SRM Global Master Fund LP v Treasury Commisioners (2009)


The assumptions which the valuer of Northern Rock shares was required to make pursuant to the Banking (Special Provisions) Act 2008 s.5(4) did not violate the rights of shareholders under the European Convention on Human Rights 1950 Protocol 1 art.1


The appellants (S) appealed against a decision ((2009) EWHC 227 (Admin), (2009) BCC 251) dismissing their claims for judicial review of the basis of assessment on which compensation would be payable to them as former shareholders of Northern Rock plc following its nationalisation in February 2008. Northern Rock was a bank which had formerly been a building society. Its core business remained residential mortgage lending. It financed a large part of its mortgage lending by borrowing money on the wholesale money markets. In August 2007 disruption in the global financial markets left Northern Rock unable to find liquidity in the wholesale markets. Although it was solvent in balance-sheet terms, it was unable to meet its debts as they fell due. The Bank of England as lender of last resort (LOLR) provided temporary liquidity support to Northern Rock, against appropriate collateral and at an interest rate premium. In the absence of acceptable private sector proposals for the future of Northern Rock, the government then decided to take it into public ownership. The relevant legislation provided for compensation for shareholders. The amount of compensation was to be determined by an independent valuer on the assumption that Northern Rock was unable to continue as a going concern and was in administration. S submitted that (1) the terms of the scheme, under which they would get nothing or virtually nothing for their shares, violated their rights under the European Convention on Human Rights 1950 Protocol 1 art.1; (2) the regulatory authorities were guilty of a series of culpable errors in their regulation of Northern Rock and that wrongful conduct by the expropriating state should be taken into account in setting the terms of the nationalisation; (3) an interference with rights protected by Protocol 1 art.1 would not be lawful unless there were in place procedures by which the merits of the expropriation in issue could be tested.


(1) The case-law of the European Court of Human Rights established three governing principles all of which were engaged in the instant case: the need for a fair balance to be struck between the public interest and private rights, the principle of proportionality and the doctrine of the margin of appreciation. The government support accorded to Northern Rock was done exclusively for the protection of the banking system and thus the general economy as a whole, and not at all in the interests of Northern Rock itself or its shareholders. The decision to take Northern Rock into public ownership was a strategic exercise of government policy, intended to preserve for the sake of the national economy the benefits won by the LOLR operation at the least possible cost to the taxpayer. The purpose of the LOLR support and the nationalisation was not to confer a benefit on shareholders, since that would be inconsistent with the principles on which such support was given. The terms of the compensation scheme were not motivated by the desire to make a profit. At the relevant time no party other than the government would put money into Northern Rock: no commercial entity was prepared to acquire Northern Rock save on terms that the government continued to provide support and bore the risk of default. The assumptions in the Banking (Special Provisions) Act 2008 s.5(4) were in line with the conditions on which LOLR was provided. They were an application of the policy considerations which underpinned LOLR. In the circumstances the margin of appreciation had to be a wide one. The court would only interfere if it were to conclude that the state's judgment as to what was in the public interest was manifestly without reasonable foundation, James v United Kingdom (A/98) (1986) 8 EHRR 123 ECHR and Lithgow v United Kingdom (A/102) (1986) 8 EHRR 329 ECHR applied. The compensation scheme was not a charade. The purpose of the legislative assumptions was to put the shareholders in the position they would have occupied had no LOLR support been provided. In context that objective could not be characterised as manifestly without reasonable foundation. (2) The regulatory authorities did not owe duties to the shareholders. It had not been demonstrated that any regulatory failings were an effective cause of Northern Rock's difficulties. The allegations of regulatory failure could not assist those shareholders who had acquired shares after the public announcement of LOLR support. (3) The statutory assumptions were not assumptions of facts which might or might not be true, and whose truth or otherwise ought to be examined. They constituted the policy according to which the valuation would proceed. The requirement of procedural fairness inherent in Protocol 1 art.1 was met by the availability of judicial review.

Appeal dismissed