‘Rights breach’ to write off Rock

Jan 14 2009 by Jon Tunney, The Journal

THE Government has been accused in the High Court of trying to make a profit from nationalising Northern Rock at the expense of shareholders.

Lawyers argued a shareholder compensation scheme introduced when the bank was taken over last February was based on false criteria when it valued shares at little more than zero.

Lord Pannick QC, for the bank’s biggest investor SRM Global, told the court the Government had taken over the “valuable business” in a way that meant it would pay shareholders very little for it, thus opening up the opportunity to make a profit in the long term.

He told Lord Justice Stanley Burnton and Mr Justice Silber: “It is clearly disproportionate that all of that profit should be enjoyed by the Government and none by the shareholders whose assets were nationalised.”

Lord Pannick said what he described as a “no compensation scheme” amounted to a breach of the shareholders’ human rights.

In a judicial review hearing set for four days, shareholders are seeking a declaration that the compensation provisions are incompatible with the European Convention on Human Rights. If the Government loses, it will be forced to reconsider the terms of reference given to independent valuer BDO Stoy Hayward to reflect what the shareholders say is the true value of their shares – at least £3 each.

The Government contends the Treasury and the Bank of England provided substantial financial assistance to Northern Rock – £27bn in loans and a £29bn guarantee fund – without which it would have gone into liquidation.

It argues the shares should be valued on the basis of what they would have been worth without the financial assistance.

The Treasury said it had appointed Andrew Caldwell, of accountant BDO Stoy Hayward, to provide an independent assessment of possible compensation based on the value of the bank without taxpayer assistance.

But Lord Pannick told the judges Northern Rock was at the time a solvent business with a strong asset base, albeit with short-term cash problems.

He said: “Northern Rock was not a charity case – it had to pay a penal rate for the support it received.”

Lord Pannick said Chancellor Alistair Darling and the Treasury had repeatedly stated the Government was not taking a risk because it was satisfied the loans would be repaid and the guarantees would not be called upon. There was “no cost” to the taxpayer. He also pointed to Government announcements that it intended to sell the bank back to the private sector for a substantial sum when market conditions improved.

Lord Pannick said in those circumstances, it was inconsistent with the principle of fair value compensation for the State to take 100% of the assets that ended up in its ownership.

He said the compensation criteria were false because Northern Rock was a going concern and it was not in administration.

The shareholders’ case is being brought by SRM Global, RAB Capital and about 150,000 private shareholders who held as much as 25% of the company’s shares.

Private shareholders, including former and current Northern Rock employees, are backed by the UK Shareholders Association. Before yesterday’s court hearing in London, Roger Lawson, of the UK Shareholders Association, told BBC Radio 4’s Today programme: “We take many risks as shareholders, but we don’t accept the risk normally that the Government will confiscate one’s property without fair compensation.

“We are going to court to get a fair and independent valuation. Clearly the terms of reference set by the Government are a fix and they will ensure that the Government pays nothing.

“We are saying that [Northern Rock] wasn’t worthless, that it was actually a significantly valuable property and we should get fair compensation, judged by a proper, independent, normal, commercial valuation.”

The hearing continues today.