R (SRM Global Master Fund LP) v Treasury Commissioners

The Court of Appeal dismissed the appellants' challenge under Article 1 of Protocol 1 (A1P1) to the statutory compensation scheme established by the Banking (Special Provisions) Act 2008 and attendant secondary legislation for the nationalisation of Northern Rock. The court held that the assumptions mandated by s.5(4) of the 2008 Act and the Compensation Scheme Order (notably the assumed withdrawal of Bank of England and Treasury assistance and assumptions about insolvency/administration) were lawful. The court applied the established Convention principles: (i) the need to strike a fair balance between the general interest and protection of property, (ii) proportionality, and (iii) the margin of appreciation, concluding the margin was wide in this macro-economic context.

Key legal grounds: (a) the statutory assumptions were intended to put shareholders in the position they would have occupied had no public financial support been provided and were consistent with the objectives of lender-of-last-resort policy and avoidance of moral hazard; (b) the court would only interfere if the State's judgment was manifestly without reasonable foundation, which was not shown; (c) procedural safeguards existed (appointment of an independent valuer, reconsideration and tribunal routes and judicial review) so no procedural impropriety under A1P1 arose.

The appellants, who were shareholders in Northern Rock plc, sought declarations under s.4 of the Human Rights Act 1998 (alternatively quashing orders) that the compensation regime created under the Banking (Special Provisions) Act 2008 and the Northern Rock plc Compensation Scheme Order 2008 (the statutory scheme) was incompatible with their rights under Article 1 of the First Protocol to the European Convention on Human Rights (A1P1). They argued that the assumptions required by s.5(4) of the 2008 Act (notably an assumption that all Bank of England and Treasury financial assistance had been withdrawn and that no future assistance would be given) and further assumptions in the Compensation Scheme Order would produce a ‘fire-sale’ valuation leaving shareholders with nothing, which was disproportionate and contrary to A1P1.

Background and procedural posture

• Nature of the claim: declaratory relief under s.4 HRA and alternative quashing orders challenging the assessment basis for compensation following nationalisation of Northern Rock on 22 February 2008; appellants sought to show incompatibility with A1P1.
• Path to this court: the claim was dismissed by the Divisional Court (Stanley Burnton LJ and Silber J) ([2009] EWHC Admin 227); the appellants obtained permission to appeal to the Court of Appeal.
• Relevant statutory framework: Banking (Special Provisions) Act 2008 (sections 2, 3, 5 and related provisions); Northern Rock plc Transfer Order 2008; Northern Rock plc Compensation Scheme Order 2008 (paragraphs 3(2), 6, 7(1), 10(1) etc.).

Issues framed by the Court

1. The principal issue: whether the s.5(4) assumptions and related assumptions unlawfully deprived the shareholders of their possessions contrary to A1P1 by producing no or derisory compensation.
2. The regulatory issue: whether alleged regulatory failures by authorities (Bank of England, FSA) should affect the fairness of the compensation terms.
3. The procedural issue: whether the scheme denied procedural safeguards required by A1P1 (independent determination of the merits) because the valuer was bound by statutory assumptions.

Reasoning and conclusions

• The court reviewed Strasbourg and domestic authority establishing the three governing principles: fair balance between general interest and private right, proportionality, and the margin of appreciation. It explained that in a matter of macro-economic policy and nationalisation the margin of appreciation is wide and interference is appropriate only if the State's judgment is manifestly without reasonable foundation.
• On the principal issue the court held the statutory assumptions were intended to place shareholders in the position they would have been in had no public financial support been provided. That objective was consistent with lender-of-last-resort policy, the avoidance of moral hazard, and the statutory purposes in s.2(2) of the 2008 Act. The court rejected the contention that the government was motivated by profit or that the support involved no risk such as would make the assumptions disproportionate.
• On the regulatory issue the court accepted the Divisional Court’s reasoning that primary responsibility for Northern Rock’s problems lay with management and shareholders, that regulatory failures (if any) did not establish a legal entitlement affecting compensation terms, and that any alleged regulatory shortcomings did not demonstrate that the statutory scheme was manifestly without reasonable foundation.
• On the procedural issue the court held that procedural fairness was provided by the scheme (independent valuer, reconsideration, referral to the Financial Services and Markets Tribunal) together with judicial review to challenge the assumptions themselves; the valuer need not examine or displace policy assumptions.

The Court of Appeal therefore dismissed the appeal.

Appeal dismissed. The Court held that the statutory assumptions in s.5(4) of the Banking (Special Provisions) Act 2008 and the related assumptions in the Compensation Scheme Order were lawful and fell within the State’s wide margin of appreciation in this macro-economic, nationalisation context. The assumptions reflected the legitimate parliamentary objective of excluding value attributable to public lender-of-last-resort support so as to avoid moral hazard; they were not manifestly without reasonable foundation. Procedural safeguards (independent valuer, reconsideration, tribunal and judicial review) were adequate.

The claims were first heard by the Divisional Court (Stanley Burnton LJ and Silber J) which dismissed them ([2009] EWHC Admin 227) on 13 February 2009. The appellants were granted permission to appeal to the Court of Appeal, which delivered this judgment on 28 July 2009 ([2009] EWCA Civ 788).