Harbinger Capital Partners v Andrew Caldwell (as the Independent Valuer of Northern Rock Plc) and Another
| Jurisdiction | England & Wales |
| Judge | Lord Justice Lewison,Lord Justice Beatson,Lord Justice Mummery |
| Judgment Date | 09 May 2013 |
| Neutral Citation | [2013] EWCA Civ 492 |
| Docket Number | Case No: A3/2011/2981 |
| Court | Court of Appeal (Civil Division) |
| Date | 09 May 2013 |
[2013] EWCA civ 492
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TAX TRIBUNAL
(TAX AND CHANCERY CHAMBER)
Mr Justice Warren President, Judge Andrew Bartlett QC and Sandi O'Neill
NR/001/2010
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Mummery
Lord Justice Lewison
and
Lord Justice Beatson
Case No: A3/2011/2981
MR M PHILLIPS QC, Mr Pushpinder SainiQC, Mr D Allison & Mr W Willson (instructed by Brown Rudnick LLP) for the Appellant
Mr M Howard QC, Mr M Chamberlain & Mr J Dawid (instructed by Mayer Brown International LLP) for the First Respondent
Hearing dates: 22 and 23 January 2013
Introduction
The troubles that beset Northern Rock in the autumn of 2007 were the harbinger of the near collapse of the global banking system in the following year. On 22 February 2008, following attempts to keep it going in the private sector, Northern Rock was nationalised. Upon nationalisation all existing shares in Northern Rock passed into Government hands. The issue on this appeal is the basis on which compensation for those shares is to be determined.
The compulsory transfer of shares in Northern Rock to the Treasury Solicitor, as nominee of the Treasury, was effected by article 2 of The Northern Rock plc Transfer Order 2008. This was an order made under powers contained principally in section 3 of the Banking (Special Provisions) Act 2008 ("the Act"). Section 5 of the Act required the Treasury, in relation to any order made under section 3 transferring securities to the public sector, to make a scheme for determining the amount of any compensation payable to the persons who held the securities immediately before the transfer. Section 5 (4) provided:
"In determining the amount of any compensation payable by the Treasury by virtue of any provision in an order under this section, it must be assumed—
(a) that all financial assistance provided by the Bank of England or the Treasury to the deposit-taker in question has been withdrawn (whether by the making of a demand for repayment or otherwise), and
(b) that no financial assistance would in future be provided by the Bank of England or the Treasury to the deposit-taker in question (apart from ordinary market assistance offered by the Bank of England subject to its usual terms)."
Financial assistance was in turn defined by section 15 (1) as follows:
""financial assistance", in relation to any person, includes—
(a) assistance provided by way of loan, guarantee or indemnity,
(b) assistance provided by way of any transaction which equates, in substance, to a transaction for lending money at interest (such as a transaction involving the sale and repurchase of securities or other assets), and
(c) assistance falling within paragraph (a) or (b) provided indirectly to or otherwise for the benefit of the person (including the provision of assistance within paragraph (a) or (b) to any group undertaking of that person),
whether provided in pursuance of an agreement or otherwise and whether provided before or after the passing of this Act."
Pursuant to its statutory duty, the Treasury made The Northern Rock plc Compensation Scheme Order 2008. The scheme was set out in a schedule to the order. Paragraph 3 (2) of the schedule provided:
"The amount of compensation payable to a person shall be an amount equal to the value immediately before the transfer time of all shares in Northern Rock held immediately before the transfer time by that person."
The transfer time was defined as the beginning of 22 February 2008. Paragraph 6 of the schedule said:
"In determining the amount of any compensation payable by the Treasury to any person in accordance with paragraphs 3 to 5, it must be assumed (in addition to the assumptions required to be made by section 5 (4) of the Act (compensation etc for securities transferred etc)) that Northern Rock
(a) is unable to continue as a going concern; and
(b) is in administration."
The amount of the compensation was to be assessed by an independent valuer appointed by the Treasury. The appointee was Mr Caldwell. He determined the value of all shares in Northern Rock (both preference shares and ordinary shares) as nil. In so doing he applied the valuation assumption in section 5 (4) (a) on the basis that it required him to assume that at the transfer time Northern Rock had repaid all monies that had been lent to it by the Bank of England; and had realised sufficient of its assets to enable that to have been done. Harbinger Capital Partners, who had an interest in preference shares in Northern Rock, challenged that decision before the Upper Tribunal (Tax and Chancery Chamber). The challenge failed. The Tribunal (Mr Justice Warren P, Mr Andrew Bartlett QC and Ms Sandi O'Neill) held that the valuer was right in his interpretation of section 5 (4) (a). Their decision is at [2011] UKUT 408 (TCC), and is available on bailii. For the reasons that follow, in my judgment (although a minority one) the Tribunal was wrong.
The factual background
The factual background is set out in the judgment of Laws LJ in SRM Global Master Fund LP v HM Treasury [2009] EWCA Civ 788. I pick out only a few salient points that are relevant to the current appeal. At all material times, both before and after the provision of financial assistance by the Bank of England and HM Treasury, Northern Rock's assets as recorded in its balance sheet exceeded its liabilities. Its problem was liquidity: cash flow insolvency rather than balance sheet insolvency.
The Bank of England intervened as lender of last resort. The then Governor of the Bank of England explained the principles applicable in a lecture quoted by Laws LJ. The following are the relevant points for the purposes of this appeal:
"First, we will explore every option for a commercial solution before committing our own funds. Initially, we will always look to major shareholders to provide support. Short of that, we will encourage the bank to try to find a buyer…
Second, central banks are not in the business of providing public subsidy to private shareholders. If we do provide support, we will try to structure it so that any losses fall first on the shareholders and any benefits come first to us. And any support we provide will be on terms that are as penal as we can make them, without precipitating the collapse we are trying to avoid.
Third, we aim to provide liquidity: we will not, in normal circumstances, support a bank that we know at the time to be insolvent. Our own capital is not there to be used as risk capital. But it would be wrong to conclude from this that loans or guarantees never involve any risk…
Fourth, we look for a clear exit. The company may be required to run down or restructure its operations, under our surveillance, to the point where it can do without our support within a given period. Making the terms of our support as unattractive as possible has the great advantage of encouraging this process… We aim to protect the system, not to keep in being unviable banking capacity and so interfere in the market process unnecessarily."
Assistance from the Bank of England and the Treasury was given in stages and took different forms. The assistance was not given for the purpose of rescuing Northern Rock as an end in itself, but for the protection of the banking system as a whole. Liquidity support was first given on 14 September 2007. The Treasury press announcement contained the statement that "The FSA judges that Northern Rock is solvent, exceeds its regulatory capital requirement and has a good quality loan book". This is consistent with the third principle in the Governor's lecture. Three days later the Chancellor of the Exchequer announced that the government would guarantee existing deposits in Northern Rock. The guarantee was extended in the following month to cover new retail deposits. The guarantee was paid for by a fee charged to Northern Rock. The guarantee was subsequently extended again to cover certain unsubordinated wholesale obligations. Ultimately it covered all unsecured retail products, all uncollateralised and unsubordinated wholesale products and wholesale borrowings, all payment obligations under uncollateralized derivative transactions and (to a limited extent) all collateralised derivatives and collateralised wholesale borrowings (including covered bonds). By 31 December 2007 the Bank of England had lent almost £27 billion to Northern Rock, and the Treasury had assumed contingent liabilities under guarantees to the tune of about £29 billion. These loans were secured in various ways.
Since the assistance was coming from the state, EU rules about state aid came into play. The European Commission has issued Community Guidelines on State Aid for Rescuing and Restructuring Firms in Difficulty ( 2004/C 244/02). They point out that rescue aid is by nature temporary and reversible assistance. Rescue aid must be limited to the minimum necessary for a period not exceeding six months. The aid must consist of reversible liquidity support in the form of loan guarantees and loans at a proper interest rate (§ 15). The guidelines go on to set out the criteria that must be satisfied in order for the Commission to approve the rescue aid (§ 25). These criteria include:
i) The aid must consist of liquidity support in the form of loan guarantees or loans at a proper interest rate. Any loan must be reimbursed and any guarantee must come to an end within a period of six months...
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