EY faces $2.5bn lawsuit for 'audit negligence' over NMC collapse

NMC Health collapsed in 2020 after a report by activist investor Muddy Waters claimed that the company had inflated its cash balances. Reuters

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Alvarez & Marsal, the administrator of UAE healthcare operator NMC Health, has filed a lawsuit against the UK arm of EY alleging negligence over the auditor's work on NMC’s accounts between 2012 and 2018.

The lawsuit, which was filed in the Commercial Court in London on Friday, seeks at least $2.5 billion in damages.

“The issues that we found at NMC Health following our appointment were broad, complex and multilayered,” a representative for Alvarez & Marsal said in a media statement.

“As part of our wide-ranging investigation into the situation, we have looked at the role of the auditors and have now launched formal legal proceedings against EY in the UK for audit negligence with regards to its work with the company between 2012 and 2018.”

EY will “defend the claim vigorously”, Reuters cited a representative as saying.

London-listed NMC Health collapsed in 2020 after a report by activist investor Muddy Waters claimed that the company had inflated its cash balances and understated its level of debt. A subsequent investigation revealed more than $4bn of hidden debt that led to the company’s failure.

NMC Health was founded by BR Shetty in 1975 and grew from a single hospital into the UAE’s biggest privately-owned healthcare operator.

The company was listed on the London Stock Exchange in 2012 and was valued at $11.32bn at its peak but was put into administration in April 2020 after it declared its debts at $6.6bn, materially higher than the $2.1bn previously stated in its accounts.

Mr Shetty lived in the UAE for 50 years but returned to India in 2020.

He has launched his own legal action in the US against former executives, banks and an auditor, claiming that they were responsible for a complex $5bn fraud. Dr Shetty claims that cheques were signed in his name without his knowledge by former senior executives.

The company's creditors approved a restructuring plan in 2021 and in March, 34 NMC companies exited administration and became subsidiaries of a new group.

These companies completed a “deed of company arrangement” (DOCA) restructuring process under the Abu Dhabi Global Market and left administration on March 25.

However, both UK-registered NMC Healthcare and UAE-registered NMC Healthcare will remain in administration until their restructuring and legal issues are resolved.

NMC said earlier this year that it is pressing ahead with the restructuring after 95 per cent of its creditors approved its plan to reduce its debt pile to $2.25bn.

The DOCA also involves a mechanism that allows creditors to exit and generate more funds than the sale of distressed assets may yield.

“As administrators, we have an obligation to maximise returns for creditors and this action is part of those wider efforts,” the Alvarez & Marsal representative said on Friday.

The UK's commercial courts are part of the business and property courts of the High Court of Justice.

They handle complex and high-value national and international business disputes, often involving parties based outside the UK.