Government 'set up nil compensation scheme' for Northern Rock shareholders
Shareholders' lawyers told the High Court that the "unfair" scheme was based on false criteria which would lead to shares being valued at zero – even though the Government had run no financial risk to itself or the public when it bailed out Northern Rock.
The legislation on which compensation assessment was based "does not provide for a compensation scheme – instead it provides for a no compensation scheme," said Lord Pannick QC, for the bank's biggest former investor, SRM Global.
And that, he said, amounted to a breach of 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.
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 at the end of the judicial process, it would be forced to reconsider the terms of reference given to independent valuers BDO Stoy Hayward so as to reflect what the shareholders say is the true value of their shares – at least 3 per share and probably much more.
The Government contends 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, it argues, the shares should be valued on the basis of what they would have been worth without the financial assistance.
But Lord Pannick told Lord Justice Stanley Burnton and Mr Justice Silber that Northern Rock was a solvent business with a strong asset base, albeit with short-term liquidity difficulties.
The Treasury and the Bank of England had provided assistance "at penal interest rates designed to cover any risk being born by the Government".
"Northern Rock was not a charity case – it had to pay a penal rate for the support it received," he said.
Chancellor Alistair Darling and the Treasury repeatedly stated that the Government was not taking any risks because it was satisfied the loans would be repaid and the guarantees would not be called upon. There was "no cost" to the taxpayer.
The Government had announced it intended to sell the bank back to the private sector for a substantial sum when market conditions improved.
In all those circumstances, it was inconsistent with the principle of "fair value" compensation for the State to take 100% of the value of the assets that ended up in its ownership, Lord Pannick said.