UK: Rock Bottom Prices

Last Updated: 18 May 2009
Article by Edward Davis and Sue Millar

In R (on the application of SRM Global Master Fund LP and Others) v Treasury Commissioners [2009] EWHC 227 (Admin), former shareholders of Northern Rock failed to persuade the Divisional Court on judicial review that the statutory compensation scheme established to value shares in the nationalised bank was incompatible with their human rights.


In the period following the collapse of the wholesale money markets in August 2007, Northern Rock plc ("NR") was the recipient of significant public financial assistance. On 14 September 2007, the Bank of England provided NR with a liquidity support facility; on 20 September 2007, HM Treasury announced that all existing deposits in NR would be guaranteed; on 9 October 2007, additional facilities, repayable upon demand and subject to a time limit, were granted to NR and the guarantee of NR deposits was extended to all new retail deposits. By February 2008, the lending extended by the government exceeded £20 billion. Private sector proposals for the future of NR were sought, but the terms of such proposals were not considered acceptable by the UK government. Consequently, on 17 February 2008, the Chancellor announced that NR would be taken into public ownership, with the creation of a compensation scheme for its former shareholders.

The Relevant Legislation

On 21 February 2008, the Banking (Special Provisions) Act 2008 ("the Act") was passed into law and gave the government the power to nationalise NR. The nationalisation was effected by the transfer of the shares in NR to the Treasury Solicitor. The Northern Rock plc Compensation Scheme Order 2008 ("the Order"), made on 12 March 2008, contained the formal provisions for the appointment of an independent valuer to establish the amount of compensation payable to a shareholder. The key provisions within this legislation were section 5(4) of the Act and paragraph 6 of the Order which provide:


In determining the amount of any compensation payable by the must be assumed: (a) that all financial assistance provided...has been withdrawn...and (b) that no financial assistance would in future be provided ...".


In determining the amount of any compensation payable by the must be assumed (in addition to the assumptions required to be made by section 5(4) of the Act that Northern Rock: (a) is unable to continue as a going concern; and (b) is in administration".

The former shareholders said that the effect of these assumptions would probably lead the independent valuer to conclude that the shares in NR were worth little more than zero. (The independent valuer has not yet concluded his valuation of the shares.) Immediately before nationalisation, the market price of shares in NR had stood at 90p (it had been around 200p during mid-2007). Perhaps unsurprisingly, the statutory compensation scheme, or rather its assumptions, caused much consternation amongst the former shareholders of NR.

Article 1 Rights

A number of former shareholders in NR sought redress by issuing judicial review proceedings, seeking to challenge the valuation process rather than the nationalisation itself. The matter was heard in the Divisional Court in mid-January 2009. The central issue at the hearing was whether the statutory compensation scheme was compatible with the shareholders' rights under Article 1 of the First Protocol of the European Convention of Human Rights ("A1P1") (which concerns the protection of property). The Article states:


No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law".

The former shareholders submitted that the requirements of A1P1 were not satisfied. They noted that NR was a going concern immediately before nationalisation and stated that there were no good reasons for assuming that "all financial assistance provided...has been withdrawn" as, at the time of nationalisation, there had been no prospect of such a withdrawal. The defendants, being the Commissioners of HM Treasury, submitted that the focus should be on the period from 13 September 2007 to the date of nationalisation, during which NR had no entitlement to financial assistance, without which NR would have been insolvent. Consequently, the defendants submitted that the requirements of A1P1 had been satisfied.

On this central question, the Court found that: as at 12 September 2007, NR had been unable to pay its debts as they fell due; only public funding was available to NR at the time; and but for the public support provided, NR would have had to cease trading and would have had to go into administration, if not insolvent liquidation. The Court decided that it should make no difference to the assessment of fair value in February 2008 that the Bank of England had provided financial support during the previous months. Consequently, the Court held that the requirements of A1P1 had been satisfied and that the assumptions were fair.

The former shareholders also raised some other ancillary matters to bolster their case, namely, allegations that: certain procedural requirements had not been adhered to; the government had introduced the compensation scheme so as to make a profit; there had been regulatory failings on the part of the Bank of England, the defendants and FSA; the government had acted differently in relation to other banks. In each case, the former shareholders argued that these matters were relevant to the Court's assessment of whether the requirements of A1P1 had been satisfied. The Court either declined to consider or rejected each of these submissions and dismissed the judicial review proceedings.

The former shareholders have been granted leave to appeal the decision to the Court of Appeal. The appeal is expected to be heard in July 2009.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

This article was originally written for Stephenson Harwood's quarterly publication, Finance Litigation Legal Eye. If you would like to receive this publication, please contact Stephenson Harwood.

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