R (on the application of SRM Global Master Fund LP & Ors) v Treasury Commissioners (2009)


The legislation relating to the assessment of compensation payable to former shareholders of Northern Rock plc following its nationalisation in February 2008 was not unfair or incompatible with their rights under the European Convention on Human Rights 1950 Protocol 1 art.1.


The claimants (S) applied for judicial review claiming that the legislation relating to the assessment of compensation payable to them as former shareholders of Northern Rock plc following its nationalisation in February 2008 was unfair and incompatible with their rights under the European Convention on Human Rights 1950 Protocol 1 art.1. Northern Rock was originally a building society but had been converted into a public company. Its core business was residential mortgage lending. The business was financed by borrowing on the wholesale money market. In August 2007 it became unable to finance its business in that way because of liquidity problems in that market. Although its assets as stated in its balance sheet exceeded its liabilities it could not pay its debts as they fell due. The Bank of England made facilities available to Northern Rock by way of loans repayable on demand and at a premium rate of interest. The government then nationalised Northern Rock. Before it did so it indicated that the relevant legislation would provide for the assessment by an independent valuer of compensation payable to shareholders on the basis that the government should not be required to compensate shareholders for value which was dependent on taxpayers' support and that public sector ownership would be an alternative to the administration or liquidation of the company. S submitted that the basis of valuation was unfair; Northern Rock was, at the date of nationalisation, in fact a going concern, with an excess of assets over its liabilities; the valuation provisions were unfairly designed to give the government a profit beyond a fair return for the financial support it provided to the company; effectively, the legislative provisions deprived the shareholders of Northern Rock of that profit contrary to the European Convention on Human Rights 1950 Protocol 1 art.1.


S's case mischaracterised the legislative provisions as to compensation. It confused a legislative provision that provided for the payment of no compensation or compensation that was negligible in relation to the true value of the asset taken with a provision that provided for compensation to be determined by a valuer on specified assumptions. In the latter case, the primary question for the purposes of art.1 of Protocol 1 was whether compensation so determined was in all the circumstances fair. If the specified assumptions were appropriate, the compensation so determined would be fair. If, in truth, the asset acquired by the state, when fairly valued, has no or negligible value, the compensation provisions were compatible with art.1 of Protocol 1: in such a case, the fact that no, or negligible, compensation was payable resulted not from any unfairness in the statutory provisions, but from the lack of any value attributable to the asset in question. The statutory assumptions in the instant case reflected the relevant facts and relevant legal obligations of the state and resulted in a fair valuation. S were not entitled to be compensated for value created or enhanced by the provision of public financial assistance. S could not show that they had to bear an individual and excessive burden, Beyeler v Italy (33202/96) (No1) (2001) 33 EHRR 52 ECHR considered. Quite apart from the margin of appreciation allowed to the legislature and the government, there had been no infringement of S's rights under art.1 of Protocol 1. (2) Allegations of regulatory failure did not assist S. The primary responsibility for the insolvency of Northern Rock lay with its management. If there was any failure on the part of the regulatory authorities, it was not in any duty owed to the shareholders of Northern Rock. Any loss of value of the shares caused by regulatory failure had already occurred by the time its liquidity problems became public and it became insolvent on a cash flow basis. There was no evidence which could lead to a finding that, but for the alleged failures, Northern Rock would have survived as a going concern. (3) S's case on legitimate expectation failed. They had not identified any relevant statement of the defendants that financial support would be given to Northern Rock or that it would be continued. The evidence was to the contrary. In relation to the assessment of compensation itself, the evidence was inconsistent with any expectation such as that asserted by S. As a matter of fact there was no reasonable expectation prior to nationalisation that the Bank of England would provide or continue to provide financial assistance to any bank. (4) The expectation or intention of the government as to any eventual profit did not affect the fair value of the company at the date of nationalisation. (5) In the instant case the decision to nationalise Northern Rock was not itself under challenge, Hentrich v France (A/296-A) (1994) 18 EHRR 440 ECHR and Capital Bank AD v Bulgaria (49429/99) (2007) 44 EHRR 48 ECHR considered. S's challenge was to the requirement that the public financial assistance provided to Northern Rock should be excluded from consideration, but that was a policy decision to which the margin of appreciation applied. S failed to show that the compensation scheme was manifestly without reasonable foundation and therefore that the margin of appreciation had been exceeded, Katikaridis v Greece (19385/92) (2001) 32 EHRR 6 ECHR considered.

Application refused