Northern Rock investors lose court case

The shareholders claimed the Government deliberately set out to make a profit from its nationalisation of the bank at their expense.

They alleged that a shareholder compensation scheme introduced by statute when Northern Rock was taken over last February was based on false criteria which would lead to shares being valued at, if anything, little more than zero so the Government would inevitably make a profit when the bank was eventually sold off.

Shareholders sought a declaration that the compensation provisions were incompatible with the human rights principle that the taking of property by the state must be balanced by compensation reasonably related to the value of that property.

But Lord Justice Stanley Burnton, sitting in London with Mr Justice Silber, said today: "We have come to the conclusion that the provisions made for the compensation of the shareholders of Northern Rock do not infringe their rights."

The case was brought by two major investors, SRM Global and RAB Capital, and around 150,000 private shareholders who held as much as 25% of the company's shares.

The private shareholders, including former and existing Northern Rock employees, were backed by the UK Shareholders Association.

The shareholders were granted permission to appeal.

Government lawyers had argued that the Treasury and the Bank of England provided substantial financial assistance to Northern Rock - £27 billion in loans and a £29 billion guarantee fund - without which it would have gone into liquidation.

Therefore, they contended, the shares should be valued on the basis of what they would have been worth without the financial assistance.

Dismissing the claim for judicial review, the judges said: "We have some sympathy for the position of the former long-term shareholders of Northern Rock, who doubtless believed they had an investment in a reliable bank.

"Ultimately, however, they entrusted their investment to the hands of the management of the company.

"As it turned out, their business plan was flawed and could not survive the unprecedented circumstances of the latter part of 2007.

"In our judgment ... none of the former shareholders has any justifiable claim against the defendant (the Treasury) beyond their entitlement under the compensation scheme."

Northern Rock's assets, as valued and stated in its balance sheet, exceeded its liabilities.

But, because of the impossibility of borrowing money in the wholesale financial markets in the midst of international turbulence, it did not have the liquid funds to meet its current liabilities and repay depositors, and so could not pay its debts as they fell due.

In their judgment, the judges said that, as at September 13 2007, no public announcement had been made about the financial support to be provided to the bank.

However, it was now a "notorious" fact that the bank's plea for support was leaked to the BBC, leading to a run on the bank. In four days, £4.45 billion of retail deposits (nearly 20% of the total) were withdrawn.

The judges said the loans and guarantees provided for Northern Rock were "not gratuitous" - premium rates of interest and fees were payable.

The loans were repayable on demand - if repayment had been demanded before nationalisation, the bank would have been rendered insolvent.

The Bank of England was the only source of support because no private funding was available.

And Northern Rock had no contractual or other private enforceable right to that support or to its continuation.

Fairness required that the valuation of the shares reflected these relevant facts, the judges said.

The court saw nothing unfair in the compensation scheme, requiring the Treasury to pay compensation on the same basis that it could fairly have paid in September 2007, rather than on the basis of a value enhanced by public funding unavailable elsewhere.

The judges sympathised with the bank's small shareholders, particularly those whose shares formed part of their pension funding.

"However, all shareholders, large or small, professional or private, are investors in the fortunes of the company the shares of which they hold, and the small shareholders had the misfortune to hold investments in a company that by September 13 2007 was cash flow insolvent," they said.