Harbinger Capital Partners v Caldwell (As the Independent Valuer of Northern Rock Plc) & Anor (Rev 1)

The Court of Appeal considered the correct interpretation of the statutory valuation hypothesis in section 5(4)(a) of the Banking (Special Provisions) Act 2008 and the related scheme provisions governing compensation on the nationalisation of Northern Rock. The decisive question was whether the statutory assumption that "all financial assistance ... has been withdrawn (whether by the making of a demand for repayment or otherwise)" required the valuer to assume only that a demand for repayment had been made or whether it required the assumption that the assistance had in fact been repaid and consequently that Northern Rock had realised assets to effect repayment.

The majority (Mummery and Beatson LJJ) held that the ordinary meaning of "withdrawn" in the context of the package of financial assistance encompassed the assumption that the assistance had been brought to an end as at the valuation date, which in the case of money lent required treating the loans as repaid and therefore the notional realisation of assets to effect repayment. They relied on established principles about the effect of statutory hypotheses (East End Dwellings) and held that the assumption should be given the inevitable consequences required to put the valuer in the hypothesised position. The majority also rejected arguments based on EU state aid rules and Article 1 of Protocol 1 ECHR that would require a narrower construction.

Lewison LJ dissented, applying the "reality principle" of valuation: departures from reality should be no greater than the hypothesis strictly requires. He would have held that the statute required assuming that a demand for repayment had been made (so that assistance was withdrawn as a matter of assent) but did not compel the further counterfactual assumptions that loans had been repaid or assets realised before the valuation date.

Background and nature of the claim:

• On 22 February 2008 Northern Rock was taken into public ownership under emergency legislation. The Banking (Special Provisions) Act 2008 required the Treasury to make a compensation scheme. The valuer appointed under the scheme (Mr Caldwell) assessed the value of Northern Rock's shares at nil by applying assumptions in section 5(4) of the Act and related scheme provisions.
• Harbinger Capital Partners (a shareholder) challenged the valuer's approach before the Upper Tribunal; the Tribunal upheld the valuer. The matter was appealed to the Court of Appeal, which had to decide the proper meaning and legal effect of the Withdrawal Assumption in section 5(4)(a).

Issues framed by the court:

• What does the phrase in section 5(4)(a) that "all financial assistance ... has been withdrawn (whether by the making of a demand for repayment or otherwise)" require the valuer to assume as at the valuation/transfer date?
• Does the assumption require only that a demand for repayment be treated as having been made (the "Demand Interpretation"), or does it require treating the assistance as actually repaid and therefore the notional realisation of assets to effect repayment (the "Repayment Interpretation")? Alternatively, should repayment be assumed to be effected by an in-specie transfer at book value (the "Repayment-in-Kind Interpretation")?
• How do valuation principles (the reality principle and the law about statutory hypotheses), EU state aid considerations and Article 1 of Protocol 1 ECHR bear on interpretation?

Court’s reasoning (concise):

• Majority view (Mummery and Beatson LJJ): the ordinary meaning of "withdrawn" in the context of the statutory package of financial assistance is that the assistance must be assumed to have been brought to an end as at the valuation date. For assistance given by way of loans repayable on demand, that entails assuming repayment on the valuation date and the notional realisation of assets to make that repayment. The majority relied on the established doctrine that, when a statute requires assuming a factual state of affairs, inevitable corollaries of that state must also be assumed (East End Dwellings). The majority held this interpretation was consistent with the domestic legislative purpose, EU state aid considerations and ECHR principles, and that it best ensured shareholders were not compensated for value dependent on taxpayer support.
• Dissent (Lewison LJ): the "reality principle" governs interpretation and application of valuation hypotheses; departures from reality should be no greater than the statute strictly requires. Section 5(4)(a) authorises assuming the assistance had been withdrawn by a demand for repayment, but does not clearly require the further counterfactual steps of assuming repayment and pre-valuation realisation of assets. Those consequential assumptions are not compelled by the statutory words and offend the reality principle; a valuer should instead assess what a hypothetical purchaser would perceive at the valuation date, taking into account real facts and policies (for example, the Bank of England’s recovery practices).

Remedy and outcome of proceedings: The Court of Appeal, by majority, dismissed the appeal. The valuer’s approach and the Upper Tribunal’s decision were therefore upheld; Harbinger’s alternative constructions were rejected.

Appeal dismissed. By majority the Court held that the Withdrawal Assumption in section 5(4)(a) of the Banking (Special Provisions) Act 2008 must be given its ordinary meaning such that, for financial assistance by way of loans, the assistance is to be treated as brought to an end as at the valuation date — which entails assuming repayment and, as a consequence, realisation of assets to effect repayment. Lewison LJ dissented, favouring a narrower construction under which only a demand for repayment need be assumed and further counter-factual assumptions were not compelled by the statute.

Appeal from the Upper Tribunal (Tax and Chancery Chamber), whose decision is reported at [2011] UKUT 408 (TCC). The present judgment is the Court of Appeal decision in [2013] EWCA Civ 492.