The Court of Appeal has given judgment in R (SRM Global Master Fund LP) v Commissioners of Her Majesty's Treasury  EWCA Civ 788. The case concerned a challenge to the compensation scheme established in the wake of the nationalisation of Northern Rock. The appeal was dismissed, for reasons similar to those given in the High Court, which are discussed in detail here. However Laws LJ, giving the leading judgment, made important observations on the court's role in assessing the proportionality of compensation measures.
The appeal concerned a challenge to the assumptions on which the compensation scheme for former shareholders of Northern Rock was established. The key assumptions were that the bank was unable to continue as a going concern and in administration. The Claimants contended that these assumptions inevitably meant that their shares would be assessed as worthless, despite the substantial assets Northern Rock held at the date of nationalisation. This was said to be inconsistent with the right to property guaranteed in Article 1 of the First Protocol to the European Convention on Human Rights ("A1P1").
The court dismissed the appeal. Most of the discussion is devoted to the first ground of appeal, which related to the proportionality of the assumptions.
The decision reaffirms the relatively wide margin of appreciation given to public authorities in assessing the level of compensation for a deprivation of property, at least where the decision is in the pursuit of broad social or economic objectives. In particular, a wide margin of appreciation might be given to public authorities in respect of actions or decisions in the context of macro-economic policy where the objective is the protection of the banking system and economy.
The court held that in the context of the policy underlying the Government's Lender of Last Resort ("LOLR") role, there was a reasonable basis for adopting the assumptions. Accordingly, the assumptions were not "manifestly without reasonable foundation".
The court essentially agreed with the High Court in relation to the other two grounds of appeal:
- Any alleged regulatory failures in the handling of Northern Rock were irrelevant, because they were not an effective cause of the shareholders' losses.
- The assumptions were matters of policy based on the LOLR regime, not assumptions of fact, and accordingly did not need to be subject to challenge in the valuation procedure itself.
Proportionality under A1P1
The court reiterated the basic principle under A1P1, established in cases such as Sporrong and Lönnroth v Sweden (1983) 5 EHRR 35, that a deprivation of property had to strike a fair balance between the public and private interests. That required there to be a reasonable relationship (or proportionality) between the compensation paid and the property's value. In the paradigm case of a single property being taken in pursuit of a specific and limited local objective, A1P1 would often require the payment of market value or something close to it. However, the state had a "margin of appreciation" to provide less compensation where that was appropriate in the pursuit of legitimate policy objectives: Lithgow v UK, judgment of 8 July 1986, Series A no. 102. Whilst the width of the margin of appreciation varies, in the context of macro-economic policy where the objective is the protection of the banking system and economy, the test was whether the compensation scheme was "manifestly without reasonable foundation" (following James v UK  8 EHRR 123).
The court concluded that the assumptions were consistent with the principles underlying LOLR, namely: (i) that LOLR assistance was deployed in the interests of the financial system as a whole and not in the interests of individual shareholders; and (ii) limits were placed on the LOLR regime to avoid encouraging moral hazard.
The court acknowledged the "seductive force" of the argument that Northern Rock still had substantial assets, despite its liquidity problems, and those assets were as much a contributor to any future sale price as Government support. The Government might therefore obtain substantial value, and even profit, from assets built up by shareholders and for which they had received no value.
However, the court concluded that the nationalisation had not been without risk for the Government, and that a profit on the eventual sale was by no means guaranteed or the reason for the Government's decision to set the assumptions. Furthermore, the assumptions would not inevitably lead to no compensation being paid to shareholders. Rather, compensation would be at a level set having regard to the objectives of the LOLR regime. In those circumstances, the court concluded that the assumptions were "by no means" manifestly without reasonable foundation.
The decision reaffirms the relatively wide margin of appreciation given to public authorities in assessing the level of compensation for a deprivation of property, at least where the decision is in the pursuit of broad social or economic objectives. It is clear that a wide margin of appreciation might be given to public authorities in respect of actions or decisions in the context of macro-economic policy where the objective is the protection of the banking system and economy.
However, the court looked closely at whether the Government had in fact struck the balance properly, indicating that the result might have been different if (unusually) a successful rescue was a "sure thing" or the Government had set the assumptions with a view to maximising profit, rather than protecting the principles underlying the LOLR regime.
This can be seen as a reassertion of the traditional role of the court in focusing on the process and legality of public decisions. The Government will need to take care, in any future cases, to balance the public relations benefit of bullish statements about future profit and the safety of taxpayer money against the need to show that a proper assessment of proportionality was undertaken.