Vol 6 (2009) - Issue 3

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Rock and a Hard Place: Judicial Review of the Compensation Scheme for Shareholders in Northern Rock plc

In SRM Global Master Fund LP and others v The Commissioners of Her Majesty’s Treasury [2009] EWHC 227 (Admin), the claimants sought a declaration that the compensation scheme for shareholders in Northern Rock plc (‘NR’) pursuant to the Banking (Special Provisions) Act 2008 (the ‘Banking Act’) and the Northern Rock plc Compensation Scheme Order 2008 (SI 2008/718) (the ‘Compensation Order’) made under the Banking Act is incompatible with Article 1 of the First Protocol (the ‘Protocol’) to the European Convention on Human Rights (the ‘ECHR’).

The English courts are entitled to declare that primary legislation is incompatible with the ECHR under section 4 of the Human Rights Act 1998 (the ‘HRA’). Section 6 of the HRA provides that it is unlawful for a public authority to act in a way that is incompatible with the ECHR.

Facts

NR’s difficulties arose since it relied heavily on the wholesale money markets and the issue of asset backed securities in order to fund its business operations. As those sources of funding ceased to become available in the second half of 2007, NR encountered liquidity problems that resulted in the Bank of England (the ‘BoE’), the Financial Services Authority (the ‘FSA’) and HM Treasury (the ‘Treasury’) (together the ‘Tripartite Authorities’) agreeing in principle on 3 September 2007 to provide financial support in order to enable NR to meet its liabilities as they fell due.

Details of NR’s precarious financial position were leaked to the BBC and broadcast on 13 September 2007. This resulted in a run on NR between 14 and 17 September 2007, with depositors withdrawing approximately GBP 4.45 billion in retail deposits during that time. In order to counter the public panic generated, the BoE agreed to provide a liquidity facility to NR on 14 September 2007, and on 17 September 2007 the Chancellor of the Exchequer issued a statement, subsequently expanded upon by the Treasury on 20 September 2007, that all existing retail deposits and all existing and renewed wholesale deposits with NR would be guaranteed. The BoE liquidity facility was subsequently increased and extended and the Treasury guarantees were expanded to cover further deposits and borrowings of NR.

The BoE facilities were repayable on demand, but were in any event subject to a time limit of 17 March 2008, since this was the latest date that the European Commission had stated in its decision of 5 December 2007 by which the BoE facilities and Treasury guarantees would have to be repaid in full in order to avoid contravention of Article 87(1) of the EC Treaty. The Treasury stated on 21 December 2008 that the guarantees provided by it would be withdrawn on reasonable notice, which would not be less than three months’ notice.

On 21 January 2008 the Treasury announced the possible availability of ‘a financing structure that could be made available to Northern Rock and other interested parties, for a possible private sector solution for the entire company’. A separate announcement later that day stated that temporary private sector ownership of NR was a possibility, and that any compensation payable in the event of nationalisation would assume that ‘all financial assistance to Northern Rock from the Bank of England or the Treasury (including the 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’.