EY’s UK business has tried to use the “pause” in the wider firm’s split of its audit and consulting businesses to resist a disclosure request in a multibillion-dollar legal claim.
Alvarez & Marsal, administrators of former FTSE 100 hospital group NMC Health, are pursuing a $2.7bn lawsuit against EY UK for failing to raise red flags as auditor of the company before it collapsed in 2020 amid allegations of fraud. EY has denied wrongdoing and is defending the claim.
The administrators asked a judge on Monday to force EY to disclose details of its finances or insurance cover, which would indicate its ability to pay any potential penalty, before going ahead with the planned global split.
The legal claim is not due to reach a full trial until next year at the earliest but lawyers for the administrators on Monday asked the High Court in London to order EY to disclose details of the planned spin-off of its global consulting arm, including in the UK, at least 28 days before it calls a vote on the transaction or, if there is no vote, 28 days before the separation goes ahead.
“NMC harboured concerns that the effect of EY’s planned separation would be to reduce EY’s assets and future income such that EY would be unable to meet the substantial judgment debt (more than $2.7bn) that would arise if NMC prevails,” the administrators said in a written submission to the court during Monday’s preliminary hearing.
“EY has provided nothing in the way of confirmation or comfort that following the separation, it will be in a position to meet the damages award in these proceedings, including by reference to EY’s insurance cover,” they added.
Dealing with potential legal liabilities from lawsuits relating to audits such as NMC’s and that of collapsed German company Wirecard has been one of a string of issues that have held up EY’s plans to press ahead with its break-up.
Lawyers for the NMC administrators said they had asked EY to confirm that it had insurance to cover the amount claimed by NMC’s administrator. If EY could not give this confirmation, the administrators said it should disclose its net asset position in the UK, which stood at £248mn in July 2021.
The administrators said that if EY’s UK net assets were less than the $2.7bn claimed, it should confirm that it would not diminish or dissipate its assets by transferring its audit operations “for less than full market value” or make distributions to its partners. The final request would in effect prevent EY from paying its partners in the UK, who are remunerated out of the firm’s profits.
Lawyers for EY, who have previously described any connection between the split and the NMC court case as “fanciful”, said in written arguments on Monday that the firm had agreed to provide “relevant information” to the administrators “in good time” before any split. However, they added that this was “premature and unnecessary” because planning for the separation “is paused”, and said the administrators’ request for information should be dismissed or adjourned.
Progress on the split was halted after EY’s US boss Julie Boland paused proceedings this month citing a series of issues including the likely effect of the split on the “health” of the remaining audit business.
The legal case is likely to intensify scrutiny of the break-up of the business’s audit and consulting operations, the potential impact on the quality of EY’s audits and the financial resilience of the remaining audit firm after the break-up.
The audit firm would generate smaller profits if it sold its consulting business but has said it plans to use some of the proceeds from a spin-off to strengthen its balance sheet by paying off debts.
The hearing continues.
