SRM Global Master Fund Lp & Ors, R. (On the Applications of) v The Commissioners of Her Majesty's Treasury

Compensation for property taken by the state may be assessed by an independent valuer on statutory assumptions, provided the resulting valuation is fair in all the circumstances. A valuation may properly exclude value created solely by public financial assistance where the owner had no enforceable right to that assistance or its continuation.

A purely factual expectation that public support will continue does not increase compensation without a corresponding legal duty. A legitimate expectation requires a clear and unambiguous representation, a sufficiently defined obligation, and a duty owed to the claimant.

Under A1P1, the court must review whether a fair balance has been struck. In economic matters, legislation will be upheld unless manifestly without reasonable foundation.

The claimants were former shareholders in Northern Rock plc. They sought judicial review of the statutory basis for assessing compensation after Northern Rock was transferred into temporary public ownership.

The Banking (Special Provisions) Act 2008 required the valuer to assume that financial assistance from the Bank of England and the Treasury had been withdrawn and would not be provided in future. The Northern Rock plc Compensation Scheme Order 2008 added assumptions that Northern Rock could not continue as a going concern and was in administration.

The claimants argued that those assumptions were incompatible with A1P1 because Northern Rock was balance-sheet solvent, had received extensive public support, and might have generated future value. They also relied on alleged regulatory failure, legitimate or reasonable expectations of continued support, the Government’s possible profit, treatment of other banks, and procedural fairness.

1. The claims were dismissed. The statutory assumptions did not produce compensation that was incompatible with A1P1. The challenge was to the compensation basis, not to the lawfulness or purpose of nationalisation.
2. Fairness required the valuation to reflect the relevant facts and legal obligations. Northern Rock was cash-flow insolvent, could not continue without public support, and had no contractual or other enforceable right to that support. The Bank of England’s loans were repayable on demand. Continued support was therefore precarious and could fairly be excluded from the valuation.
3. The shareholders were not entitled to compensation for value created or enhanced by public financial assistance. The Government’s possible future profit did not alter the fair value at the vesting date, since the taxpayer bore the risk of future loss and could receive future benefits.
4. The claimants established no legitimate expectation of continued support. A legitimate expectation required a clear and unequivocal representation, a sufficiently defined obligation, and a duty owed to the claimants. There was no such representation. A reasonable expectation, understood as a purely factual expectation, could not increase compensation in the absence of a legal duty.
5. Any regulatory failure did not assist the claimants. The regulators’ duties protected depositors and the financial system, not shareholders. In any event, the relevant loss of value had occurred before later purchasers acquired their shares, and no causal basis showed that Northern Rock would have survived without public support.
6. The procedural requirements of A1P1 did not require the valuer to reconsider the statutory policy assumptions. The relevant facts were undisputed; the exclusion of public support was a policy choice. The Compensation Scheme was not manifestly without reasonable foundation and did not impose an individual and excessive burden.