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

Where legislation requires financial assistance to be assumed to have been withdrawn on a specified valuation date, assistance given as a loan must be treated as repaid on that date. A demand for repayment merely begins the withdrawal process and does not end the borrower’s continuing use and benefit of the money.

The hypothesis therefore entails the realisation of sufficient assets to make repayment. The reality principle preserves actual circumstances only outside the statutory assumption; it cannot narrow the counterfactual state of affairs which Parliament requires. Excluding value attributable to continuing taxpayer support when assessing compensation for nationalised shares is compatible with the right to peaceful enjoyment of possessions.

Northern Rock plc was transferred into public ownership under the Banking (Special Provisions) Act 2008. Its compensation scheme required an independent valuer to value the shares immediately before transfer while assuming that public financial assistance had been withdrawn and would not be provided in future.

The valuer treated the outstanding Bank of England loans as repaid on the valuation date and assumed that Northern Rock had realised sufficient assets to repay them. This converted its balance-sheet surplus into a deficit, and the shares were valued at nil. Harbinger Capital Partners, which had an interest in preference shares, challenged that interpretation. The Upper Tribunal rejected the challenge in [2011] UKUT 408 (TCC).

The central issue on appeal was whether section 5(4)(a) required completed repayment of the financial assistance or merely a demand for repayment.

1. Appeal dismissed by a majority. Mummery and Beatson LJJ held that the valuer and Upper Tribunal correctly adopted the repayment interpretation of section 5(4)(a) of the Banking (Special Provisions) Act 2008. Lewison LJ dissented.

2. The statutory words required a completed state of affairs on the valuation date. In the case of money advanced by loan, financial assistance continued while Northern Rock retained the money’s use and benefit. A demand for repayment was only the first step towards withdrawal. The parenthetical reference to withdrawal by demand concerned the mechanics applicable to different forms of assistance; it did not make an unfulfilled demand equivalent to completed withdrawal.

3. The assumed withdrawal consequently required the loans to be treated as repaid on the valuation date. Repayment necessarily entailed treating Northern Rock as having realised sufficient assets on that date. This gave effect to the statutory purpose of excluding from compensation any share value dependent upon taxpayer support and was consistent with the assumption that no future assistance would be provided.

4. The reality principle did not narrow the statutory hypothesis. It required adherence to reality only on matters outside the hypothesis. Once section 5(4)(a) was construed as requiring repayment, the necessary counterfactual consequences of repayment also had to be assumed.

5. The repayment interpretation was compatible with article 1 of the First Protocol. A state has a wide margin in fixing compensation for nationalised property, and full compensation is not invariably required. Excluding value attributable to continued use of government funds was not manifestly without reasonable foundation.

6. Lewison LJ would have allowed the appeal and remitted the valuation. He considered that assistance by an on-demand loan was withdrawn when repayment was demanded, and that neither actual repayment nor a pre-valuation realisation of assets was an inevitable consequence. The majority rejected that construction, so the Upper Tribunal’s decision and the nil valuation stood.

1. Court of Appeal (Civil Division): By a majority, dismissed the appeal and upheld the repayment interpretation adopted below: [2013] EWCA Civ 492 .
2. Upper Tribunal (Tax and Chancery Chamber): Rejected Harbinger’s challenge and held that the valuer correctly interpreted section 5(4)(a) of the Banking (Special Provisions) Act 2008: [2011] UKUT 408 (TCC).