The High Court has dismissed the application for judicial review brought against the Treasury by former shareholders of Northern Rock, who sought to challenge the basis on which compensation was calculated when Northern Rock was nationalised.
The valuation scheme in the Northern Rock plc Compensation Scheme Order 2008 (the “Scheme”) provided for an independent valuer to assess compensation on the assumptions that: (i) all State financial assistance is withdrawn before the nationalisation; (ii) Northern Rock is “unable to continue as a going concern”; and (iii) is in administration. The former shareholders challenged these assumptions as unfair, arguing that the independent valuer should have been allowed to determine the share value without such required assumptions.
The former shareholders claimed that the actions of the public authorities had led to their having a legitimate (or at least “reasonable”) expectation that financial assistance would continue, and that the Scheme breached their human rights. They argued that under Article 1, Protocol 1 of the Human Rights Act 1998, which protects private property (“A1P1”), they were entitled to “fair value” for their shares. The primary question was whether compensation determined in accordance with the Scheme was incompatible with A1P1. The shareholders also claimed the nationalisation was really to secure a profit for the Government and relied on regulatory failings and the behaviour of the Government in respect of subsequent bank failures/ difficulties in support of their claim.
The Treasury’s case was that most of the shareholders’ arguments were irrelevant. The only real question was whether the compensation scheme was compatible with A1P1. In that regard, the court should only intervene where the legislature’s judgment about compensation was “manifestly without reasonable foundation”.
The court wholly dismissed the former shareholders’ arguments. The court noted that no challenge had been made to the nationalisation itself, only to the basis of valuation of compensation under the Scheme. Therefore, arguments based on why the bank was nationalised (e.g. to make a profit) and the circumstances (including any regulatory failure) that led to its nationalisation, were irrelevant. The court also noted that the applicants had not differentiated between shareholders who had acquired their shares at different times – whether before financial support was given to the bank or otherwise.
The key issue relating to A1P1 concerned the deprivation (i.e. nationalisation) of property (i.e. the shares) and whether the means by which this was done were proportionate in light of the aims sought to be achieved. The court considered the key agreed facts, including Northern Rock’s cash-flow insolvency from September 2007 onwards, that no private funding was available, that “lending of last resort” was primarily given to protect the financial system (not the distressed bank), and that the loans were repayable on demand.
The court found that the shareholders had mischaracterised the compensation provisions, equating a provision providing for no compensation (as they put it) with one providing for compensation to be determined by reference to specific assumptions (i.e. the Scheme). If the assumptions were appropriate, then the compensation, even if it were zero, would be fair. On the facts, the required assumptions were not unfair. Even if they were, neither the basis of compensation nor its consequences were without reasonable foundation. The former shareholders were “not entitled to be compensated for value created or enhanced by the provision of public financial assistance”.
The court also rejected the shareholders’ claims based on legitimate or “reasonable” expectations. The shareholders had failed to identify any express or implied statement by the Treasury, FSA or Bank of England that could lead to a legitimate expectation that financial assistance would continue. That support was always clearly temporary – by way of loans repayable on demand. In the months leading to the nationalisation, the Treasury often stated the facilities could be withdrawn or discontinued. A Treasury regulatory announcement (the “Announcement”) a month before nationalisation had even set out the basis of any compensation (including the required assumptions) if nationalisation occurred. Yet the two main applicants (SRM and RAB) had purchased further significant holdings in the bank after that announcement – they were speculating. Even if a “reasonable” expectation of continued financial assistance could create some kind of duty on the part of the public authorities (which was not accepted by the court), no such reasonable expectation could be shown.
While finding that any regulatory failings were irrelevant to the application, the court also decided that the tripartite authorities (the FSA, Treasury and Bank of England) owed no duty of care to shareholders (or indeed depositors) of a regulated bank, regardless whether there had been a regulatory failure. In relation to the FSA, the protection of regulated persons or their investors was not one of its statutory objectives.
Although the claims were wholly dismissed, it is noteworthy that the court emphasised its sympathy for long-term shareholders, but noted that the way the claims were made precluded any distinction between different shareholders based on when they acquired their interests. Yet the court was clearly affected by SRM and RAB’s decisions to purchase further shares after the Announcement. It is unclear whether a different result may have been achieved if the potential claims had been separated out, based on when shares had been acquired.
