearly aware of the effect of the DTBP the likelihood of objection by policyholders with GAOs and the nature of the likely objection (see paragraph 57) were matters of obvious commonsense.

The Applicants’ case on negligence.

71.              It was submitted that the relevant non-executive directors were entitled to rely on the wide terms of Article 65, Mr Ranson’s duties as the Appointed Actuary and the fact that he considered the DTBP to be valid. It was also submitted that the events of 1993/4 had no relevance to the only years in which the claim was made.


72.              On the basis of the alleged facts and these submissions, I cannot characterise Equitable’s case as one which has no real prospect of succeeding.

1996 TO 1998

Equitable’s Case on Negligence

73.              It is submitted that it was the duty of the applicants to read the papers sent to them for the February Special meeting, which included the statement of bonuses with the single paragraph describing the DTBP, and to ensure that they understood it. Bonus decisions were at least one of the most important decisions taken each year. On that basis it is said the DTBP should have been discussed much as it was in 1993 and legal advice on its validity sought. It is also submitted that the applicants should, in discharging their duty to inform themselves of the business of Equitable, have appreciated the extent to which guarantees had been given and the growing gap between GARs and CARs (see paragraph 10), and enquired how it was to be addressed. For those of the applicants who had been party to the introduction of the DTBP in 1993/4 Equitable submits that they should have re-visited the issue and raised again the concerns which it must be assumed were raised at that time.

The Applicants Case on Negligence

74.              It was submitted that by 1996 the DTBP was settled and apparently non-controversial policy and it was fanciful to contend that the applicants (especially those who were not directors in 1993/4) should have focussed upon let alone questioned a statement forming a minor part of the “small print” in papers sent for a board meeting which they were not even expected to attend and which was not drawn to their attention by the executive directors including the Appointed Actuary. It is in this context that reference was made to the apparent inconsistency in the case Equitable seeks to make against E&Y and the case it makes against the applicants (paragraph 68).

Conclusion on Negligence

75.              I have given anxious consideration to these submissions. In particular in the case of both Mr Wilson and Ms Page, each of whom has said that they were unaware of the DTBP and neither of whom were directors in 1993/4, the submissions made on their behalf are particularly powerful. Nonetheless I have ultimately reached the conclusion that Equitable’s submissions do pass the test I have to apply.

Equitable’s Case on Causation

76.              The case is summarised in paragraph 21. Whilst the legal advice would have been strongly positive it would also have acknowledged a real risk of a contrary decision and a need to make a clear statement to policyholders about the effect of the DTBP [paragraph 66(v)]. Such a statement would have resulted (as it did in 1998/9) in protests from policyholders with GAOs and publicity. A test case would therefore have been launched with the same outcome as Hyman. In those circumstances Equitable would have been well placed to cut bonuses and (in 1996) to acquire a hedge as a precaution against losing the legal argument.

The Applicants’ Case on Causation

77.              The Applicants submitted that Equitable’s Case was far-fetched and speculative. In receipt of strongly positive legal advice and conscious of the commercial damage to Equitable if bonuses were to be cut, a judgment that it was not appropriate to cut bonuses would have been made which could not sensibly be alleged to be one which no reasonable non-executive director could have made.

Conclusion on Causation

78.              Again, I cannot characterise Equitable’s case as one which has no real prospect of succeeding.

79.              Mr Rabinowitz submitted that even if I reached the conclusion I have on both negligence and causation yet I might conclude that both were so near the line of reality and unreality that I could safely say that with two such hurdles to jump Equitable would fall over at least one. I agree that a court should try to stand back and look at the overall picture. Suffice it to say that my view of the overall picture does not affect the conclusions I have expressed.


Equitable’s Case on Bonus Cuts

80.              On the basis of the assumed facts it is submitted that the applicants had or at least should have had serious concerns about the validity of the DTBP and the consequences if it were invalid. Whilst there was a balance which needed to be struck between cutting bonuses and damaging goodwill that exercise was not undertaken, some significant cuts should have been made, and it would be for a trial to determine the extent of the cuts which could and should have been made. If the cuts had proved to be unnecessary in the event the funds “saved” could have been distributed. But if Hyman were to be lost any significant savings would go at least some way to assisting in a crisis.

The Applicants’ Case

81.              The bonus rates were set after consideration of the legal and executive advice received by the board. Cutting reversionary bonuses would have resulted in serious commercial damage for no purpose, if, as expected, Hyman was won. Any savings in bonus payments which might have been achieved in the short time scale before the result of Hyman was known would in any event have been insignificant in context. There was a judgment to be made and it was fanciful to contend that no reasonable non-executive director could have approved the bonus rates in fact declared.


82.              Again, I think the applicants have made some powerful points but, conscious of the warnings given by the Court of Appeal in the auditor’s proceedings, I do not think they are so powerful as to justify the relief they seek. I think it can realistically be contended that faced with a real risk of defeat in Hyman and the very serious consequences that would follow that some precaution by way of bonus cuts should have been taken. Whether or not that course would have had worse consequences than any saving achieved and whether or not a judgment that it would or might do so could sensibly be characterised as negligent will no doubt be major questions at a trial.

The Mis-Selling Claims

83.              In principle I think the claim founded on the alleged failure to ensure that the risks of losing Hyman were publicly appreciated is one which should proceed. In terms of the way in which it is presented, even in the Draft RAPOC, it still leaves quite a lot to be desired. Mr Milligan readily accepted that the claims by policyholders included matters of no relevance to the present issues which could not on any view be claimed against the applicants. The remedy of the applicants must, however, be found elsewhere than in CPR 24.2 if they wish to pursue that further.


84.              I do not think it useful to add to the length of this judgment by addressing Equitable’s case on breach of fiduciary duty further than I have already. If the claim in negligence is to proceed it is of no substantial importance whether or not this claim also proceeds. Equitable has now attempted in the Draft RAPOC to relate the claims it makes to the breaches of fiduciary duty relied upon.


85.              Granted that the claims in negligence are to be the subject of a full trial I do not think it appropriate to address the questions to which Section 727 directs the court’s attention (see paragraph 45).


86.              I have concluded that Equitable’s claims against the non-executive directors are not ones of which it can be said that they have no real prospect of succeeding. I should stress that this conclusion does not mean that I think Equitable’s case is right or even probably right. I am not required on these applications to address those questions and I have not done so. Nothing I have said on any aspect of the parties’ submissions should be read in such a way. I would add that where a court does conclude that a claim cannot be dismissed on a summary application I think it should be wary of over-analysis and explanation of its reasoning as the consequence must be taken to be that there will be a full trial of the issues at which any such analysis risks being more of a hindrance than a help.