241 Pizza

In a hearing set for four days, more than 150,000 individual and institutional shareholders are seeking a declaration that the compensation provisions set by the Government under the Banking (Special Provisions) Act 2008 are incompatible with the European Convention on Human Rights.

If the Government loses, it would be forced to reconsider the terms of reference given to BDO Stoy Hayward, the independent valuer.

These had required the valuer to assume that the bank was in administration and not a going concern, making shares almost worthless.

However, shareholders say that the true value of their shares in Northern Rock was at least £3 to £4 a share rather than a matter of pence.

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 said 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.

Alistair Darling, the Chancellor, and the Treasury repeatedly stated that the Government was not taking any risks because it was satisfied that the loans would be repaid and the guarantees would not be called upon. There was “no cost” to the taxpayer.

The Government had announced that 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 per cent of the value of the assets that ended up in its ownership, Lord Pannick said.

Shareholders are drawing a contrast between the Government’s conduct in the Northern Rock rescue and its subsequent acquisition of stakes in other banks, such as Bradford & Bingley, whose shareholders were not wiped out.

Their case is based on the principle, enshrined in human rights law, that the taking of property by the state without payment of an amount reasonably related to its value will normally constitute a disproportionate interference with property rights.

Shareholders say the Treasury’s share valuation criteria assumed that the bank was in administration, was no longer a going concern and was no longer receiving financial assistance from the Bank of England or the Treasury when it was nationalised.

The criteria were false, they argue. Financial assistance remains in place; Northern Rock is a going concern (it has already repaid £15.4 billion of the loan and expects to pay the rest by 2010), and it is not in administration.

The shareholders’ case is being brought by SRM Global, RAB Capital and around 150,000 private shareholders who held as much as 25 per cent of the company’s shares.

The private shareholders, including former and existing Northern Rock employees, are backed by the UK Shareholders Association.

Before the hearing in London, Roger Lawson, of the UK Shareholders Association, told BBC Radio 4’s Today programme: “We take many risks as shareholders but we don’t accept the risk normally that the Government will confiscate one’s property without fair compensation.

“We are going to court to get a fair and independent valuation ... Clearly, the terms of reference set by the Government are a fix and they will ensure that the Government pays nothing.

“We are saying that [Northern Rock] wasn’t worthless, that it was actually a significantly valuable property and we should get fair compensation, judged by a proper, independent, normal, commercial valuation.”

The case continues.

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