GRAINGER AND OTHERS v. THE UNITED KINGDOM
Inadmissible
David Thór Björgvinsson;Lech Garlicki;Ledi Bianku;Nebojša Vučinić;Nicolas Bratza;Päivi Hirvelä;Vincent A. De Gaetano
1. The following summary of the facts is based on the applicants’ submissions and the findings of the domestic courts. 2. The names of the applicants and their representatives are set out in the attached table. One of the applicants, SRM Ltd Global Master Fund Partnership, is an investment fund incorporated in the Cayman Islands. As a result of transactions between 14 September 2007 and 12 February 2008 it became the largest shareholder in Northern Rock plc, with 48,452,655 shares, amounting to 11.5% of the issued ordinary share capital. Another applicant, RAB Special Situations (Master) Fund Ltd is also an investment company incorporated in the Cayman Islands. It acquired its shares in Northern Rock by transactions between 19 September 2007 and 14 February 2008. By the date of Northern Rock’s nationalisation, it owned 34,444,299 shares, amounting to 8.18% of the issued ordinary share capital. The remaining applicants are individual small shareholders, some of whom acquired their shares on demutualisation; others of whom acquired theirs as employees under an approved profit share scheme or share incentive plan, or other incentive schemes, or by contributions to the company pension fund. Others were small investors who bought their shares on the stock exchange. At the date of nationalisation there were some 150,000 small shareholders. 3. Northern Rock was originally a building society. In 1997 it was converted into a public limited company, listed on the London Stock exchange and authorised to carry on business as a bank. On its demutualisation, shares were issued to its existing depositors. Its core business remained residential mortgage lending. It grew to become the fifth largest United Kingdom mortgage lender and the eighth largest United Kingdom bank. 4. Unlike most other banks in the United Kingdom, Northern Rock financed a large part of the loans it made to lenders by borrowing money and by issuing bonds backed by a pool of mortgage loans. As a result of turbulence in the international financial markets, by August 2007 it had become impossible for it to raise sufficient money on the wholesale market. Moreover, the problems in the United States of America associated with the securitisation of subprime mortgages made it impossible for Northern Rock to raise funds by securitising its own mortgage book. 5. Northern Rock’s assets, as valued and stated in its balance sheet, exceeded its liabilities. However, because of the impossibility of borrowing in the wholesale financial markets it did not have the liquid funds to pay its current liabilities and to repay depositors, and so it could not pay its debts as they fell due. 6. On 13 August 2007 Northern Rock alerted the Financial Services Authority to its liquidity problems and its doubts over the sustainability of its situation. On 3 September 2007 the Treasury, the Bank of England and the Financial Services Authority (“the Tripartite Authorities”) agreed in principle to provide financial support, as a “Lender of Last Resort” (“LOLR”), to allow Northern Rock to maintain liquidity. It was considered that Northern Rock’s problems constituted a genuine threat to the stability of the financial system, with a risk of serious disturbance in the wider economy. 7. LOLR Assistance is made under procedures set out in a Memorandum of Understanding between the Tripartite Authorities, which provides: “14. In exceptional circumstances, there may be a need for an operation which goes beyond the Bank’s published framework for operations in the money market. Such a support operation is expected to happen very rarely and would normally only be undertaken in the case of a genuine threat to the stability of the financial system to avoid a serious disturbance in the UK economy. If the Bank or the FSA identified a situation where such a support operation might become necessary, they would immediately inform the other authorities and invoke the co-ordination framework outlined in paragraph 16 below. Ultimate responsibility for authorisation of support operations in exceptional circumstances rests with the Chancellor. Thereafter they would keep the Treasury informed about the developing situation, as far as circumstances allowed. 15. In any such exceptional circumstances, the authorities’ main aim would be to reduce the risk of a serious problem causing wider financial or economic disruption. In acting to do this, they would seek to minimise both moral hazard in the private sector and financial risk to the taxpayer arising from any support operation.” The principles on which LOLR is provided by the Bank of England were further explained in a lecture given at the London School of Economics in 1993 by the then Governor of the Bank. In particular, he underlined that LOLR is designed not to protect the individual bank or its shareholders, but to safeguard the financial system as a whole from contagion, thereby preventing damage to the wider economy. 8. On 13 September 2007 the BBC broadcast leaked information about the bank’s liquidity problems which, over the following three days, led depositors to withdraw GBP 4.45 billion, nearly 20% of Northern Rock’s retail deposits. 9. On 14 September 2007 the Tripartite Authorities authorised the Bank of England to provide LOLR support, in the form of a secured loan at a premium rate of interest. On 17 September 2007 the Chancellor of the Exchequer announced that the Tripartite Authorities would guarantee the safety of all existing deposits in Northern Rock. By 9 October 2007 the loan provided by the Bank of England was virtually exhausted. To prevent the company from collapsing, a further loan was put in place, which was repayable on demand, again at a premium rate of interest and secured against all assets of the company. 10. The Government had duly informed the European Commission of the measures it had taken in relation to Northern Rock. On 5 December 2007 the Commission issued a decision. The Commission concluded that the measures taken by the Government between 17 and 20 September 2007 and those announced on 9 October 2007 constituted non-notified State aid pursuant to Article 87(1) of the Treaty establishing the European Community. However, the measures were compatible with the Common Market as rescue aid pursuant to Article 87(3)(c), and the Commission raised no objection to them. Nonetheless, it informed the Government that: “The Commission expects your authorities to respect their commitment to communicate to the Commission, not later than 17 March 2008, a credible and substantiated restructuring plan or a liquidation plan or a proof that the aid measures granted have been repaid in full and that the guarantees have been terminated.” 11. On 21 January 2008 the Treasury announced that the preference of the Tripartite Authorities was to find a private sector solution for Northern Rock. However, if no suitable private sector solution could be found, the Government would bring forward legislation which would empower the Treasury to take Northern Rock into temporary public ownership, since it was not considered that it would be in the public interest to allow the bank to go into administration. If Northern Rock were taken into public ownership, the legislation would provide for the assessment by an independent valuer of compensation payable to the former shareholders. The principles for assessing compensation, which would be set out in the legislation brought forward, would reflect: “the principle that the Government should not be required to compensate shareholders for value which is dependent on taxpayers’ support and the fact that public sector ownership would be an alternative to an administration of the company. Accordingly, the compensation would be assessed by the valuer on the basis, among other things that all financial assistance to Northern Rock from the Bank of England or HM Treasury (including HM Treasury’s existing guarantee arrangements) had been withdrawn and no other financial assistance (apart from Bank of England assistance on its usual terms through standing facilities or open market operations) were made available by them to Northern Rock.” 12. By 17 February 2008 there were two private sector proposals for the future of Northern Rock. However, both involved the continuation of public financial support to the company, and the Government did not consider that either would deliver sufficient value for money for the taxpayer. The Chancellor of the Exchequer therefore announced that legislation would be brought forward to take Northern Rock into a period of temporary public ownership. 13. The power to nationalise Northern Rock was conferred on the Government by the Banking (Special Provisions) Act 2008 (“the 2008 Act”), which was passed into law on 21 February 2008. The nationalisation of the company was effected by the Northern Rock plc Transfer Order 2008, which was made on the same date and came into force on 22 February 2008. It transferred the shares in the company to the Treasury Solicitor as nominee of the Treasury at the beginning of 22 February 2008. 14. The total amount lent by the Bank of England to Northern Rock as at 31 December 2007 was some GBP 27 billion. In addition, the Treasury had assumed contingent liability under guarantees of some GBP 29 billion. As at 31 March 2008, GBP 24.1 billion of the loans remained outstanding. 15. Immediately before nationalisation, the market price of Northern Rock shares was 90 pence, giving a market capitalisation of approximately GBP 379 million. 16. The statutory instrument making provision for the determination of the compensation payable to the former shareholders of Northern Rock was the Northern Rock plc Compensation Scheme Order 2008 (“the Compensation Scheme Order”: see paragraph 26 below), made on 12 March 2008. It required the independent valuer, when calculating the amount of compensation to be paid by the Treasury, to assume that Northern Rock was unable to continue as a going concern and was in administration. 17. On 2 April 2008, the European Commission informed the United Kingdom that it had decided to initiate the procedure laid down in Article 88(2) of the EC Treaty in relation to State aid potentially incompatible with the common market. However, it did not consider that the proposed compensation scheme was incompatible, for the following reasons: “The decision of 5 December 2007 already established that Northern Rock is a firm in difficulty. Its situation has not improved since then. In particular, if all the rescue aid measures were withdrawn, the firm would immediately exit the market. ... The Commission has accordingly decided that the measures implemented on 18 December 2007 are compatible with the EC Treaty and that if the shareholders are only compensated on the basis of an independent valuation of the company without any State support, the purchase of the shares from existing shareholders does not constitute State aid.” 18. On 7 December 2009 the Valuer wrote to the former shareholders informing them that his provisional view was that, applying the statutory assumptions, there would be no residual value in the company and therefore no compensation would be payable. 19. The applicants challenged the assumptions required by the Compensation Scheme Order by way of judicial review proceedings in the Administrative Court. They contended that, contrary to Article 1 of Protocol No. 1 to the Convention, the assumptions imposed on the Valuer failed to strike a fair balance; gave rise to procedural unfairness, since the Valuer could not take into account all relevant facts; and wrongly prevented the regulatory failures of the State from being taken into account in the assessment of compensation. 20. The Divisional Court dismissed the proceedings on 13 February 2009 ([2009] EWHC 227 (Admin)). It took the view that the statutory assumptions imposed on the Valuer reflected the fact that, but for the support provided by the Bank of England, Northern Rock would have been unable to pay its debts as they fell due and would have had to cease carrying on business. The court further held that its function was one of review: to determine whether the State had exceeded its margin of appreciation. It held that the margin of appreciation in this case was narrower than it had been in the cases of James and Others v. the United Kingdom, 21 February 1986, Series A no. 98; Lithgow and Others v. the United Kingdom, 8 July 1986, Series A no. 102; and Mellacher and Others v. Austria, 19 December 1989, Series A no. 169, since the decision to nationalise Northern Rock was made on narrower economic grounds, by comparing the financial benefits to the taxpayer of nationalisation with the alternatives available. However, following Katikaridis and Others v. Greece, 15 November 1996, Reports of Judgments and Decisions 1996V, the court considered that the relevant test was whether the determination under challenge was “manifestly without reasonable foundation”, and it did not consider that the Compensation Scheme could be so condemned. Moreover, there had been no procedural unfairness and Northern Rock’s problems were due to the failures of its managers, rather than the State’s lack of regulation. 21. The applicants’ appeal to the Court of Appeal was dismissed on 28 July 2009 ([2009] EWCA Civ 788). The Court of Appeal held that the Government support accorded to Northern Rock from September 2007 onwards had constituted a “Lending of Last Resort” (“LOLR”) operation, carried out in the context of macro-economic policy, strictly and exclusively for the protection of the banking system as a whole and not in the interests of Northern Rock or its shareholders. As with all LOLR support, it was always intended to be a short-term operation. The decision to take the company into public ownership was a strategic exercise of Government policy, intended to preserve for the sake of the national economy the benefits of the LOLR operation at the least possible cost to the taxpayer. In these circumstances, the margin of appreciation available to the State had to be wide. The court should only interfere if it were to conclude that the State’s judgment as to what was in the public interest was manifestly without reasonable foundation, which was not the case here. LOLR assistance would not have been provided if support had been available on the market and nationalisation was only carried out because no commercial entity was prepared to acquire Northern Rock except on terms that the Government continued to provide support and carried the risk of default. There was no evidence to support the applicant’s allegation that the Government were motivated by profit. The purpose of the statutory assumptions was to put the shareholders in the position they would have occupied had no LOLR support been provided. If the assumptions produced a nil value for the shares, this was only because the business was shown to be worthless without the support put in by the Government and there was nothing in the assumptions to prevent the Valuer from attaching a premium value to Northern Rock’s loan book and other assets. 22. The applicants were refused further permission to appeal by the Supreme Court on 16 December 2009. 23. The 2008 Act conferred power on the Treasury to make an order transferring securities issued by an authorised United Kingdom deposittaker to the Treasury’s nominee. By virtue of section 2(1) read with section 2(2) of the 2008 Act, the power was exercisable by the Treasury if it considered it desirable to do so for either or both of the following purposes: “(a) maintaining the stability of the UK financial system in circumstances where the Treasury consider that there would be a serious threat to its stability if the order were not made; (b) protecting the public interest in circumstances where financial assistance has been provided by the Treasury to the deposit-taker for the purpose of maintaining the stability of the UK financial system.” 24. Section 5 required the Treasury to make a scheme for determining the amount of any compensation payable by the Treasury to persons who held the securities immediately before they were transferred. Section 5(4) read as follows: “(4) In determining the amount of any compensation payable by the Treasury by virtue of any provision in an order under this section, it must be assumed – (a) that all financial assistance provided by the Bank of England or the Treasury to the deposit-taker in question has been withdrawn (whether by the making of a demand for repayment or otherwise), and (b) that no financial assistance would in future be provided by the Bank of England or the Treasury to the deposit-taker in question (apart from ordinary market assistance offered by the Bank of England subject to its usual terms).” “Ordinary market assistance” was defined in subsection (5)(b) and did not include the financial support that had been provided to Northern Rock since September 2007. 25. The nationalisation of Northern Rock was effected by the Northern Rock plc Transfer Order 2008 made under the 2008 Act. It came into force on 22nd February 2008, and transferred all the shares in Northern Rock to the Treasury Solicitor as nominee of the Treasury with effect from the beginning of that date. 26. The Compensation Scheme Order 2008 gave effect to the compensation scheme set out in the Schedule to the Order (“the Compensation Scheme”). It required: “The amount of compensation payable to a person [to] be an amount equal to the value immediately before the transfer time of all shares in Northern Rock held immediately before the transfer time by that person”. 27. The Compensation Scheme contained provision for the appointment of an independent valuer to assess compensation and for any person dissatisfied with his determination of compensation to refer the matter to the Financial Services and Markets Tribunal. Paragraph 6 of the Compensation Scheme provided: “6. In determining the amount of any compensation payable by the Treasury to any person in accordance with paragraphs 3 to 5, it must be assumed (in addition to the assumptions required to be made by section 5(4) of the Act (compensation etc. for securities transferred etc.)) that Northern Rock — (a) is unable to continue as a going concern; and (b) is in administration.”