R (SRM Global Master Fund LP) v Commissioners of HM Treasury
| Jurisdiction | England & Wales |
| Judge | Lord Justice Stanley Burnton |
| Judgment Date | 13 February 2009 |
| Neutral Citation | [2009] EWHC 227 (Admin) |
| Date | 13 February 2009 |
| Court | Queen's Bench Division (Administrative Court) |
| Docket Number | Case No: CO/4342/4715/4351/2008 |
[2009] EWHC 227 (Admin)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
DIVISIONAL COURT
Lord Justice Stanley Burnton
Mr Justice Silber
Case No: CO/4342/4715/4351/2008
Lord Pannick QC, Matthew Collings QC and Claire Weir (instructed by White & Case LLP) for the First Claimants
Michael Beloff QC, David Wolfson and Iain Steele (instructed by Nabarro LLP) for the Second Claimants
Thomas de la Mare (instructed by Edwin Coe LLP) for Dennis Grainger and others
Ben Jaffey (instructed by Legal & General Group Plc Legal Department) for the Interested Party
Lord Grabiner QC, Clive Lewis QC, Javan Herberg and Paul Nicholls
(instructed by Slaughter and May) for the Defendants
Hearing dates: 13, 14 & 15 January 2009
Lord Justice Stanley Burnton:
This is the judgment of the Court to which both members of the Court have contributed.
I. Introduction
In these proceedings the Claimants challenge the compatibility of the legislation relating to the assessment of compensation payable to them as former shareholders of Northern Rock plc following its nationalisation in February 2008. They contend that the provisions of the legislation concerning the assessment of their compensation are unfair and incompatible with their rights under Article 1 of the First Protocol to the European Convention on Human Rights (“A1P1”). The Defendants, the Commissioners of Her Majesty's Treasury, in effect the Government, contend that the provisions of the legislation are fair and compatible with the Convention.
Prior to its nationalisation, the Bank of England (“the Bank”) had lent over £20 billion to Northern Rock and these sums were repayable on demand. Additional financial support had been provided by the Treasury. As will be seen, the legislation requires a valuer to value Northern Rock's shares on the assumptions that all financial assistance provided by the Bank and the Treasury had been withdrawn and that no financial assistance would be provided in the future by the Bank, and that it was not, at the relevant date, a going concern. The Defendants say that this was fair and appropriate in the circumstances. The Claimants' case is that this basis of valuation was unfair: Northern Rock was, at the date of nationalisation, in fact a going concern, with a strong mortgage book and 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 had provided and was providing to the company. Effectively, the legislative provisions deprive the shareholders of Northern Rock of that profit.
The Claimants do not challenge the decision to nationalise Northern Rock itself: their challenge relates to the provisions of the compensation scheme. Conversely, the Defendants do not contend that they or the Bank were precluded from giving financial assistance to Northern Rock by the provisions of the EC Treaty relating to State aid. The issue to be determined is the compatibility of the statutory compensation scheme with the Claimants' rights under AIP1.
The structure of our judgment is as follows. This introduction is section I. Having described the parties involved in these proceedings in section II, in section III we explain the meaning of solvency, an important concept to understand because Northern Rock was described as solvent while it was receiving public financial support until the date of its nationalisation. In section IV we set out the principles applicable to the Bank of England's role as Lender of Last Resort. Central to the issues we have to determine are the circumstances and the facts relating to the public financial support given to Northern Rock, and in section V we provide a chronology of the events leading to the decision to nationalise it. The legislation under which the company was nationalised and provision made for compensation to be determined and paid to its shareholders is summarised in section VI. The contentions of the parties are summarised in section VII. We set out A1P1 and summarise the jurisprudence of the European Court of Human Rights in section VIII. In our judgment, the essential facts on which the resolution of the issues in these proceedings depends are relatively few. We set them out in section IX. We discuss the contentions of the parties and set out our conclusions in section X, under the following headings:
(a) The position apart from the issues of (b) regulatory failure, (c) a legitimate of reasonable expectation of public financial support, (d) the Treasury's reward and profit, (e) the Tripartite Authorities treatment of other banks and (f) the procedural requirements of A1P1.
(b) The allegations of regulatory failure.
(c) Legitimate or reasonable expectation of public financial support.
(d) The allegations concerning the “subsidy” said to have been provided to Northern Rock and that the Treasury is seeking to make a profit out of nationalisation.
(e) The contention that the Government's support given to other banks shows that the compensation scheme is unfair.
(f) The submission that the compensation scheme does not satisfy the procedural requirements of A1P1.
Our final conclusion is shortly set out in section XI.
II. The parties involved
Northern Rock plc
Northern Rock was originally a building society. In 1997 it was converted into a public limited company, listed on the London Stock Exchange and authorised to carry on business as a bank under the Banking Act 1987. On its demutualisation, shares were issued to its existing depositors. Its core business remained residential mortgage lending. It grew to become the fifth largest UK mortgage lender and the eighth largest UK bank by market capitalisation. The events leading to its nationalisation are referred to below.
The parties to these proceedings
The First Claimant, SRM Global Master Fund LP (“SRM”) is an investment (or hedge) fund based in the Cayman Islands. As a result of transactions between 14 September 2007 (which was the date when the Bank issued a statement that it had provided “a liquidity support facility” to Northern Rock) and 12 February 2008 it became the largest shareholder in Northern Rock, with 48,452,655 shares, amounting to 11.5% of the issued ordinary share capital.
The Second Claimant, RAB Special Situations (Master) Fund Ltd (“RAB”) is also an investment company incorporated in the Cayman Islands. It acquired its shares in Northern Rock by transactions between 19 September 2007 and 14 February 2008. By the date of Northern Rock's nationalisation, it owned 34,444,299 shares, amounting to 8.18% of the issued ordinary share capital.
The Third Claimants are representative small shareholders of Northern Rock. Some acquired their shares on demutualisation; others are or were employees who acquired their shares under an approved profit share scheme or share incentive plan, or other incentive schemes, or by contributions to the company pension fund. Others were small investors who purchased their shares on the stock exchange. Three of the small group of representative shareholders had purchased shares after the Bank had issued the statement on 14 September 2007 that it had provided financial support to Northern Rock. At the date of nationalisation there were some 150,000 small shareholders.
At the date of nationalisation, the Interested Party, Legal & General, held over 18 million shares in Northern Rock, amounting to about 4.3 per cent of the issued share capital. Most of the shares were the assets of pension funds and unit trusts, and were long term investments.
The Defendants, the Commissioners of Her Majesty's Treasury, may be regarded as the representatives of central government for the purposes of these proceedings.
The Tripartite Authorities
Under the Financial Services and Markets Act 2000, as a bank Northern Rock was regulated by the Financial Services Authority. As the regulator, the FSA was responsible for Northern Rock's authorisation and supervision. The statutory regulatory objectives of the FSA are:
(a) market confidence;
(b) public awareness;
(c) the protection of consumers;
(d) the reduction of financial crime.
See section 2 of the Financial Services and Markets Act 2000.
The Bank of England, as the UK central bank, is the bankers' bank. It is the Lender of Last Resort; and the financial assistance it provides as Lender of Last Resort is referred to as LOLR. The Bank's functions include “ensuring the stability of the monetary system as part of its monetary policy functions. It acts in the markets to deal with fluctuations in liquidity”.
The Treasury is responsible for:
“i. The overall institutional structure of financial regulation and the legislation which governs it …
ii. informing, and accounting to Parliament for the management of serious problems in the financial system and any measures used to resolve them, including any Treasury decision concerning exceptional official operations …
iii. accounting for financial sector resilience to operational disruption within government.”
Cooperation between the Treasury, the Bank of England and the FSA is the subject of a Memorandum of Understanding, from which the quotations in the preceding paragraphs have been taken. Under...
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