Northern Rock drops legal claim against ex-directors

Adam Applegarth and his fellow former Northern Rock directors have escaped being sued by the nationalised bank for their part in its near-implosion.

Ron Sandler, Northern Rock's chairman, said yesterday that the lender had given up hope of suing former board members because there were "insufficient grounds to proceed on grounds of negligence".

Northern Rock hired Freshfields, the City law firm, and KPMG accountants in June to check whether the bank should sue the directors and the bank's auditor, PricewaterhouseCoopers.

Lawyers have always doubted that a case would get off the ground. Equitable Life, the collapsed insurer, brought a lengthy £3.7bn negligence claim against its former directors and auditor but the case was abandoned in 2005, leaving policyholders with a legal bill of more than £80m.

Philip Vaughan, a partner at Simmons & Simmons who defended the Equitable directors, said: "How very wise is my first reaction – Equitable spent three years pursuing people and putting them through hell and it was utterly pointless."

Mr Applegarth, the former chief executive, left Northern Rock in December with a £760,000 payoff. He pursued breakneck growth in the mortgage market, including selling "Together" loans worth up to 125 per cent of a property's value. Together loans fuelled a sharp jump in arrears and repossessions for Northern Rock in the third quarter. Residential arrears at the end of September were 1.87 per cent of total mortgages, up from 1.18 per cent three months earlier. Repossessed properties jumped to 4,201 from 3,710. Together mortgages, which make up less than 30 per cent of total loans, accounted for about half of the arrears and three-quarters of repossessions.

Mr Sandler said the state-guaranteed bank saw a big inflow of deposits in September, which increased this month amid growing fears for bank safety. Northern Rock has had to limit its taking of deposits from new customers to stay within its agreed limit of 1.5 per cent of total. Retail balances increased by £3bn to £17.2bn in the third quarter.

The bank has repaid £15.4bn of its original £26.9bn government loan, partly by shrinking its mortgage book by encouraging customers to remortgage with rival banks. Mr Sandler said the plan to repay the loan in full in 2010 was still on track.

Mr Sandler, who had been earning £1.1m a year as executive chairman, will have his salary fall to £350,000 after handing over executive duties to Gary Hoffman, the former Barclays banker who joined as chief executive two weeks ago.