Names to pay tax on Gooda award

THE Inland Revenue is set to take a large bite out of the estimated pounds 500m compensation to be paid to Gooda Walker names following Tuesday's court ruling. Names will lose up to 40 per cent of any payments eventually made to them.

While compensation awarded by the courts is normally tax-free, the Lloyd's award is deemed to be trading income. The Revenue says names are being taxed now because they were allowed to offset their original Gooda Walker syndicate losses against other income over the 1989-91 tax years, when the losses were incurred.

The Council of Lloyd's met yesterday to discuss a new settlement offer to aggrieved investors taking legal action similar to the landmark case won by Gooda Walker names on Tuesday.

The council is widely expected to try to arrange a settlement between 'spiral' action groups and the insurers who would foot the bill for further successful court actions.

In a separate development yesterday, the Secretan Names Association succeeded in sacking Ernst & Young as auditors to four syndicates being wound down. Josceline Grove, secretary of the association, said: 'It is absurd to be suing Ernst & Young and paying them at the same time to do the audit.'

Tuesday's judgment, which found that losses suffered by names on the Gooda Walker syndicates were the result of negligence and incompetence, will strengthen the cases being brought by other groups.

Mr Justice Phillips criticised the 'spiral' that developed at Lloyd's in the late 1980s when underwriters reinsured each other against catastrophes such as the Piper Alpha oil rig explosion.

Preliminary discussions have already been held with some groups of litigating names on a new settlement proposal. The deal is expected to offer names extra money and a cap on their liability for losses. A contribution from firms of auditors facing the prospect of legal action, such as Ernst & Young and the Gooda Walker auditors Littlejohn Frazer, will also be sought.

Any money raised in this way would be placed in premium trust funds. These are funds into which names' premiums are paid and held for three years. They can be used only for the payment of claims, expenses and the distribution of profits back to names.

David Rowland, chairman of Lloyd's, recently indicated that he would favour any method that would help to ensure that the solvency of Lloyd's was maintained, as this approach would.

The victorious Gooda Walker names are the least likely to accept a new offer, although Lloyd's would like to see their award - which could be more than pounds 500m - kept in the premium trust funds. Michael Deeny, chairman of the Gooda Walker action group, said: 'They would have to offer better terms than we could get by enforcing our judgment.'

He said the names would require a proper audit of the errors and omissions insurance cover available to pay their award, an additional contribution from the Lloyd's central fund and a cap on their liabilities.

Other groups of names fear the insurance available to pay damages could be used up quickly. Val Powell, chief executive of the Association of Lloyd's Members, said: 'Names to follow the Gooda Walker group in the courts are very likely to want to settle.'

About 30 groups of names are planning actions, and their claims add up to more than pounds 3bn.