R (on the application of SRM Global Master Fund LP) v Treasury Commissioner R (on the application of RAB Special Situations
(Master) Fund Ltd) v Treasury Commissioner R (on the application of
Grainger and others) v Treasury Commissioner [2009] All ER (D) 139(Feb) [2009] EWHC 227 (Admin)
Queen’s Bench Division, Divisional Court , Stanley Burnton LJ and
Silber J, 13 February 2009
The claimants were all shareholders in Northern Rock plc. The Bank of England (the Bank), as the ’s central bank, was the bankers’ bank. It was the lender of last resort, and the financial assistance it provided as such was referred to as LOLR. Its functions included ensuring the stability of the monetary system. In August or September 2007, Northern Rock became insolvent, being unable to pay its debts as they fell due. The Bank provided LOLR, but nonetheless Northern Rock was nationalised in February 2008, pursuant to the Banking (Special Provisions) Act 2008 (BSP 2008). A premium rate of interest was payable on the loans provided by LOLR. BSP 2008 required a valuer to value Northern Rock’s shares on the assumption that all financial assistance in the future would be provided by the Bank, and that it was not at the time a going concern.
The claimants brought an application for judicial review, contending that that basis of valuation was unfair. They argued that Northern Rock was, at the date of nationalisation, a going concern, with a strong mortgage book and an excess of assets over its liabilities. They submitted that the valuation provisions were unfairly designed to give the government a profit beyond a fair return for the financial support it had provided and was providing to the company. In effect, the legislative provisions deprived the shareholders of that profit. The claimants did not challenge the decision to nationalise itself, rather the provisions of the compensation scheme which, they contended, breached their right to property under Art 1 of the First Protocol to the European Convention on Human Rights.
Burnton LJ:
On the basis that the result of the legislative provisions would probably be that the valuer would find that the shares in Northern Rock was either nil or a “derisory” sum, the claimants submitted that that was a case of expropriation without compensation, which could be justified under Art 1 of the First Protocol only in exceptional circumstances.
That way of putting the case confused a legislative provision that provided for the payment of no compensation 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 purpose of Art 1 was whether compensation was in all the circumstances fair. If the asset acquired by the state had no or negligible value, the compensation provisions were compatible with Art 1, because the lack of compensation derived not from unfairness in the statutory provisions but from the lack of any value attributable to the asset in question. In the instant case, but for the support provided by the Bank, Northern Rock would have ceased trading. It had no contractual or other private enforceable right to that financial support or to its continuation.
The government could, without being in breach of any private or public law duty owed to the shareholders, have withdrawn its financial support; if it had done so, the company would have gone immediately into administration, and the shares would have had the value that would be attributed to them under the compensation scheme. The claimants also alleged that the Bank was insufficiently proactive in responding the credit squeeze, and the Financial Services Authority (FSA) failed in the exercise of its regulatory functions.
His lordship held that if there had been any failure on the part of the regulatory authorities, it was not in any duty owed to the shareholders of Northern Rock. Neither the Bank nor the FSA owed any duty to the shareholders.
The claimants also argued that they had a legitimate expectation that in common with other central banks, the Bank would continue to provide support to Northern Rock “until such times as the temporary liquidity difficulties which Northern Rock was experiencing eased”.
His lordship held that there was no legitimate expectation before nationalisation that once LOLR had been provided, it would remain in place with the consequence that it should be taken into account for the purpose of valuing the shares. The case on legitimate expectation fell at every hurdle. The claimants had not identified any relevant statement that financial statement would be given to Northern Rock or that it would be continued.
The assumptions mandated by the compensation scheme did not result in any unfairness. It could not be said that either the basis of compensation, or the consequence that the shareholders would not receive compensation reflecting any value produced by or attributable to public financial assistance was without reasonable foundation, let alone manifestly so.
The claims would be dismissed.
