SRM Global, the hedge fund that became the largest shareholder in Northern Rock, said yesterday that it would continue its fight for government compensation after losing its second legal challenge.

The fund, which owned 11.5 per cent of Northern Rock, is leading a legal campaign claiming that the Treasury’s compensation scheme, which values former shareholders’ stakes at close to zero, is “unlawful and unfair”.

The legal action was launched in conjunction with RAB Special Situations, another hedge fund, and about 200,000 small shareholders in Northern Rock, many of them former employees of the lender.

Rejecting the latest challenge, three judges at the Court of Appeal said that the Government’s compensation scheme was reasonable because it was designed to put shareholders of the bank in a position that they would have been in if the Treasury had not provided financial support.

SRM said it would seek permission to appeal to the House of Lords and subsequently to the European Court of Human Rights, if necessary.

As was the case at the High Court in February, costs at the Appeal Court were awarded against SRM and RAB.

At a recent hearing, counsel for SRM told the Court of Appeal that the compensation plan infringes a human rights principle that the taking of property by the state must be balanced by compensation reasonably related to its value. But Lord Justice Laws, sitting with Master of the Rolls Lord Clarke and Lord Justice Waller at the Court of Appeal, upheld the Government’s argument that if it had not stepped in to bail out Northern Rock, the bank would have collapsed.

The judges said the shareholders’ argument had “seductive force”, but they concluded that it was reasonable for the Government to value the shares according to its compensation scheme, which considers their value as a private independent business without the benefit of the government rescue.

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