England and Wales High Court (Administrative Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEENS BENCH DIVISION
ADMINISTRATIVE COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		15 October 2002

Mr Justice Stanley Burnton:

Introduction

1. 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

2. 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.
3. 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.
4. 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

5. 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

6. 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

7. 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

8. 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

9. 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.
10. 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 claim, have no real prospect of success. E&Y contend that they did not advise on the possible sale of the Society, and therefore had no duty in relation to a possible sale, and that even if they had advised the directors as the Society alleges they should have done, there is no prospect of the Society establishing that the directors would have decided to sell it. In relation to the claim for overpaid bonuses, E&Y point out that the Society does not allege that the decisions as to the bonuses to be declared were made in reliance on their audit work.
11. At the date of the hearing before me, no directions had been given in the Commercial Court proceedings. A Case Management Conference took place on the day following the hearing before me. E&Y’s application for summary judgment is to be heard in mid-January 2003.
12. Equitable Life has also instituted proceedings against 15 of its former directors. If E&Y’s application for summary judgment is unsuccessful, those proceedings are likely to be joined and heard with the proceedings against E&Y. Some of the directors are acting in person. There is also apparently a dispute as to the directors’ and officers’ insurance cover, which may affect the progress of the litigation.
13. It is likely that disclosure of documents will take place over the coming months. However, further steps in the litigation are likely to await the determination of the application for summary judgment, since if it is successful witness statements and expert evidence will be unnecessary. Furthermore, counsel for E&Y were unable to estimate the likely duration of the trial. It is unlikely, therefore, that an order fixing the trial date will be made before January 2003 at the earliest.

The JDS: authority, purpose and provisions

14. The European and English legal background to the JDS is set out in the judgment of the Divisional Court in R v Chance, ex parte Smith [1995] BCC 1,095, at 1,096 to 1,098, which in turn drew upon the judgment of Mann LJ in the Divisional Court in R v ICAEW, ex parte Brindle [1993] BCC 736. To avoid cross-referencing, I set out the relevant part of the judgment in Smith as Annex 1 to this judgment.
15. The relevant provisions of the Scheme are set out or summarised in Annex 2 to this judgment.

The JDS investigation into Equitable Life

16. On 30 April 2001, pursuant to paragraph 6(b) of the Scheme, the Investigation Committee of the ICAEW reported to the Executive Committee of the JDS concerning Equitable Life and its subsidiary undertakings and certified that in its opinion the information before it gave rise to public concern. It requested the Executive Committee to refer its report and certificate to the Executive Counsel to be dealt with in accordance with the scheme “in order that the role of all members and member firms associated with the Society, whether as auditors, advisors, directors, managers, or other employees, may be examined”. That report was referred to the Executive Counsel, who thereupon came under the duty imposed by paragraph 6(c) to enquire into the matter.
17. Those principally concerned in the Executive Counsel’s enquiry are E&Y partners and other personnel who were engaged in the audits of Equitable Life. He is also investigating the conduct of a former director of Equitable Life who is a chartered accountant, and of a former employee of E&Y.
18. E&Y were formally notified of the enquiry by Mr Dickson by letter dated 18 May 2001. Until the request for a stay of that enquiry, requested by E&Y’s solicitors Barlow Lyde & Gilbert by letter dated 16 May 2002, E&Y fully co-operated with the enquiry, dealing with preliminary questions in writing, and paginating and producing for inspection the large volume of documentation that Mr Dickson and his team wished to inspect. These include all the audit files from 1992 to 2000 and correspondence files from 1988 to 2001. Mr Dickson is assisted by accountants from RSM Robson Rhodes, and in particular Mr David Medland, a partner in that firm. JDS inspection of the documents began in March 2002, and has continued periodically since. By July of this year, Robson Rhodes had inspected audit files for all the years from 1992 to 2000, together with audit manuals, technical materials, actuarial consulting files and board minutes, and have been provided with copies of documents requested by them. Inspection of documents is continuing.
19. Mr Dickson responded to Barlow’s request for a stay on 30 May 2002. He took the view that the issues raised in the Commercial Court proceedings were “discrete and not very wide-ranging”, and he did not consider that E&Y or the individuals concerned in the proceedings would be hindered in defending the proceedings, or in responding to Lord Penrose’s Inquiry if his investigation continued. He promised to be “as flexible as possible, taking into account not only the demands of the action and of Lord Penrose’s Inquiry, but also the professional and commercial obligations of those involved to their other clients” in making requirements of E&Y partners and staff. He stated that he planned short factual interviews with an E&Y manager, Mr Geraghty and one of their actuaries, Ms Farrelly, at the end of July, to be followed by interviews with a small number of E&Y partners in October, and that he planned to complete the fieldwork in the investigation by the end of this year. It would then be for him to consider the reports of his experts, and whether there was a basis for bringing disciplinary proceedings. He refused to stay his enquiry. By separate letter of the same date, Mr Dickson asked to interview Mr Geraghty and Ms Farrelly, each for half a day, and he gave five suggested dates for the interviews. He promised to send a list of questions in advance so that the matters involved could be properly researched. Ms Farrelly did not join E&Y until November 1996, and so the assistance she can give in respect of earlier years is limited.
20. On 12 July 2002, Mr Dickson sent a list of 145 questions to be addressed by Mr Geraghty and Ms Farrelly during their interviews. The questions cover the audit years 1992 to 1996 cursorily, but are more numerous and detailed in relation to subsequent audits. They vary from the purely documentary, asking for the location of identified documents or whether they exist, to the substantial, such as whether certain client procedures gave cause for concern.
21. E&Y have offered to provide a senior manager or partner to assist Mr Dickson’s team in locating relevant documents. Mr Hapgood, on their behalf, said that they would comply with other requests for information by providing written answers. But it is clear from the third witness statement of Ms Canning, of Barlows, that a major concern of E&Y is the nature of the interview process that they anticipate Mr Dickson conducting. In other JDS investigations, the interviewee has been cross-examined by a lawyer, and she asserts that such interviews can be “highly pressurising to the individual involved”. For his part, Mr Dickson stated, in his first witness statement, that he objected to proceeding solely by way of written question and answer because “It denies me the opportunity to judge for myself the truthfulness and honesty of the answers by reference to the demeanour of the witnesses”. Mr Hapgood, for E&Y, submitted that it was not the object of Mr Dickson’s investigation for him to assess the truthfulness or honesty of witnesses; Mr Beloff disputed this.

The law applicable to the application for a stay of regulatory proceedings

22. The two leading cases are the decision of the Court of Appeal in Brindle [1994] BCC 297 and the decision of the Divisional Court in Smith. The decision of the Court of Appeal in R v Panel on Take-overs and Mergers, ex p Fayed [1992] BCC 524 was only on a renewed application for leave to apply for judicial review of decisions of the Panel not to adjourn its disciplinary proceedings against Mr Fayed, but is nonetheless instructive. There were substantial differences between the approach of the Court of Appeal in Brindle and the Divisional Court in Smith, to which I refer below. However, the general principles were helpfully set out by Dyson J in R v Executive Counsel of the JDS, ex p Hipps (1996) (New Law Transcript 296069202), as follows:

“(i) the court is not concerned with a Wednesbury review of Mr Chance’s decision not to adjourn the proceedings. Rather I am required to exercise an original jurisdiction whether to grant a stay: see R v Take-overs and Mergers Panel, ex parte Guinness [1990] 1 QB 146, 178G-H, 184C-E, and R v Chance, ex parte Smith (supra) at 1100G.

(ii) the jurisdiction to stay one of two concurrent sets of proceedings must be exercised sparingly and with great care: see R v Panel on Take-overs and Mergers, ex parte Fayed & Ors [1992] BCC 524, 531E and R v ICAEW, ex parte Brindle [1994] BCC 297, 310D-E.

(iii) unless a party seeking a stay can show that if a stay is refused there is a real risk of serious prejudice which may lead to injustice in one or both of the proceedings, a stay must be refused: see ex parte Fayed at 531, ex parte Brindle at 316G-H.

(iv) if the court is satisfied that, absent a stay, there is a real risk of such prejudice then the court has to balance that risk against the countervailing considerations. Those considerations will almost always include the strong public interest in seeing that the disciplinary process is not impeded. Ex parte Brindle 310E-G, ex parte Smith 1100G, 1103B-D.

(v) in a case where the balancing exercise is carried out, the court will give great weight to the view of the person or body responsible for the decision as to the factors militating against the stay and the weight to be given to them, but the court is the ultimate arbiter for what is fair: see ex parte Smith 1101F-G, 1102H to 1103F and ex parte Guinness 184D-E.

(vi) each case turns on its own facts. Accordingly, only limited assistance can be derived when comparing the facts of a particular case with those of other cases where a stay was granted (as in ex parte Brindle) or where a stay was refused (as in ex parte Smith)….”

23. Both Mr Hapgood and Mr Beloff accepted this as an accurate statement of the general principles, and I gratefully adopt it. There were, however, issues between them on a number of subsidiary but important legal issues. The principal of these was whether the existence of concurrent proceedings relating to the same matter is to be regarded as inherently unfair, as stated by Hirst LJ in Brindle at 311B, in a judgment with which Sir Roger Parker agreed. In Smith the Divisional Court stated, at 1,104, that Hirst LJ was not there laying down any general proposition to that effect. Mr Hapgood disputed this: he submitted that the statement of Hirst LJ was a basis for the decision in Brindle; that the Divisional Court was bound by the decision of the Court of Appeal, and was therefore not free, in Smith, to reject it; and he submitted that I was entitled, and indeed bound, to follow the decision of the Court of Appeal rather than the later inconsistent decision of the Divisional Court. Mr Beloff disputed each of these propositions.
24. While the decision in each case must turn on its facts, and in Smith the Divisional Court was at pains to distinguish the facts of Brindle, there is a marked difference of approach in the judgments in those two cases. The Divisional Court in Smith was far more supportive of the disciplinary proceedings than the Court of Appeal in Brindle. Indeed, in Smith the Divisional Court stated, at 1,101C, that “Brindle was decided on its own facts”: a statement that I read as code for disagreement with the approach of the Court of Appeal in Brindle.
25. Looking at the matter generally, in my judgment, with respect to the Court of Appeal in Brindle, the approach of the Divisional Court in Smith is to be preferred. Regulatory investigations and disciplinary proceedings perform important functions in our society. Furthermore, the days have gone when the High Court could fairly regard the proceedings of disciplinary tribunals as necessarily providing second class justice, as indeed Mr Hapgood fully accepted. The approach of the Divisional Court in Smith is in line with that of the Court of Appeal in Fayed; it seems to me that it is the approach of the Court of Appeal in Brindle which is out of line. This is not, of course, to suggest that Brindle was not correctly decided, or that the law is other than as stated by the Court of Appeal, apart from the issue as to the inherent injustice of concurrent proceedings.
26. Turning to this issue, although in Huddersfield Police Authority v Watson [1947] KB 842 Lord Goddard CJ stated, at 848, that a judge at first instance is bound by a decision of a Divisional Court, more recently, in R v Manchester Coroner, ex parte Tal [1985] QB 67, the Divisional Court stated, at 81:

“… we find it difficult to imagine that a single judge exercising this (supervisory) jurisdiction (of the High Court) would ever depart from a decision of a Divisional Court.”

This assumes that in theory I could depart from the decision of the Divisional Court in Smith. However, I am clear that the present is not the case in which to exceed the bounds of the imagination of the Divisional Court in Tal.

27. There are essentially two points to be considered. The first is the added pressure on the resources of the defendants/respondents in the civil and disciplinary proceedings. One may take an extreme case in which the scope of the regulatory inquiry or disciplinary proceedings and of the civil proceedings is narrow, such that the respondents to the former who are the defendants in the latter may deal with both without difficulty, and the sums involved are small. Whether there is any injustice arising from the pressure on resources depends on the facts of the case.
28. The second point made on behalf of E&Y is that concurrent proceedings raise a risk of inconsistent decisions. Since it is expected in the present case that any disciplinary proceedings would be concluded before a trial of the Commercial Court claim, this point sits uneasily with the contention that there is a risk of the trial judge being influenced by an adverse decision of a disciplinary tribunal. Be that as it may, unless a disciplinary tribunal is bound by a decision of a civil court on issues of fact, and vice versa, that risk exists, at least in theory, even if the civil and disciplinary proceedings are sequential. It is common ground that neither court nor tribunal would be bound by the decision of the other on any issue of fact. In any event, experience shows that cases such as the claim by Equitable Life are seldom fought to trial; and if there are decisions by both tribunal and court, it is more likely that both court and tribunal will arrive at correct, and therefore consistent, decisions on the evidence available.
29. As Mr Beloff rightly pointed out, any scheme such as the JDS is likely to operate concurrently with claims for damages by those who suffer loss as a result of the alleged negligence or other default of the accountants concerned. It would be highly regrettable if the bringing of civil proceedings were to be regarded as necessarily supporting a stay of a regulatory investigation or of disciplinary proceedings conducted in and for the public interest. The risk of inconsistent decisions on questions of fact is inherent in a regulatory and disciplinary system separate from the courts, and in my judgment is not inherently a cause of unfairness.
30. Apart from authority, therefore, I would not conclude that concurrent proceedings are inherently unfair or productive of injustice. I am therefore disposed to accept the judgment of the Divisional Court in Smith on this point. I do not think it obvious that the Court of Appeal in Brindle were laying down a general statement of law on this point, divorced from the facts. The facts in Brindle were quite exceptional, relating to BCCI, a bank that had been an engine of fraud on an enormous and international scale, and there was no suggestion of any impropriety on the part of the accountants, who were heavily engaged in assisting regulatory and criminal authorities.
31. The origin of Hirst LJ’s statement in Brindle would seem to be the judgment of the Court of Appeal in Conteh v Onslow Fane and another (The Times, 26 June 1975, Bar Library Transcript No. 291 of 1975), to which he referred at [1994] BCC 311, and in which he had in fact appeared as leading counsel for the unsuccessful respondent defendant. That case concerned the domestic tribunal of British Boxing Board of Control; the judgment of the Court of Appeal does not refer to any public interest in the continuation of its proceedings against Mr Conteh. He was accused of misconduct in breaking his contracts with his former manager and former promoter, and the High Court proceedings had been brought by him for declarations that these contracts were not binding on him. It was conceded by the Board that any finding that the contracts were binding on Mr Conteh would be provisional, and that a subsequent High Court judgment to a different effect would prevail. Judgment in the High Court proceedings would, therefore, if Mr Conteh was successful, be determinative of the disciplinary proceedings. That case, and the earlier case of Thames Launches v Trinity House [1961] Ch 197, are very different from the present kind of case.
32. Lastly on this point, it seems to me that the proposition that the existence of parallel regulatory and civil proceedings is inherently unjust is inconsistent with the judgments of the Court of Appeal in Fayed: see the judgment of Neill LJ at [1992] BCC 531G and 532A and of Steyn LJ at 537E-H.
33. One other general point needs to be made. It appears from the judgment of Lloyd LJ in R v Take-over Panel, ex p Guinness [1990] 1 QB 146, at 184D-E, of Steyn LJ in Fayed at [1992] BCC 535H and of the Divisional Court in Smith at 1,102G that the Court will give great weight to the evaluation of those responsible under a regulatory scheme of the public interest in the continuation of its proceedings. Indeed, in Smith the Court stated:

“… as Parliament has entrusted the initial valuation of the case against the applicants to the respondent, and has built into the disciplinary scheme adequate procedural protections for the applicants, we believe that absent quite exceptional circumstances such as those listed by Steyn LJ (in Fayed) … we should not get involved in a detailed consideration of the merits, but accept the respondent’s valuation that there is a strong public interest in the continuance of this enquiry (which could lead to disciplinary proceedings) not being delayed by order of the court.”

34. I can now turn to consider the heads of prejudice relied upon by E&Y. I can conveniently take these heads from the helpful document produced by the Claimants, to which the Defendant’s comments were added.

The continuation of the enquiry will delay, impede and prejudice the Claimants in their defence of the Commercial Court proceedings and of the enquiry itself

35. Mr Hapgood’s opening submissions for E&Y took the burdens of the Commercial Court litigation and of co-operating with Lord Penrose’s Inquiry as givens which had, or should have, priority over the JDS proceedings. I do not think that that is the right way to look at the position. I think that I should assume that Langley J, who is the Commercial Court judge in question will take into account the demands of the JDS enquiry in giving directions in the proceedings before him, and that Lord Penrose will similarly be understanding of the competing demands on the time of those who are able to provide the information he seeks. Unless the contrary is shown, I should also assume that the Executive Counsel of the JDS, and any Disciplinary Tribunal that may be appointed in due course, will not seek to impose unfair burdens on those involved.
36. In assessing the risk of prejudice, the Court is necessarily looking at the future and making assumptions as to what is likely to occur, based on the information currently available. There may be no trial of the Commercial Court claim: E&Y’s application for summary judgment may succeed, or the case may be settled. The duration of any trial cannot be estimated; given the involvement of the directors, it may take place not in 2004, as suggested by E&Y, but significantly later. Conversely, Mr Dickson may decide that there are no grounds for disciplinary proceedings against E&Y; or his investigation or any tribunal or appeal tribunal hearing may be delayed. A decision made now to order or to refuse a stay is not final: changing circumstances may make a stay necessary when formerly it was not, or remove the need for a stay.
37. In assessing whether prejudice will be caused to E&Y if I do not order a stay, I take into account the following:

(a) Both the Commercial Court litigation and the JDS enquiry are very substantial indeed. If anything, the scope of the JDS enquiry is the greater. There are over 700,000 pages of relevant material that may have to be considered in the litigation, and I assume that more may be relevant to the JDS enquiry.

(b) It is understandable and reasonable that E&Y should wish to give priority to the Commercial Court proceedings. Indisputably, if wholly successful, they would lead to the destruction of the firm, and possibly even to the bankruptcy of many of its partners. On the information presently available, given the facts of the Equitable Life affair, and the fact that none of the inquiries referred to above has suggested any impropriety or incompetence on the part of anyone from E&Y (or of any impropriety within Equitable Life itself), while Mr Dickson is right not to commit himself to a view, the JDS enquiry and any disciplinary proceedings are unlikely to lead to the most serious of sanctions against the firm or those involved in the Equitable Life audits.

(c) The burden of the Penrose Inquiry is not likely to interfere with the defence of the Commercial Court proceedings or to be unduly onerous. When Mr Hapgood opened the case, he told me that Phase 3 of that Inquiry, which focuses on the actual audit of Equitable Life, and therefore involves the audit partners and other personnel engaged in those audits, had not begun, and that it looked as if it would begin in the second half of 2003. However, in order to correct that statement, the Solicitor to the Inquiry stated, in a letter to Barlows dated 3 October 2002, that phase 3 had already begun. To some extent, the progress of that Inquiry has been impeded by difficulties in obtaining copies of relevant documents. However, Lord Penrose hopes to complete phase 3 by January 2003, assuming full co-operation from E&Y, and little is to happen in the Commercial Court proceedings before then.

38. In assessing the added burden of the JDS enquiry, I take the following into account:

(a) The similarity of subject matters of the Commercial Court litigation, the Penrose Inquiry and the JDS enquiry reduces the burden added by the last-mentioned.

(b) All, or the great majority, of the relevant action of E&Y during the audits, and the information on which they relied, will have been documented contemporaneously, as required by good professional practice and auditing guidelines. (Hence the large volume of relevant documents.) Given the absence of any suggestion of impropriety, recollection of witnesses and oral evidence should be of relatively minor significance.

(c) As is the practice in all large accountancy firms, E&Y performed an internal review of its work with Equitable Life when its difficulties came to light, at least in part because of the risk of litigation. It is for this reason that Mr McNamara states that he has been required to spend considerable time assisting their lawyers since late 2000. Much of the information sought by Mr Dickson will already have been elicited by the internal review.

(d) While E&Y is a very large firm, and able to devote considerable resources to litigation, it is those involved in an audit who are principally concerned and whose time will be most required in explaining and if necessary defending the audit.

(e) Mr Dickson’s estimates of the time he requires from E&Y partners and personnel are modest. I give weight to his estimates, in view of his position and his experience. While I have considerable doubts whether he can deal with the 145 questions for Mr Geraghty and Ms Farrelly in one day, I do not think that his estimate will be so greatly exceeded as to be unduly onerous. Similarly, I accept for present purposes his estimate that he will require one or two interviews with a small number of partners, which will probably not last more than a day each.

(f) I should accept Mr Dickson’s assurances of flexibility at face value, unless they are shown to be unfounded. That has not been shown. I similarly assume that he will accept any guidance given by the court as to conduct of his investigation.

(g) Mr Dickson’s provision of written questions will be of considerable assistance in preparing for the interviews of Mr Geraghty and Ms Farrelly. They will be able to refer to and rely on others on questions such as the location of documents, and will be able to consult their working papers and prepare their responses in relation to questions as to their own actions. The work involved in preparing answers will be substantial.

(h) E&Y’s offer of written answers to the questions suggests that a major concern is not so much the time involved in answering the questions, but in the possibility of oral answers being given in interview that will be prejudicial to E&Y in the Commercial Court proceedings. That is a separate head of alleged prejudice that I consider below.

39. In my judgment, I should focus on the demands of the Commercial Court litigation at the present time. E&Y’s evidence on its application for summary judgment against Equitable Life required little input from Mr McNamara, the client service partner on the audit, or from any other of their partners or personnel. It is unlikely that any substantial input will be required if E&Y serve any further evidence in support of their application. No orders have been made for the service of witness statements. I accept Mr Beloff’s submission that there is a “window of opportunity” between now and the determination of that application when, notwithstanding the other professional and personal demands on the time of those concerned, time could be given for interviews in the JDS enquiry without significantly prejudicing the defence of the Equitable Life proceedings. Having regard to the matters referred to above, I do not think that Mr McNamara’s estimates of the time required of him for the defence of the Equitable Life claim can relate to the period between now and the determination of the application for summary judgment. If they do, it is not reasonably necessary to carry out that work now.
40. E&Y have not established that the burdens imposed by the continuation of the JDS enquiry between now and the determination of their application for summary judgment will cause them significant prejudice in their defence of the Equitable Life claim or in their provision of accurate information to the enquiry. Given the expected duration of the Penrose Inquiry, its demands will not prejudice co-operation with the JDS or the defence of the Commercial Court proceedings.
41. Doubtless E&Y will again consider their position if their application for summary judgment is unsuccessful. But in that event, they will have an up-to-date estimate of the time required by Mr Dickson to complete his investigation, and of the time he requires for the remaining interviews, if any, of their partners and personnel, and that information will be taken into account by the Commercial Court in giving further directions. I think that I should also assume that there is a real possibility that Mr Dickson will conclude that there are no grounds for an adverse finding, in which case the JDS proceedings will come to an end.
42. In the light of my above conclusions, I do not have to decide on Mr Beloff’s submission that since the Penrose Inquiry is non-statutory, and the JDS investigation is to be regarded as statutory, as between them it is the JDS enquiry that must have priority. The point has substance, but it does not mean that the public interest in the completion of the Penrose Inquiry is to be disregarded.

Inherent unfairness in two tribunals contemporaneously considering the same issue

43. I considered this issue above and rejected E&Y’s submission on the point.

Equitable Life could gain a substantial and unfair advantage in the Commercial Court proceedings from the generation of documents in the enquiry

44. There is a degree of speculation under this head. The documents generated in Mr Dickson’s enquiry will be the correspondence in which information is sought from E&Y and provided by them, and the transcripts of the proposed interviews. Why should it be assumed that the information provided in writing and during the interviews will be damaging to E&Y rather than supportive of their case?
45. In Smith, the Divisional Court said, at 1,104-1,105, in respect of a similar contention:

“Next, complaint is made that the disciplinary proceedings would generate their own documents which may be used to the applicants’ disadvantage in the civil proceedings. The principal documents identified before us were the transcripts of what the individuals might say in relation to the issues in interviews conducted under the scheme, and in evidence before the tribunal. If there was a real inconsistency between what they then said and what was said in the civil proceedings thereafter, then the reason for that inconsistency would have to be investigated. If there was an explanation for it, the inconsistency would not harm them. If there was no such explanation, the inconsistency would be rightly taken into account. There would be no injustice in that. The only other identified documents were the possibility that additional accountants’ reports might be generated – this might be so, but it is difficult to see how it could lead to injustice in the second set of proceedings. Surprise is the enemy of justice, and we see no likely injustice in having to give two different accounts on oath of the same incident.”

46. Even if I were free to do so, I would not disagree with this approach. In practice, the witness statements of E&Y’s factual witnesses in the Commercial Court proceedings will be prepared in the light of, and with the benefit of, any interviews or evidence they have given in the JDS proceedings. I see no unfairness in the testing of the substance of their answers in cross-examination against their interviews and evidence in the JDS proceedings.
47. Furthermore, I do not think that E&Y’s concerns that unfair reliance will be placed by Equitable Life on insubstantial differences in the wording of answers in JDS interviews as against evidence in court are well founded. The Commercial Court judge can be relied upon to ensure that documents are not unfairly or misleadingly deployed.
48. Furthermore, it is not to be assumed that the Commercial Court will necessarily order disclosure of all the documents produced in the JDS proceedings.
49. Mr Hapgood made a more substantial submission concerning the purpose and manner of the JDS interviews, which would affect the content of their transcripts and may therefore conveniently be considered under this head. He submitted that the interviews would include hostile cross-examination by counsel for Mr Dickson. He referred to, and relied upon, Mr Dickson’s own evidence that a purpose of the interviews was to give him

“… the opportunity to judge for myself the truthfulness and honesty of the answers by reference to the demeanour of the witnesses.”

Mr Hapgood submitted that this was not a proper purpose of an interview. The purpose of the interviews is to obtain “information”, and he contrasted the use of that word in paragraph 11 of the Scheme with the use of the word “evidence” to be given to a Joint Disciplinary Tribunal. A similar emphasis on the provision of “information” is to be found in paragraph 9 of the JDS Regulations. Mr Beloff took issue with these submissions; he also made the point that the present application is not for a declaration as to the meaning and effect of paragraph 11, but for a stay.

50. The scheme gives the Executive Counsel discretion to decide whether to require information to be given orally or in writing. There are advantages in an interview, in which follow-up questions may be asked and documents put before an interviewee, quite apart from the assessment of credibility. Furthermore, there can be no objection to cross-examination as such: the forensic distinction between evidence in chief and cross-examination is alien to an interview designed to elicit information. Doubtless, the Executive Counsel is entitled to ask questions designed to elicit whether there is an explanation for action taken (or omitted) by an interviewee; and generally probing questions may be asked. But generally I do not think that it is for the Executive Counsel, under the Scheme, to decide whether he personally believes what he is told by an interviewee. The purpose of the power to call for information is to ascertain, so far as possible, what was done or not done by the accountant in question and what reason is given for the action taken, so that the Executive Counsel can decide whether, in his opinion, “there are grounds upon which an adverse finding concerning the professional or business conduct, efficiency or competence of a Member or Member Firm may be made”. There may be such grounds even if the Executive Counsel personally accepts what he is told by a Member, which if true means that no disciplinary offence was committed by him, but the Member’s account cannot be objectively confirmed.
51. However, these observations do not affect the conduct of interviews, save that it must be borne in mind that it is not the purpose of the fact-finding power to subject those interviewed to a pressurised or hostile cross-examination, or to a preliminary trial of the allegations against them. The participation of counsel for the Executive Counsel in the interviews is not of itself a reason to believe that the interviews will be hostile or the interviewees put under undue pressure, and the evidence before me does not establish that the interviews in this case are likely to be objectionable. If objection is taken to the nature of interviews when they are conducted, the court will have to consider it on the evidence then before it.

The personal demands of the JDS enquiry

52. One of those heavily involved in the Equitable Life audits has suffered recent personal tragedies, to the stresses of which have been added those naturally arising from the financial problems of a major client, the various investigations that have since taken place, and the claims that have been made against the firm. The medical report relating to him makes the point that the demands on his time and work should be sensitively and flexibly managed. He is perfectly able to carry out his demanding work for his clients. The demands of the Equitable Life litigation on him will be substantial if E&Y’s application for summary judgment is unsuccessful. Nonetheless, given the present position in the Commercial Court proceedings, Mr Dickson’s estimates of the time required for his interview, and my impression of the requirements of the Penrose Inquiry, the added pressures of the JDS enquiry should not be unmanageable or prejudicial to his health. The interview should not place undue stress on the interviewee, for reasons to which I have referred above.
53. It was submitted on his behalf that the continuation of the JDS enquiry, combined with the estimate of the time he had to devote to the Equitable Life litigation, meant that he was effectively suspended from practice; and Mr Dutton pointed out that there is no power under the scheme to suspend an accountant from practice pending an enquiry or pending proceedings before a Disciplinary Tribunal. Even if the accountant in question were now heavily involved in preparing the defence of the Equitable Life claim, I do not think that this would be an appropriate way to look at the consequences of a JDS enquiry. If the combination of the Equitable Life litigation, the Penrose Inquiry (in which the accountant’s assistance is voluntary) and the JDS enquiry took up the whole of the accountant’s reasonable working time, the JDS enquiry would not be the sole cause of his inability to work for the firm’s clients. The Executive Counsel must take into account the other demands on the time of the relevant E&Y partners and personnel when he considers when interviews can properly be required to take place and their duration, account being taken of the other available resources of the firm and the urgency of the enquiry on the basis of the information then available to the Executive Counsel.
54. E&Y have not established that the continuation of the JDS enquiry will cause real prejudice to the personal or professional lives of anyone else.

The risk of a decision by a JDS Disciplinary Tribunal influencing the Commercial Court judge

55. This assumes that the enquiry will result in proceedings before a Disciplinary Tribunal, that there is a real risk that it will make an adverse finding against E&Y, that there will be a trial of the Commercial Court claim, and that judgment will be given after the Disciplinary Tribunal proceedings. These assumptions would not justify a stay at the present stage of the enquiry and of the Commercial Court proceedings, when these events are speculative.
56. Be that as it may, there is no justification for the suggestion that the Commercial Court judge will decide the claims before him otherwise than on the evidence before him. There is nothing in this point.

Conclusion on prejudice

57. In Smith, the Divisional Court concluded that:

“.. there is nothing in the information before us that would justify us in concluding that the additional burden of the disciplinary enquiry might be the last straw that would prevent a proper defence being made to the civil proceedings.”

Mr Hapgood submitted that the test so applied put too high a burden on a claimant; and that the only question was whether the continuation of the enquiry would create a real risk of serious prejudice which may lead to injustice in one or both sets of concurrent proceedings. I have sympathy with this submission, but I need not determine it. For the reasons I have given above, and taking all the aspects of prejudice relied upon by E&Y that have substance, I am clear that E&Y have not established that there is now a real risk of serious prejudice in any of the proceedings to which I have referred if the JDS enquiry now continues. Whether the position will be different if E&Y’s application for summary judgment fails, or if Mr Dickson decides that there are grounds for an adverse finding against E&Y or an individual accountant and a Disciplinary Tribunal is appointed, must be considered if and when those contingencies occur, on the information then available.

58. It follows that E&Y have not established the precondition for a stay, and it is unnecessary for me to carry out a balancing exercise as between the risk of that prejudice and countervailing considerations.
59. For the reasons set out above, the application for a stay will be dismissed.

Annex 1: European and UK legal background to the scheme

60. The scheme has both a Community and statutory backing. The Community source relates to the Eighth Directive (84/253 of 10 April 1984), dealing with “co-ordination measures” relating to the qualification, competence, and standards of auditors within the Community, and the responsibilities of member states for their regulation.
61. Article 23 provides:

“Member States shall prescribe that persons approved for the statutory auditing of the documents referred to in Article 1(1) shall carry out such audits with professional integrity.”

62. Article 26 provides:

“Member States shall ensure that approved persons are liable to appropriate sanctions when they do not carry out audits in accordance with Article 23…”

63. Effect is given to the directive in England and Wales by the Companies Act 1989. …

“Statutory background

64. The “main purposes” of Part II of the Companies Act 1989 are:

“to secure that only persons who are properly supervised and appropriately qualified are appointed company auditors, and that audits by persons so appointed are carried out properly and with integrity and with a proper degree of independence.” (section 24(1).)

65. In order to secure those objectives a person or a firm is eligible for appointment as an auditor only if he is a member of a recognised supervisory body (section 25(1)). Such a body means a body established in the UK which maintains and enforces rules as to (a) the eligibility of persons to seek positions as company auditors and (b) the conduct of company audit work, which are binding on persons seeking appointment as or acting as company auditors (section 30(1)). The requirements for recognition as a supervisory body are contained in Part 2 of Schedule 11 to the Act. Paragraph 6(1) of the Schedule provides that:

“The body must have adequate rules and practices designed to ensure that the persons eligible under its rules for appointment as a company auditor are fit and proper persons to be so appointed.”

66. Paragraph 7(1) provides that:

“The body must have adequate rules and practices designed to ensure –

(a) that company audit work is conducted properly and with integrity …”

67. Paragraph 9 provides:

“The body must have rules and practices designed to ensure that persons eligible under its rules for appointment as a company auditor continue to maintain an appropriate level of competence in the conduct of company audits.”

68. Paragraph 10(1) provides that:

“The body must have adequate arrangements and resources for the effective monitoring and enforcement of compliance with its rules.”

69. Paragraph 12(1) provides that:

“The body must have effective arrangements for the investigation of complaints –

(a) against persons who are eligible under its rules to be appointed company auditor …”

70. The recognition of a supervisory body is a matter for (now) the President of the Board of Trade; and the Institute of Chartered Accountants in England and Wales, the Institute of Chartered Accountants of Scotland and the Chartered Association of Certified Accountants all received recognition. They are each bodies incorporated by Royal Charter …
71. Additionally it is important to note the statutory basis for the Auditing Guideline relating to the auditor’s responsibility in relation to fraud and other irregularities, to be found in section 109 and 180(1)(q) of the Financial Services Act 1986.

Annex 2: the JDS Scheme

72. The scheme is referred to as the Joint Disciplinary Scheme because it is applicable to the Institute of Chartered Accountants in England and Wales and the Institute of Chartered Accounts of Scotland. Paragraph 3 of the Scheme sets out its scope:

“This Scheme embraces the professional and business activities of all Members and Member Firms and sets out the procedures for investigating and regulating their professional and business conduct, efficiency and competence in circumstances which give rise to public concern in the United Kingdom. …”

The chartered accountant and any certified accountant partners and employees of E&Y are “Members” and the firm is a “Member Firm”.

73. The objectives of the Scheme, set out in paragraph 4, are:

“… to promote the highest possible standards of professional and business conduct, efficiency and competence:

(a) by Members in the performance of their professional or business activities … ; and

(b) by Member Firms in the provision of the services which they offer to the public;

by providing a system for the investigation and regulation of the activities of Members and Member Firms so as to secure their adherence to all professional criteria including but not limited to all relevant recommendations and standards promulgated from time to time by or with the approval of the Councils of the Participants.”

74. The Scheme is administered by an Executive Committee consisting of two chartered accountants appointed by the ICAEW, two appointed by the ICAS, three independent members, and a chairman who is a chartered accountant appointed jointly by the ICAEW and the ICAS. Paragraph 6 of the Scheme provides for the appointment by the Executive Committee of a legally qualified Executive Counsel. The present Executive Counsel is Christopher Dickson, a barrister; he has held that position since the beginning of 1998. Paragraphs 6(b) and (c) of the Scheme are as follows:

“(b) Whenever the Executive Committee receives a report from an investigation committee of a Participant which concerns, or which in the opinion of the investigation committee may concern, the professional or business conduct, efficiency or competence of one or more Members and/or Member Firms (whether or not referred to specifically in the report) and the investigation committee making the report certifies that in its opinion the circumstances of the matter are ones which give rise to public concern in the United Kingdom, the Executive Committee shall refer the report to the Executive Counsel to be dealt with in accordance with this Scheme. The Executive Committee shall at the same time make public the reference to the Executive Counsel of the matter.

(c) Upon receipt of such a reference the Executive Counsel shall enquire into the matter and into such facts and circumstances arising in the course of the enquiry into the matter as the Executive Counsel considers appropriate.”

75. Paragraph 6(d) authorises the Executive Counsel to engage accountants, solicitors, counsel and others to assist him. Paragraph 6(f) is as follows:

“If, following his enquiry, the Executive Counsel is of the opinion that there are grounds upon which a Joint Disciplinary Tribunal could make an adverse finding concerning the professional or business conduct, efficiency or competence of a Member or Member Firm he shall request the Executive Committee to appoint such a Tribunal at the same time delivering to the Executive Committee a formal complaint specifying the manner in which he alleges that the conduct or quality of work of the Member or Member Firm concerned fell below that which was to be expected of such a Member or Member Firm at the time of the activities in question and giving particulars sufficient to enable it to be properly understood by a Joint Disciplinary Tribunal.”

76. Paragraph 6(h) requires the Executive Counsel to notify the Member or Member Firm concerned of action proposed under 6(f) and to give him or them an opportunity of making written representation to him. If the Executive Counsel concludes from his enquiry that there is no case to answer against any Member or Member Firm, he must so report in writing to the Executive Committee. If, however, a formal complaint is made against a Member or Member Firm, it is considered by a Joint Disciplinary Tribunal of 3 or 5 persons, the chairman of whom must be barrister, advocate or solicitor. Although the rules of evidence adopted by the Courts of England and Wales or Scotland do not apply to proceedings before the Tribunal, the procedure before them is very much as in a trial, in which the Executive Counsel is represented as, in effect, the prosecutor, and the Member or Member Firm concerned is represented as, in effect, the defendant or defendants.
77. The penalties available if a complaint is upheld are set out in paragraph 7(g) of the Scheme:

“If the finding reached under paragraph 7(e) is adverse to a Member Firm, the Joint Disciplinary Tribunal may make an order reprimanding or severely reprimanding and/or fining such Member Firm and/or withdrawing the registration as an auditor and/or the investment business certificate of such Member Firm as the Joint Disciplinary Tribunal considers appropriate having regard to the Joint Disciplinary Tribunal’s views as to the nature and seriousness of the adverse finding and any other circumstances which the Joint Disciplinary Tribunal considers relevant and an order for the payment, in the manner set out in paragraph 10, of the whole or part of the costs of and incidental to the enquiry (including the hearing of the complaint before the Tribunal).

…”

78. There is also provision for an appeal to an appeal tribunal by a Member or Member Firm against whom an adverse finding is made.
79. The duty of the Executive Counsel to investigate a matter on receipt of a reference under paragraph 6(b) must be read with the duties of Members and Member Firms to co-operate with him and with any Joint Disciplinary Tribunal imposed by paragraph 11:

“11. Duties of Members and Member Firms

Every Member shall at all times co-operate fully and ensure that every firm in which he is a partner or of which he is a director shall co-operate fully with the Executive Counsel and any Joint Disciplinary Tribunal or Appeal Tribunal established pursuant to this Scheme. The Executive Counsel shall have power to call upon any Member or Member Firm to provide, promptly, information relevant to the matter under enquiry orally and/or in writing as the Executive Counsel or the Tribunal shall require and evidence to a Tribunal orally and/or in writing as the Executive Counsel or the Tribunal shall require. Without in any way limiting the generality of the above power, the Executive Counsel shall have power to require any Member or Member Firm to provide, promptly, information, orally and/or in writing to any investigating accountants, solicitor or counsel or other person appointed by him or the Executive Committee. The foregoing power to require any Member or Member Firm to provide information and/or evidence shall include the power to inspect and to take copies of the books, documents and records relevant to the matter under enquiry which are in the possession or under control of such Member or Member Firm.”

80. The provisions of the Scheme are supplemented by the JDS Regulations, which also impose an obligation on Members or Member Firms to co-operate with the Executive Counsel. Regulation 9 is as follows:

“Seeking Information

(a) The Executive Counsel may call upon any Member or Member Firm (including any Members or Member Firms under enquiry) to provide promptly to him or to the Members or Member Firms carrying out detailed investigations or other enquiries at the direction of the Executive Counsel or to solicitors or counsel or other persons engaged by him, such information as the Executive Counsel considers it necessary for the purposes of the enquiry and to co-operate in any other manner required by paragraph 11 of the Scheme.

(b) The Executive Counsel shall receive from any Member or Member Firm under enquiry, any information which may be tendered to the Executive Counsel and which, in the opinion of the Executive Counsel, may be material to the enquiry.

(c) The Executive Counsel may request or receive from any other person any information which may be material to the enquiry.

(d) Information given under paragraph (a) or (c) of this Regulation shall be provided orally and/or in writing as the Executive Counsel shall decide.”

81. The enquiry of the Executive Counsel into the conduct of a Member or Member Firm is held in private, but it is to be expected that a written record will be made of any interviews. A record is made of the proceedings of a Disciplinary Tribunal of the JDS; the proceedings are normally held in private, but a respondent may request a public hearing, and if all respondents so request the request will normally be complied with: see Regulations 25 and 25A of the Scheme Regulations. A Tribunal has power to make an order for costs against a respondent, but no power to award costs in favour of a vindicated respondent. In practice, the findings of a Disciplinary Tribunal are not made public unless there is no appeal from its decision; in the event of an appeal, it is the decision of the Appeal Tribunal that is published.