Rock shareholders lose legal challenge

Former shareholders in nationalised bank Northern Rock failed today in a renewed legal challenge to the Government's "zero return" compensation scheme.

The Court of Appeal in London dismissed an appeal by individual shareholders - including current and retired employees of the Newcastle-based bank - and two hedge funds which also stand to lose out, who had attacked the scheme as "unlawful, unfair and manifestly disproportionate".

They claimed the compensation scheme was deliberately based on false criteria which would lead to shares being valued at zero so the Government would inevitably make a profit when the bank was eventually sold off.

But Lord Justice Laws, sitting with Master of the Rolls Lord Clarke and Lord Justice Waller, rejected any suggestion that the scheme was "in truth only a charade, the product of a settled intention by government to set a formula which would yield a zero figure for compensation".

The scheme was reasonably designed to put shareholders of the ailing bank in the position they would have occupied, vis-a-vis the value of their shares, had no financial support been provided by the Bank of England and the Treasury, the judge said.

The judges upheld the Government's argument that, but for that support, Northern Rock would have been unable to pay its debts as they fell due and would have had to cease business. It was not unreasonable that shares should be valued on that basis.

The case was brought by two hedge funds, SRM Global and RAB Capital, and up to 200,000 private shareholders.

They said they would pursue the case in the Supreme Court and, if necessary, the European Court of Human Rights in Strasbourg.

The small investors, headed by former Northern Rock employee Dennis Grainger, 62, who personally lost £114,000 in shares when the bank was nationalised, were backed by the UK Shareholders Association.

They say they stand to lose the vital provisions they made for retirement and personal planning such as funeral payments.

The shareholders insist their shares should be valued at more than £4 each.

The Government argues that the State's £54 billion bail-out of Northern Rock in the form of loans and guarantees in February last year was at considerable cost and risk to the taxpayer.

It was therefore right that, if the bank thrived under public ownership, the State should benefit when it was sold off to the private sector.

Jon Wood, of SRM Global, said after today's ruling: "We are encouraged that the Court of Appeal's judgment acknowledges the real force of our arguments.

"We embarked upon this legal challenge in the full expectation that it would be a lengthy process. We are determined to see it through to its conclusion."

The challenge to the scheme is based on argument that it infringes the human rights principle that the taking of property by the State must be balanced by compensation reasonably related to its value.

Lord Justice Laws said the short-term rescue of Northern Rock, in the absence of help from elsewhere in the market, was by means of "Lender of Last Resort" (LOLR), the underlying purpose of which was to prevent damage to the banking system as a whole, and thus the country's economy, and categorically not to confer a benefit on shareholders.

The judge rejected the shareholders' argument that the takeover involved no risk to the Government.

The economic reality was "all one way", he said. Supporting or acquiring Northern Rock was not a sound commercial proposition for others in the market.