R (SRM Global Master Fund LP) v Commissioners of HM Treasury
| Jurisdiction | England & Wales |
| Judge | Lord Justice Laws,Lord Justice Waller,The Master of the Rolls |
| Judgment Date | 28 July 2009 |
| Neutral Citation | [2009] EWCA Civ 788 |
| Docket Number | Case No: C1/2009/0453, C1/2009/0446 & C1/2009/0469 |
| Court | Court of Appeal (Civil Division) |
| Date | 28 July 2009 |
[2009] EWCA Civ 788
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION, DIVISIONAL COURT
Stanley Burnton LJ and Silber J
CO/4342/2008, CO/4715/2008 & CO/4351/2008
The Master of the Rolls
Lord Justice Waller and
Lord Justice Laws
Case No: C1/2009/0453, C1/2009/0446 & C1/2009/0469
Lord Pannick QC, Mr Matthew Collings QC and Ms Claire Weir (instructed by White & Case) for the 1st Appellant
Mr Michael Beloff QC, Mr David Wolfson QC and Mr Iain Steele (instructed by Nabarro LLP) for the 2nd Appellant
Mr Thomas de la Mare (instructed by Nabarro LLP) for the 3rd Appellant
Mr Jonathan Sumption QC, Mr Clive Lewis QC, Mr Javan Herberg and Mr Paul Nicholls (instructed by Slaughter and May)
Hearing dates: 10–12 June 2009
INTRODUCTION
This is an appeal, with permission granted by the court below, against the decision of the Divisional Court (Stanley Burnton LJ and Silber J [2009] EWHC Admin 227), given on 13 February 2009, by which the court dismissed the appellants' claims for judicial review of the basis of assessment on which compensation would be payable to them as former shareholders of Northern Rock plc (“Northern Rock”) following its nationalisation in February 2008. The basis of assessment is provided for by a statutory scheme made under the Banking (Special Provisions) Act 2008 (“the 2008 Act”) which I will describe in due course. The appellants' general case is that the scheme perpetrates a violation of their rights guaranteed by Article 1 of the First Protocol to the European Convention on Human Rights (“A1P1”), which guarantees the protection of private property. The appellants say that under the scheme they will get nothing or virtually nothing for their shares which in truth, however, were valuable assets. Their claim is for a declaration under s.4 of the Human Rights Act 1998 (“the HRA”) to the effect that the material terms of the 2008 Act are incompatible with their Convention rights; and a like declaration (alternatively a quashing order) in relation to the material provisions of the attendant secondary legislation.
THE HISTORY
The Divisional Court's judgment contains a relatively full account of the facts. However the following further description of the history is intended to point up aspects which seem to me to be important for the issues we must decide. The narrative owes a good deal (but not everything) to the witness statement of Mr John Kingman, Second Permanent Secretary at the Treasury, which is careful and comprehensive. It will be convenient to make certain further observations about the facts in dealing with counsel's individual submissions.
(1) The Appellants
The appellants were, as I have indicated, all shareholders in Northern Rock. The first appellant is an investment (or hedge) fund incorported in the Cayman Islands. As a result of transactions between 14 September 2007 and 12 February 2008 (dates whose significance will appear) 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 appellant 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 appellants are representative of small shareholders. Some of these acquired their shares on demutualisation; others are or were employees who acquired theirs 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 bought their shares on the stock exchange. Three of them purchased shares after 14 September 2007. At the date of nationalisation there were some 150,000 small shareholders.
(2) The Background
Northern Rock used to be a building society, mainly based in the north east of England. In 1997 it was “demutualised”, converted into a public limited company, 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. Unlike most banks in the United Kingdom Northern Rock financed a large part of its loan book by borrowing money on the wholesale money market. This allowed the company to achieve high levels of growth; but from about late July 2007 global financial markets became severely disrupted, and one consequence was that banks' ability to raise funds from the wholesale money markets was greatly constrained. The difficulties had begun to arise earlier in the year. By August 2007 the wholesale money markets had largely closed down. The disruption's causes lie outside the scope of this litigation, and ultimately cast no light on the issues we have to resolve. Very briefly, as Mr Kingman says at paragraph 27 of his statement (and as is well known), “the disruption was caused in part by concerns about the value of financial products which had been created based on mortgage loans made in the sub-prime sector of the US housing market.”
Northern Rock was particularly affected by the disruption because of its dependence on the wholesale money markets. By August 2007 its liquidity problems had become critical. Philip Price, Chief Operating Officer of the first appellant, said in his first witness statement:
“45. The result of the credit squeeze in the UK was that inter-bank and wholesale markets effectively froze; inter-bank lending stopped very suddenly and left banks, such as Northern Rock (which depended upon the availability of such funding), unable to find liquidity from their usual sources in the wholesale markets.”
Northern Rock's assets – as the appellants are at pains to emphasise – were substantial, certainly exceeding its liabilities. Its mortgage loan-book was sound. It was solvent in balance sheet terms. But it was unable to meet its debts as and when they fell due. Unless it obtained a large injection of funds it would almost certainly be put into some form of insolvency procedure and there would be a “fire sale” liquidation of its assets. On 13 August 2007 Northern Rock alerted the Financial Services Authority (“FSA”) to its liquidity problems.
(3) The Tripartite Authorities: “LOLR”
The Treasury, the Bank of England and the FSA are together known as the Tripartite Authorities. The FSA has regulatory functions under the Financial Services and Markets Act 2000. The Bank of England is of course the UK central bank. As the Divisional Court said, it is the “bankers' bank”. In certain circumstances it may provide financial assistance as what is called “Lender of Last Resort”. Assistance of this kind is known in banking circles, and has been referred to in this litigation, by the acronym LOLR. The precise purposes of LOLR, and the conditions under which it may be made available, are of great importance for the issues in this appeal.
A decision to provide LOLR is made under procedures set out in a Memorandum of Understanding (“MoU”) between the Tripartite Authorities. The MoU provides:
“14. In exceptional circumstances, there may be a need for an operation which goes beyond the Bank's published framework for operations in the money market. Such a support operation is expected to happen very rarely and would normally only be undertaken in the case of a genuine threat to the stability of the financial system to avoid a serious disturbance in the UK economy. If the Bank or the FSA identified a situation where such a support operation might become necessary, they would immediately inform the other authorities and invoke the co-ordination framework outlined in paragraph 16 below. Ultimate responsibility for authorisation of support operations in exceptional circumstances rests with the Chancellor. Thereafter they would keep the Treasury informed about the developing situation, as far as circumstances allowed.
15. In any such exceptional circumstances, the authorities' main aim would be to reduce the risk of a serious problem causing wider financial or economic disruption. In acting to do this, they would seek to minimise both moral hazard in the private sector and financial risk to the taxpayer arising from any support operation.”
The principles on which LOLR is provided by the Bank of England are further explained in a well-known lecture given at the London School of Economics in 1993 by the then Governor of the Bank, Mr Eddie (later Lord) George, entitled “The pursuit of financial stability” (the second LSE Bank of England lecture). I must set out substantial extracts:
“The phrase itself [sc. Lender of Last Resort – LOLR] is liable to cause confusion, so let me first clarify what it does not mean. As I have explained already, we do not see it as our job to prevent each and every bank from failing. The possibility of failure is necessary to the health of the financial system, as it is to the efficiency of all other economic activity. If I can quote Bagehot again: 'Any aid to a present bad bank is the surest mode of preventing the establishment of a future good bank'…
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