Links to Northern Rock files
Northern Rock Shareholder Action Group
Northern Rock Action Group - Some Comments
Northern Rock Event Photographs
Northern Rock - past events
Northern Rock shareholder meeting
Judicial Review and Demonstrations
Appeal on Judicial Review
Northern Rock EGM Voting
Court Case & Public Demonstrations
The Judicial Review hearing, on which our claim for fair compensation depends, commenced in the High Court in London on the 13th January 2009 and finished three days later. To coincide, UKSA organised a number of events including a demonstration outside the High Court. Photographs of these events are present below.
This page contains a summary of events in the Court but it does not aim to be a comprehensive or verbatim record of what was said. It simply provides a summary of some of the key arguments and points made by the parties to the case. All the evidence and key legal arguments in a Judicial Review are given to the Court in advance so there are generally no great surprises in the court itself. The key issues being raised by the claimants, and our evidence, were given many months ago in this note: Legal Case.
There are two judges in a judicial review and no witnesses. They were Lord Justice Stanley Burnton, the senior of the two, and a Court of Appeal judge, Mr Justice Silber. There were three sets of claimants: the small shareholders; SRM Global Fund; RAB Special Situations Fund and an ‘interested party’, Legal & General.
The legal teams and counsel representing the various plaintiffs and the Government were as follows:
SRM Global: White & Case, represented by Lord Pannick, QC; RAB Capital: Nabarro Nathanson, represented by Michael Beloff, QC; The private shareholders: Edwin Coe, represented by Tom de la Mare; Legal & General, represented by Ben Jaffey; The Government: Slaughter & May, represented by Lord Grabiner, QC.
1st Day - the Naval Analogy. Lord David Pannick opened for the claimants. He presented the key arguments and said that what had been put in place by the Goverment amounted to a "No Compensation Scheme" rather than a "Compensation Scheme". He emphasised that unless the terms of reference for the independent valuation (as laid down in the Nationalisation Act and Compensation Order), were overturned, then the claimants could expect nil compensation.
He gave a naval analogy of the situation of Northern Rock shareholders. The Government effectively were like a Royal Navy ship that came across a vessel in distress - in this case Northern Rock. They proceeded to salvage it by temporary assistance. Would they then claim the full value of the vessel and its cargo? Obviously not under salvage law, but that is what the Government is doing. In addition, if there had been any pre-agreed terms for salvage then that would be applied, and not retrospectively varied at the whim of the rescuers. In the case of Northern Rock, penal interest terms on the LOLR loans and other fees had been paid by the company as agreed when the loans were made, whereas the Government now wants to claim the full value of the equity as well.
He also suggested that if the Government believed its view of the valuation of Northern Rock was sound they should be prepared to argue their case to the valuer, not put in place artificial terms of reference that inhibits the valuer from using his own judgement.
Another key point he made is that if the Government argument is upheld, then if the Government loans money to a company in future, it will become potentially worthless to the shareholders, with obvious consequences for the valuation of companies, and their willingness to accept such finance.
Michael Beloff then spoke and primarily covered the relevant legal precedents in his own amusing manner. He said the title of the Government's Compensation Order was "somewhere between a euphemism and a blatant falsehood". He suggested the Government had not challenged the claim by an expert valuer that no compensation would be payable. The compensation scheme is therefore "an elaborate and sophisticated charade".
Justice Burnton interrupted at one point to suggest that the Nationalisation Act is the key issue as the revision of the Compensation Order by itself would not be sufficient by itself to meet the claimants demand (and almost follows on automatically from the conditions for the valuation specified in the Act). This is a significant issue as judges are more reluctant to overturn "primary" legislation which they see as the "will of Parliament" than they are secondary legislation put in place by executive order.
2nd Day - the Locked Cabinet Analogy. Mr Beloff said there are no legal precedents for a Government to confiscate property with no compensation except in very special circumstances - for example overriding social or economic policy purposes or inability to pay. He suggested it was also necessary for a fair process to be in place to determine any compensation and with reasonable assumptions being applied. Also he believed the previous conduct of the Government was relevant to any compensation scheme for which there were precedents, and the regulatory authorities, the FSA, have admitted failings in the regulation of Northern Rock.
He said the valuation should be based on what the position was before nationalisation took place, i.e. what a willing buyer would pay a willing seller (the normal principle used in company valuations), at that time. But the Northern Rock valuation assumptions are divorced from reality.
Following on from Lord Pannick's analogy of naval salvage, Mr Beloff used a terrestrial analogy of the locked cabinet. Say one has a valuable cabinet containing treasure, but have lost the key. Can the locksmith who opens it claim the full value of the contents, or simply a reasonable fee for his work? The answer is obvious. In this case LOLR facilities granted by the Bank of England were the key that unlocked the value in Northern Rock. Therefore the Government is not entitled to no compensation but neither is it eligible to claim all the value. But the Government was already being paid by a penal rate of interest and other fees on the funding and guarantees provided.
There was also a breach of procedural rights in A1P1 (Article 1, Protocol 1, of the European Convention on Human Rights) in failing to provide the ability for the claimants to make representations to the value regarding the "assumptions" used for the valuation (a point raised by counsel for the small shareholders, Tom de la Mare in his written submission).
Tom de la Mare then spoke and said that denial of the fact finding process so the valuer could not look at the reality is a breach of the law - see European court precedents re Article 6. He then covered the background of Mr Dennis Grainger, who did not sell his shares because he was reassured by the Government's statements on LOLR and other matters. Others bought shares based on similar reasoning. He considered the problem of the terms of reference was a central issue because irrefutable assumptions are not compatible with Article 6.
Ben Jaffey then spoke (for Legal & General). L&G enjoy the protection of typical bilateral investment agreements that the UK executes with other countries. Article 5 of those "model" agreements protects assets against confiscation by foreign Governments without payment of fair compensation. But it would seem that they no longer have such protection in the UK if the Government's argument stands. L&G sees this as a surprising development. The current valuation process put in place for Northern Rock is a waste of time because of the Act and Order put in place, which results in a foregone conclusion.
Lord Grabiner then opened the case for the Government. He questioned whether the valuation assumptions were contrary to A1P1, and said he did not agree that the valuation will necessarily result in a figure of zero.
He stated that "Northern Rock was bust" (a very questionable statement which the Justices later indicated they did not necessarily take as a statement of fact), and suggested that Northern Rock had no right to LOLR funding, and no reasonable expectations of same. He suggested that those trading the shares running up to nationalisation such as the two main plaintiffs, were "taking a punt".
His view was that the shareholders were not entitled to any value that arises from the Government funding and hence the key assumptions in the Act (e.g. all funding withdrawn which is the first one), is reasonable.
He then discussed the Lithgow precedent at some length. This was a case of the nationalisation of large sections of the shipbuilding and aircraft industries in the UK, which ended up in the European court when the owners of the companies complained they were not fully compensated. In essence the court said there was a wide "margin of appreciation" available to Governments when determining such compensation, ie. a wide discretion on the possible valuation. Even Lord Grabiner pointed out that this did not mean zero compensation and no value as all the shareholders received some compensation (in reality they received a value based on a share price over a retrospective period of time and complained as much about that as on other issues).
(Picture right is of shareholders demonstrating outside a Northern Rock branch in London)
Lord Grabiner did however point out that the valuations in Lithgow were reduced based on funds (e.g. grants) provided to these companies before nationalisation and attempted to widen that principle to cover the Northern Rock case. But he also made clear that the Lithgow nationalisation did not exclude an arbitration procedure and there was a way for the affected parties to make representations on the valuation and the associated assumptions. In essence there seemed as much to support the claimants case as the Governments in the Lithgow precedent and this was touched on later in the closing arguments.
Note that Lord Grabiner did not seem as formidable an advocate on this, and later issues as his prior reputation had indicated to the writer that he might be.
3rd Day - Grabiner Continues, and Final Arguments. Lord Grabiner covered the issue of whether there was a prospective "subsidy" from the private sector solutions or whether the Government was likely to make a profit. But this hardly seemed to be a key issue as the nationalisation as such was not being challenged.
He then attempted to say that the claimants had alleged the Government deliberately took steps so that they could nationalise the company at less than fair value, but Lord Pannick jumped in and denied any such claim. Justice Burnton said the claim was simply that regulatory failure contributed to the difficulties of Northern Rock which resulted in due course in nationalisation.
Grabiner said that even if the Government intended to make a profit, that was irrelevant, and it is also untrue. Also if Northern Rock was treated less favourably than other banks, that is not a breach of A1P1.
He referred to Tom de la Mare's argument but he does not agree that A1P1 dictates onerous procedural obligations (not to the extent of Article 6). In any case, the lack of ability to challenge the valuation assumptions can be done in this judicial review. So it all hinges on whether the assumptions are lawful and within the "margin of appreciation".
Justice Burnton said if matters relevant to the valuation assumptions are shut out by the legislation then the question is whether this was a breach of A1P1. Justice Silber said "a judicial review can only challenge matters of law, not matters of fact". The issue here is that the court recognised it was not empowered or qualified to undertake the valuation itself and therefore was not in a position to make judgements on the facts.
Lord Pannick then spoke in rebuttal for the claimants. He said there were two core propositions advanced by Lord Grabiner: 1) that Northern Rock was bust; 2) that Northern Rock had no entitlement or expectation of financial support. But if these facts were self evident then the valuer would accept them as true, so why would the Treasury need to put the additional restrictions in place in the Act and the Compensation Order.
In reality, the valuer cannot decide two vital factual questions: 1) what is the extent to which the value of the company was due to the underlying assets of the company (as opposed to that proportion contributed by the Government); 2) the extent, if at all, the financial support was worth more than the price Northern Rock paid for this (the "subsidy" issue). The statutory assumptions prevent any fair balance between the interests of the Government and the shareholders.
Lord Grabiner said he didn't know how Goldman Sachs had calculated the subsidy. Lord Pannick said how are we expected to question this if no evidence is produced on it. Likewise the valuer cannot examine this. Note in relation to this issue that "disclosures" were expected to be a contested issue in this case but in reality the claimants lawyers did not seem to push this issue and seemed reasonably satisfied with the information received.
Pannick said their case was that the valuer had been prevented from examining all the facts relevant to the value of the company at the valuation date. He then revisited the "locked cabinet" analogy introduced by Mr Beloff, but in this case with a valuable truffle inside it, which would deteriorate over time if not removed and consumed. If a locksmith had opened the chest and consumed the truffle, with no payment in compensation to the owner, would we accept his claim that "your property would have been worthless without my assistance"?
He mentioned that Lord Mandelson had just yesterday announced loan support to companies in the present financial crisis. If Lord Grabiner is right, any business which considers such a proposition should consider it had a major "health warning" attached because of the Government's implied right to confiscate the whole company for nil compensation some time later.
Lord Pannick said one of the central questions is whether the asset had no value or not. Justice Burnton said: if it had no value then it would be unexceptional to allow confiscation without compensation.
Michael Beloff then spoke. He said according to Grabiner's argument, the Treasury could simply say "there would be no compensation" and according to him this would be OK because it was consistent with reality. But clearly it would be a breach of A1P1.
He then recapped some aspects of the Lithgow precedent. The first point it raised was that one does not just consider the legislative language, but also the effect of the legislation. Secondly regarding the margin of appreciation, nationalisation of whole industrial sectors was very different to that of a single company such as Northern Rock. Thirdly, banks are different to industrial companies. The Bank of England acts as a banker to banks, and none of the Lithgow applicants had no compensation.
He suggested the Treasury's sole argument is that Northern Rock is valueless without LOLR support. Is it true that the shareholders owned no value, or legitimate expectations? It is not a question of whether the Treasury should receive no benefit from its contribution to Northern Rock, but whether they should receive all of it.
Tom de la Mare then spoke again. He said that as regards Lord Grabiner's argument, a judicial review can tackle issues of law, but not of fact. Several precedents were referenced in support. But Grabiner said it was not for the court to tackle the issues of fact or act as valuation experts. What is the Government's justification for tying the valuer's hands? Lord Grabiner has not given any.
That concluded the arguments for the claimants and the defence.
Justice Burnton said "it is the position of the small shareholder as much as the major shareholders that concern us". Judgement was reserved and will be published in the future (probably a few weeks time).
A note on the judgement (our application was rejected) is present in this note: Update 51
NOTE: A report on the Appeal of the Judcial Review is present on the following page: Judicial_Review_Appeal.