SRM Global Master Fund LP & Ors v HM Treasury

Compensation for property taken by the state must strike a fair balance between the public interest and the protection of individual rights. Although compensation should ordinarily bear a reasonable relationship to the property's value, full market value is not invariably required.

Where nationalisation forms part of macro-economic policy, the legislature enjoys a wide margin of appreciation. Its choice of compensation terms will comply with Article 1 of the First Protocol unless manifestly without reasonable foundation. Compensation may exclude value attributable to discretionary public financial support where that support protected the financial system rather than shareholders and conferring the resulting value on them would undermine the support policy.

The appellants were former shareholders of Northern Rock plc. They challenged the statutory assumptions governing compensation after the bank's nationalisation. Those assumptions required valuation on the basis that exceptional financial assistance from the Bank of England and the Treasury had been withdrawn and would not be renewed.

The Divisional Court, Stanley Burnton LJ and Silber J, dismissed the claims for judicial review in [2009] EWHC Admin 227. The shareholders appealed, seeking declarations of incompatibility under section 4 of the Human Rights Act 1998, or equivalent relief against the secondary legislation.

The principal issue was whether the valuation assumptions violated Article 1 of the First Protocol. Further issues concerned alleged regulatory failures and whether the valuation scheme supplied the procedural safeguards required by the Convention.

1. The appeals were dismissed unanimously. Laws LJ delivered the judgment, with which Waller LJ and the Master of the Rolls agreed.

2. Article 1 of the First Protocol requires a fair balance between the community's general interest and the protection of individual rights. Proportionality and the state's margin of appreciation are the means by which that balance is struck. Compensation will ordinarily need to bear a reasonable relationship to the property's value, but full market value is not invariably required.

3. The nationalisation and compensation scheme arose from macro-economic policy directed to protecting the banking system and national economy. The state therefore enjoyed a wide margin of appreciation. As in James and Lithgow, the court could intervene only if the legislature's judgment was manifestly without reasonable foundation.

4. The exceptional lender-of-last-resort assistance was supplied solely to protect the financial system, not Northern Rock or its shareholders. It was selective, temporary, penal and directed towards a clear exit. Parliament was entitled to adopt compensation terms which preserved that policy and avoided moral hazard. The assumptions in section 5(4) of the Banking (Special Provisions) Act 2008 correctly placed shareholders in the position they would have occupied had the exceptional assistance not been provided.

5. A nil valuation would result only if Northern Rock was shown to be worthless without public support. The assumptions did not compel that result. Residual asset value, including any premium attributable to the quality of the mortgage book, remained capable of valuation. The compensation scheme was not a charade and was not manifestly without reasonable foundation.

6. Alleged regulatory failures did not alter the balance. Primary responsibility lay with Northern Rock's management; no relevant duty was owed to shareholders; later purchasers had acquired their shares after the alleged loss; and causation was not demonstrated.

7. The procedural requirement inherent in Article 1 of the First Protocol was satisfied. Judicial review supplied a court with full jurisdiction to determine challenges to the legality of the statutory policy. Within that policy, the independent valuer could determine all relevant factual valuation issues. The valuer was not required to reconsider the merits of the assumptions themselves.

1. Court of Appeal (Civil Division): The court unanimously dismissed the appeal and affirmed the dismissal of the judicial review claims: [2009] EWCA Civ 788.
2. High Court, Divisional Court: Stanley Burnton LJ and Silber J dismissed the shareholders' claims challenging the statutory compensation assumptions: [2009] EWHC Admin 227.