A judge has told EY it must give administrators at NMC Health four weeks notice of voting on whether to split its audit and consulting businesses, so they can assess whether this would affect the auditor’s ability to pay a possible $2.7bn legal award.
Alvarez & Marsal, administrators of former FTSE 100 hospital group NMC Health, are pursuing a $2.7bn legal claim 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 the High Court in London 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.
Mr Justice Foxton did not make a formal order, but said EY should give the administrators “around four weeks’” notice of any vote.
The administrators had requested advance notice so they would have time to rush to court if they believed the split would affect EY’s ability to pay a legal award in the case, which is provisionally scheduled to reach a full trial in spring 2025.
The administrators had said they were concerned that the break-up of the Big Four accounting firm would “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”.
“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 several issues holding up EY’s planned break-up.
The 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 was £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 dissipate its assets by transferring its audit operations “for less than full market value” or making distributions to its partners. The final request would in effect prevent EY from paying its UK partners.
EY’s lawyers previously described any connection between the split and the NMC court case as “fanciful” but said in written arguments that the firm would provide “relevant information” to the administrators “in good time” before any split.
EY had argued that the request for information should be dismissed or adjourned because planning for the separation was “paused”, making the application “premature and unnecessary”.
The split was “in a state of some uncertainty at the moment”, said Thomas Plewman KC for EY.
Progress on the break-up was halted by EY’s US boss Julie Boland this month citing a series of issues including the likely effect on the “health” of the remaining audit business.
The legal case is likely to intensify scrutiny of the break-up of the business, the potential impact on the quality of EY’s audits and the financial resilience of the remaining audit firm after the break-up.
EY has said it plans to use some of the proceeds from a spin-off of its consulting arm to strengthen its balance sheet by paying off debts.
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