Adam Applegarth, Northern Rock's deposed chief executive, and his colleagues have escaped legal action over the downfall of the bank.

The nationalised bank revealed yesterday that it would not sue its former directors - including Mr Applegarth, who was criticised for his role in the bank's move into risky short-term funding - or its auditors over the bank's collapse.

Northern Rock said that its external advisers - Freshfields, the City law firm, and KPMG, the accountants - had completed a review of the role of its former management team and had decided that there were insufficient grounds to proceed with any action for negligence.

The board has also decided that no action is warranted against PricewaterhouseCoopers, the company's auditors.

Ron Sandler, the chairman of Northern Rock, suggested that the decision had the full backing of the Government. “The Government, through their representatives at the bank, have been closely kept abreast of this decision,” Mr Sandler said.

He refused to be drawn on the bank's careful distinction that there were “insufficient grounds” to sue the directors but no action was “warranted” against the auditors.

Mr Applegarth and his former colleagues are now free from the threat of litigation because the two hedge funds suing over Northern Rock's collapse - RAB Capital and SRM - are suing the Government, not the former directors.

Northern Rock's decision was immediately criticised by trade unions. Thousands of staff have lost their jobs at the bank.

Graham Goddard, deputy general secretary of Unite, said: “The corporate greed and egos of a small number of individuals contributed to the near-collapse of Northern Rock and the loss of thousands of jobs in the North East. Staff in Northern Rock have paid the ultimate price in the loss of their jobs for the failures of those at the top. Yet those individuals are able to escape punishment.”

Northern Rock admitted yesterday that it would be a big challenge to pay back the rest of its debt to the Bank of England as quickly as it has paid the first tranche. It reduced its debt to the taxpayer from £26.9billion in December to £11.5billion by the end of last month, but it has been hit by a rapidly worsening property market.

Mr Sandler said: “Dislocated financial markets and falling house prices mean that the pace of progress will be significantly more challenging to maintain going forward.” However, he said that taxpayers were on track to recover their money by 2011.

The bank said that residential mortgage arrears rose by nearly 60 per cent from 1.18 per cent of the total book at the end of June to 1.87 per cent at the end of last month.

Repossessions rose by 13 per cent from 3,710 to the end of June to 4,201 at the end of September.

The biggest drag on the Rock's loan book is its Together mortgage, which allowed customers to borrow up to 125 per cent of the value of their homes. It was scrapped in February.

Northern Rock also said that retail depositors had flocked to it last month as turmoil engulfed the global banking system and it was forced to withdraw key products and cut its savings rates to ensure that it was not in breach of European Union state aid laws.

Northern Rock said yesterday that it remained within the framework agreed with the European Commission when the bank was nationalised.

It is unclear to what extent a merged HBOS-Lloyds TSB and Royal Bank of Scotland will have to comply with the same EU rules when the Government made Monday's bailout conditional on them agreeing to continue to support mortgage lending.

Mr Sandler said that Northern Rock would not compete with other nationalised banks by relaxing its lending.

“Our plan is our plan and our framework is our framework. We are proceeding with our plan and that won't be changed by anything that has happened in the past few days,” he said. He conceded that there had been informal discussions about merging part of its business with that of the nationalised Bradford & Bingley.

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive