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	England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> SRM Global Master Fund LP & Ors v HM Treasury [2009] EWCA Civ 788 (28 July 2009) URL: http://www.bailii.org/ew/cases/EWCA/Civ/2009/788.html Cite as: [2010] BCC 558, [2009] EWCA Civ 788, [2009] UKHRR 1219

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IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION, DIVISIONAL COURT
Stanley Burnton LJ and Silber J
CO/4342/2008, CO/4715/2008 & CO/4351/2008
[2009] EWHC 227 (Admin)

		Royal Courts of Justice Strand, London, WC2A 2LL
		28/07/2009

Lord Justice Laws:

INTRODUCTION

1. This is an appeal, with permission granted by the court below, against the decision of the Divisional Court (Stanley Burnton LJ and Silber J [2009] EWHC Admin 227), given on 13 February 2009, by which the court dismissed the appellants' claims for judicial review of the basis of assessment on which compensation would be payable to them as former shareholders of Northern Rock plc ("Northern Rock") following its nationalisation in February 2008. The basis of assessment is provided for by a statutory scheme made under the Banking (Special Provisions) Act 2008 ("the 2008 Act") which I will describe in due course. The appellants' general case is that the scheme perpetrates a violation of their rights guaranteed by Article 1 of the First Protocol to the European Convention on Human Rights ("A1P1"), which guarantees the protection of private property. The appellants say that under the scheme they will get nothing or virtually nothing for their shares which in truth, however, were valuable assets. Their claim is for a declaration under s.4 of the Human Rights Act 1998 ("the HRA") to the effect that the material terms of the 2008 Act are incompatible with their Convention rights; and a like declaration (alternatively a quashing order) in relation to the material provisions of the attendant secondary legislation.

THE HISTORY

2. The Divisional Court's judgment contains a relatively full account of the facts. However the following further description of the history is intended to point up aspects which seem to me to be important for the issues we must decide. The narrative owes a good deal (but not everything) to the witness statement of Mr John Kingman, Second Permanent Secretary at the Treasury, which is careful and comprehensive. It will be convenient to make certain further observations about the facts in dealing with counsel's individual submissions.

(1) The Appellants

3. The appellants were, as I have indicated, all shareholders in Northern Rock. The first appellant is an investment (or hedge) fund incorported in the Cayman Islands. As a result of transactions between 14 September 2007 and 12 February 2008 (dates whose significance will appear) it became the largest shareholder in Northern Rock, with 48,452,655 shares, amounting to 11.5% of the issued ordinary share capital. The second appellant is also an investment company incorporated in the Cayman Islands. It acquired its shares in Northern Rock by transactions between 19 September 2007 and 14 February 2008. By the date of Northern Rock's nationalisation, it owned 34,444,299 shares, amounting to 8.18% of the issued ordinary share capital. The third appellants are representative of small shareholders. Some of these acquired their shares on demutualisation; others are or were employees who acquired theirs under an approved profit share scheme or share incentive plan, or other incentive schemes, or by contributions to the company pension fund. Others were small investors who bought their shares on the stock exchange. Three of them purchased shares after 14 September 2007. At the date of nationalisation there were some 150,000 small shareholders.

(2) The Background

4. Northern Rock used to be a building society, mainly based in the north east of England. In 1997 it was "demutualised", converted into a public limited company, and authorised to carry on business as a bank under the Banking Act 1987. On its demutualisation, shares were issued to its existing depositors. Its core business remained residential mortgage lending. It grew to become the fifth largest UK mortgage lender and the eighth largest UK bank by market capitalisation. Unlike most banks in the United Kingdom Northern Rock financed a large part of its loan book by borrowing money on the wholesale money market. This allowed the company to achieve high levels of growth; but from about late July 2007 global financial markets became severely disrupted, and one consequence was that banks' ability to raise funds from the wholesale money markets was greatly constrained. The difficulties had begun to arise earlier in the year. By August 2007 the wholesale money markets had largely closed down. The disruption's causes lie outside the scope of this litigation, and ultimately cast no light on the issues we have to resolve. Very briefly, as Mr Kingman says at paragraph 27 of his statement (and as is well known), "the disruption was caused in part by concerns about the value of financial products which had been created based on mortgage loans made in the sub-prime sector of the US housing market."
5. Northern Rock was particularly affected by the disruption because of its dependence on the wholesale money markets. By August 2007 its liquidity problems had become critical. Philip Price, Chief Operating Officer of the first appellant, said in his first witness statement:

"45. The result of the credit squeeze in the UK was that inter-bank and wholesale markets effectively froze; inter-bank lending stopped very suddenly and left banks, such as Northern Rock (which depended upon the availability of such funding), unable to find liquidity from their usual sources in the wholesale markets."

Northern Rock's assets – as the appellants are at pains to emphasise – were substantial, certainly exceeding its liabilities. Its mortgage loan-book was sound. It was solvent in balance sheet terms. But it was unable to meet its debts as and when they fell due. Unless it obtained a large injection of funds it would almost certainly be put into some form of insolvency procedure and there would be a "fire sale" liquidation of its assets. On 13 August 2007 Northern Rock alerted the Financial Services Authority ("FSA") to its liquidity problems.

(3) The Tripartite Authorities: "LOLR"

6. The Treasury, the Bank of England and the FSA are together known as the Tripartite Authorities. The FSA has regulatory functions under the Financial Services and Markets Act 2000. The Bank of England is of course the UK central bank. As the Divisional Court said, it is the "bankers' bank". In certain circumstances it may provide financial assistance as what is called "Lender of Last Resort". Assistance of this kind is known in banking circles, and has been referred to in this litigation, by the acronym LOLR. The precise purposes of LOLR, and the conditions under which it may be made available, are of great importance for the issues in this appeal.
7. A decision to provide LOLR is made under procedures set out in a Memorandum of Understanding ("MoU") between the Tripartite Authorities. The MoU provides:

"14. In exceptional circumstances, there may be a need for an operation which goes beyond the Bank's published framework for operations in the money market. Such a support operation is expected to happen very rarely and would normally only be undertaken in the case of a genuine threat to the stability of the financial system to avoid a serious disturbance in the UK economy. If the Bank or the FSA identified a situation where such a support operation might become necessary, they would immediately inform the other authorities and invoke the co-ordination framework outlined in paragraph 16 below. Ultimate responsibility for authorisation of support operations in exceptional circumstances rests with the Chancellor. Thereafter they would keep the Treasury informed about the developing situation, as far as circumstances allowed.

15. In any such exceptional circumstances, the authorities' main aim would be to reduce the risk of a serious problem causing wider financial or economic disruption. In acting to do this, they would seek to minimise both moral hazard in the private sector and financial risk to the taxpayer arising from any support operation."

8. The principles on which LOLR is provided by the Bank of England are further explained in a well-known lecture given at the London School of Economics in 1993 by the then Governor of the Bank, Mr Eddie (later Lord) George, entitled "The pursuit of financial stability" (the second LSE Bank of England lecture). I must set out substantial extracts:

"The phrase itself [sc. Lender of Last Resort – LOLR] is liable to cause confusion, so let me first clarify what it does not mean. As I have explained already, we do not see it as our job to prevent each and every bank from failing. The possibility of failure is necessary to the health of the financial system, as it is to the efficiency of all other economic activity. If I can quote Bagehot again: 'Any aid to a present bad bank is the surest mode of preventing the establishment of a future good bank'...

But when a bank does seem likely to fail, the central bank must at least consider the option of supporting it... [T]here are circumstances when we may decide that, were an institution not to meet its obligations as they fell due, that would pose a serious threat to the financial system as a whole.

I should emphasise here what I believe is a crucial, but often misunderstood, point: if we decide to support a particular bank, it is not because we carry a flag for that bank as opposed to others. Our involvement is not designed to give special protection to its depositors, or to safeguard the positions of its employees, nor is it based on a wish to help its shareholders or management, who should, indeed, expect to be penalised...

Of course, our support may help the bank and its various stakeholders, but this would be essentially as a by-product of meeting our wider objective. The only issues for us are: (a) what effect the failure of the institution would have on the system as a whole; and (b) what should be done to protect the system from contagion.

In reaching a decision on support, we take care not to be predictable. Central bankers have raised unpredictability to an art form, so that the phrase 'constructive ambiguity' has become rather popular in our circles. But it is essential that no one – no one – should expect support as a matter of course...

Principles of last resort assistance

The overriding principle is not new... Our support, whatever form it takes, is directed to safeguarding the financial system (and therefore preventing damage to the wider economy), not the institution itself. Central bankers have to keep this permanently in the front of their minds, which is why I make no apology for repeating it now.

Beyond that, there are various rules which we apply. First, we will explore every option for a commercial solution before committing our own funds. Initially, we will always look to major shareholders to provide support. Short of that, we will encourage the bank to try to find a buyer...

Second, central banks are not in the business of providing public subsidy to private shareholders. If we do provide support, we will try to structure it so that any losses fall first on the shareholders and any benefits come first to us. And any support we provide will be on terms that are as penal as we can make them, without precipitating the collapse we are trying to avoid.

Third, we aim to provide liquidity: we will not, in normal circumstances, support a bank that we know at the time to be insolvent. Our own capital is not there to be used as risk capital. But it would be wrong to conclude from this that loans or guarantees never involve any risk...

Fourth, we look for a clear exit. The company may be required to run down or restructure its operations, under our surveillance, to the point where it can do without our support within a given period. Making the terms of our support as unattractive as possible has the great advantage of encouraging this process... We aim to protect the system, not to keep in being unviable banking capacity and so interfere in the market process unnecessarily.

9. Clearly the principal theme of this exegesis is that LOLR is deployed, when it is deployed, strictly and exclusively for the protection of the banking system (and thus the general economy) as a whole, and not at all in the interests of the stricken institution. A bank's failure may, by force of rumour and suspicion, undermine other banks, perhaps very rapidly – Fama, malum qua non aliud velocius ullum – but it will not always do so. The use of LOLR is discretionary, selective and unpredictable. And it is provided "on terms that are as penal as we can make them".
10. These aspects of the circumstances in which, and the terms on which, LOLR may be offered together serve another condition or requirement of the policy: the avoidance of what is called "moral hazard". "Moral hazard" has become a term of art in banking circles. Its meaning is not self-evident. As I have shown, the phrase is mentioned at paragraph 15 of the MoU. It refers to the possibility that if an institution in trouble believes it will or may be bailed out by the State, it is more not less likely to make poor business decisions; and other banks, perceiving the chance of Treasury support if they too got into difficulty, might also behave less than responsibly. Such conduct would or might in turn lead to an increased chance of economic turbulence including a run on the banks. In order to avoid the onset of "moral hazard" the central bank should not, and should not be seen to, lend support too readily to institutions whose management practices have led them into difficulty. Otherwise LOLR might be seen as a form of insurance against bad banking decisions, and that in turn would encourage more of the same.
11. Moral hazard's danger, then, is that the provision of LOLR might come to resemble the electron microscope, which changes what it sees. The constraints and conditions described by Lord George – last resort, selectivity, unpredictability, no comfort for the shareholders, clear exit – are all fashioned, in part at least, to avoid the hazard.

(4) Support for Northern Rock

12. This was the potential exceptional support structure which was in place when Northern Rock approached the FSA on 13 August 2007. Shortly thereafter the Tripartite Authorities determined that the criteria for LOLR set out in the MoU were satisfied. They judged that if Northern Rock were to get into deeper difficulty, there was a grave risk that uncertainty and want of confidence would spread to other institutions which were also exposed to the wholesale markets. On 3 September 2007 they agreed in principle to provide financial support so that Northern Rock could maintain its liquidity.
13. As at 13 September 2007 no public announcement had been made about the financial support to be provided to Northern Rock. However the fact that the company had sought and was to be provided with support was leaked to the BBC and broadcast on the evening of 13 September. There followed a run on the bank. On 14 September 2007 (which, it will be recalled, preceded the acquisition of shares by the first and second appellants and some of the small shareholders) the Bank of England provided facilities to Northern Rock. They consisted principally in a loan facility secured against high quality collateral whose value effectively capped what was available under the loan.
14. On the same day, 14 September 2007, the Treasury issued a press release:

"The Chancellor of the Exchequer has today authorised the Bank of England to provide a liquidity support facility to Northern Rock against appropriate collateral and at an interest rate premium. This liquidity facility will be available to help Northern Rock to fund its operations during the current period of turbulence in financial markets while Northern Rock works to secure an orderly resolution to its current liquidity problems.

The decision to authorise was made by the Chancellor on the basis of recommendations by the Governor of the Bank of England and the Chairman of the Financial Services Authority in accordance with the framework set out in the published Memorandum of Understanding between the Bank, FSA and HM Treasury.

The FSA judges that Northern Rock is solvent, exceeds its regulatory capital requirement and has a good quality loan book. The decision to provide a liquidity support facility to Northern Rock reflects the difficulties that it has had in accessing longer term funding and the mortgage securitisation market, on which Northern Rock is particularly reliant.

In its role as lender of last resort, the Bank of England stands ready to make available facilities in comparable circumstances, where institutions face short-term liquidity difficulties."

Materials disclosed by the respondent shows that the loan (the "liquidity support facility") was made available at a penal rate of interest.

15. Yet further measures were taken. On 17 September 2007, the Chancellor of the Exchequer issued a statement on financial markets. He said:

"... In the current market circumstances, and because of the importance I place on maintaining a stable banking system and public confidence in it, I can announce today that following discussions with the Governor and the Chairman of the FSA, should it be necessary, we, with the Bank of England, would put in place arrangements that would guarantee all the existing deposits in Northern Rock during the current instability in the financial markets.

This means that people can continue to take their money out of Northern Rock. But if they choose to leave their money in Northern Rock it will be guaranteed safe and secure."

As I understand it this was prompted, or largely prompted, by the run on the bank which followed the BBC disclosure.

16. However the facilities provided by the Bank of England on 14 September 2007 were virtually exhausted by 9 October 2007. Additional facilities were required to prevent the company from collapsing. Certain extensions had been granted on 20 and 21 September. On 9 October a further extension was given to cover new retail deposits made after 19 September. The facilities so far as they took the form of loans were as I understand it repayable on demand, but subject to a time limit of 12 February 2008 (subsequently extended to 17 March 2008 to coincide with the date by which the United Kingdom was required to submit a restructuring or liquidation plan for Northern Rock to the European Commission, which had sanctioned the support pursuant to the State Aid provisions of the EU Treaty only up to that date). On 9 October the Treasury, on behalf of the Tripartite Authorities, confirmed that:

"The guarantee arrangements previously announced to protect existing depositors of Northern Rock plc will be extended to all new retail deposits made after 19 September, including those made from today. These arrangements will cover all retail deposits, including future interest payments, movements of funds between accounts and term deposits for the duration of their term.

These arrangements will be complemented by additional facilities through the Bank of England.

The arrangements and revised facilities have been put in place at the request of Northern Rock plc. They will allow the Company to continue to pursue the full range of its strategic options.

Northern Rock plc will pay an appropriate fee for the extension of the arrangements, which is designed to ensure it does not receive a commercial advantage. As previously announced, the arrangements to protect depositors of Northern Rock plc will remain in place during the current instability in the financial markets."

17. The Chancellor of the Exchequer gave further details to the House of Commons on 11 October 2007. He said:

"In order for this guarantee arrangement not to provide the company with a commercial advantage, a fee (from which the Treasury will benefit) has been attached to it, set at a higher rate than the interest premium on the additional facilities outlined below."

These additional facilities, provided by the Bank of England, were to be

"repayable on demand and will incur a premium rate of interest... The facilities are secured against all assets of the company..."

This was, of course, quite different from the collateral which secured the 14 September 2007 facilities. This time there were both fixed charges and a floating charge over all the company's assets. In addition the Bank sought and obtained an indemnity from the Treasury in respect of its potential liability under the 9 October facilities.

18. On 18 December 2007, in response to a rating agency's intimation that it proposed to downgrade Northern Rock's long term unsecured, unguaranteed and unsubordinated credit rating, the Treasury confirmed that the guarantee arrangements for Northern Rock described in its earlier announcements were being extended at the company's request to certain unsubordinated wholesale obligations. In addition:

"No change is being made to the guarantee arrangements in respect of retail deposits of Northern Rock plc, which remain fully protected under the announcements previously made by HM Treasury. Northern Rock plc will pay an appropriate fee for the extension of the guarantee arrangements. As previously announced, the arrangements to protect retail and wholesale depositors of Northern Rock plc will remain in place during the current instability in the financial markets. Reasonable notice, which will not be less than 3 months, will be given by HM Treasury of any termination of these arrangements."

By 31 December 2007 the Bank of England had lent almost £27bn to Northern Rock, and the Treasury had assumed contingent liabilities under guarantees to the tune of about £29bn.

(5) Nationalisation

19. Events now moved speedily towards nationalisation. It is important to have in mind that the LOLR support was never intended to be other than temporary. Its purpose was to create a breathing space in which a solution to Northern Rock's difficulties might be found which would promote (at least not damage) the public interest – the stability of the banking system and thus the general economy – for which the support was given. As Lord George had said at the LSE, "[w]e aim to protect the system, not to keep in being unviable banking capacity and so interfere in the market process unnecessarily". This aspect plays its part in giving effect to the policy's repugnance to "moral hazard". And in any event, the duration of LOLR support was limited by the EU deadline of 17 March 2008 to which I have already referred.
20. In an announcement on 21 January 2008 the Tripartite Authorities expressed their preference for a "private sector solution". They continued:

"However, if no private sector solution is proposed which the Bank of England and HM Treasury, as providers of financial support to the company, and the Financial Services Authority, as its regulator, consider they can agree in light of their objectives of protecting taxpayers, promoting financial stability and protecting consumers, the Government would bring forward legislation which would empower HM Treasury, by order, to take Northern Rock into temporary public ownership. It is envisaged that any such power would be used to transfer Northern Rock's share capital, including its preference shares, into public ownership... The Tripartite Authorities consider that a temporary period of public ownership would best serve their stated objectives if a private sector solution could not be agreed on terms acceptable to the Tripartite Authorities, acting in their respective capacities. The Tripartite Authorities do not consider that an administration of Northern Rock would meet these objectives.

All of the Government's guarantee arrangements would remain in place and accordingly savers' money would remain absolutely safe. Savers and borrowers would not be affected by the company being taken into public ownership. Northern Rock would continue to operate and provide services to customers as normal. Branches, call centres, postal and internet banking would all remain open and accessible as usual.

...

The legislation brought forward would provide for the assessment by an independent valuer of compensation payable to any holder of securities transferred to HM Treasury. The principles for assessing compensation, which would be set out in the legislation brought forward, would reflect the principle that the Government should not be required to compensate shareholders for value which is dependent on taxpayers' support and the fact that public sector ownership would be an alternative to an administration of the company. Accordingly, the compensation would be assessed by the valuer on the basis, among other things that all financial assistance to Northern Rock from the Bank of England or HM Treasury (including HM 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."

21. The appellants emphasise an observation made by the Prime Minister at Prime Minister's Questions on 23 January 2008, when he said:

"[T]axpayers... will get their money back, and make a profit."

Apparently this statement remains on the 10 Downing St website. The attribution of a profit motive to government figured large in the appellants' case. For his part Mr Kingman is at pains to insist that in looking to nationalise Northern Rock the government was not motivated by the desire to secure a profit. The Prime Minister's comment was made in a context concerning potential private bids, as regards which the government had indicated it would expect to take an equity share. Nationalisation was not the context; the decision to nationalise had not by then been made.

22. By 17 February 2008 there were only two private sector proposals for the future of Northern Rock, one put forward by what was referred to as the Virgin Consortium and one by the company's management. Both involved the continuation of public financial support to the company. On that day the Chancellor announced the Government's decision to reject these options and go down the nationalisation route – "temporary public ownership". He said:

"…

3. The Government has now completed its review of the two detailed proposals on the table. We have made our choice after considering all proposals.

4. But in current market conditions, we do not believe that they deliver sufficient value for money for the taxpayer.

5. Our financial adviser Goldman Sachs has concluded from a financial point of view that a temporary period of public ownership better meets our objective of protecting taxpayers.

6. So the Government has therefore today decided to bring forward legislation to take Northern Rock into a period of temporary public ownership.

...

10. The Government guarantee arrangements I announced last year remain in place and will continue to do so.

...

14. The Financial Services Authority continue to assure me the bank is solvent. It believes that Northern Rock's mortgage book is of good quality.

...

22. Here in Britain, because of its particular business model, Northern Rock, last summer, found it increasingly difficult and then impossible to raise the billions of pounds it needed to finance its business.

23. For financial stability reasons, we decided that it was right to support Northern Rock to allow it to continue operating. It was right to protect to depositors' money and to protect the wider financial system.

24. In agreeing to that support, the Government had three objectives.

25. First, financial stability. In the then prevailing conditions, there was a serious risk that other parts of the banking system in Britain could have been destabilised.

26. It was right and necessary for the government to intervene because of the need to preserve financial stability in the system. That support was successful and prevented further contagion.

27. Secondly, the Government was also determined to safeguard depositors' money and we took action to put in place guarantee arrangements which have been successful in doing so.

28. None of the guarantees have been called and therefore there has been no cost to the taxpayer.

29. That brings me to my third objective of protecting the interests of the taxpayer.

...

38. Both [sc. private sector] proposals involve a degree of risk for taxpayers and very significantly an implicit subsidy from the Treasury, involving a payment below the market rate to the Government for continuation of its guarantee arrangements and for the financing we would be putting in place.

39. Each proposal has its pros and cons. The Virgin proposal, for instance, would have brought a new brand and management.

40. However, the taxpayer would only have seen any share of the private sector's return if the value of the business to its investors had reached at least £2.7bn.

41. The Board's proposal would have involved a similar level of subsidy. But it has other disadvantages, compared with Virgin, including: that it would bring in less new capital, providing less 'buffer' protecting the taxpayer from risk; and, that the business would have been dependent on Government guarantees for new retail deposits for longer.

42. A subsidy on the scale required would not in the Government's judgement provide best value for money for the taxpayer, in circumstances where the private sector rather than the taxpayer would secure the vast majority of the value created over the period ahead. This would be a poor reflection of the balance of risk borne by the two sides.

43. By contrast, under public ownership the Government will secure the entire proceeds from the future sale of business in return for bearing the risks in this period of market uncertainty.

44. We could have chosen to pursue either of the two private sector options. But I have always said that I was determined to protect the taxpayers' interest.

45. It is clear that the private sector alternatives do not meet this test, when compared with public ownership.

46. Accordingly, and taking all the wider considerations into account, I have concluded that this is the right approach.

47. Moreover, it is my clear assessment that under the approach we are taking the taxpayer will see its outstanding loans to Northern Rock repaid in full, with interest – and that the business can be returned to the private sector as financial markets stabilise."

23. Lord Pannick QC for the first appellant submits at paragraph 33(2) of his skeleton argument that the substance of the Prime Minister's statement about profit was effectively repeated by the Chancellor at paragraph 43 of this text. He refers also to the Chancellor's statement at a press conference on 17 February 2008:

"I think it is better for the Government to hold on to Northern Rock for a temporary period and as and when market conditions improve, which they will, the value of Northern Rock will grow and therefore the taxpayer will gain from 100% of any gain that might be realised...

As I said, market conditions will improve. Northern Rock's mortgage book is good but I think it would be a mistake for us to abandon this asset and take a loss now when if we hold on to it, when market conditions improve the taxpayer will then be able to enjoy all of the gain that would result."

24. Perhaps the high water-mark of the appellants' case on the government's putative profit motive rests on the Chancellor's statement to Parliament the next day, 18 February. By this time the Bill which was to become the 2008 Act was before the House of Commons. Its relevant terms had been adumbrated by the Tripartite Authorities' statement of 21 January, which I have set out. On 18 February the Chancellor said:

"A subsidy on the scale required would not have provided best value for the taxpayer. The private sector rather than the taxpayer would have secured the vast majority of the Value created, and that would have been a poor reflection of the balance of risk borne by the two sides. By contrast under public ownership, the taxpayer will secure the entire benefit and proceeds from the sale of the business in return for bearing the risks during this period of market uncertainty. That is why we made the decision that we did...

The Bill also provides for appropriate compensation for shareholders..."

I shall address the appellants' case as to the motives of the government in the nationalisation of Northern Rock when I come to confront the parties' submissions.

25. The decision to nationalise was arrived at with the assistance of advice furnished on 17 February 2008 by Messrs Goldman Sachs. We have seen, in conditions of confidence, certain documents relating to this, and Mr Kingman offers some account of the advice at paragraphs 114 ff of his statement. Goldman Sachs "modelled three scenarios (a recession scenario, a base case scenario, and a market upside scenario)" (Kingman paragraph 114(A)) which were respectively applied to the Virgin and management proposals, and the option of temporary public ownership, in order to ascertain the degree of ongoing public subsidy which each of the three would entail. The private sector proposals involved public subsidy essentially because the fees on offer to the Treasury in return for government guarantees (which were part and parcel of the proposals) were pitched substantially lower than a commercial rate. But nationalisation would also require a degree of ongoing support and subsidy from the government, as Goldman Sachs demonstrated. Their work showed, however, that on the assumptions made the "estimated subsidy net of guarantee fees, warrants and exit proceeds" (Goldman Sachs' table) would be substantially less in the nationalisation case than in the other two, save in the recession scenario, where the management proposal offered some saving of subsidy. The Virgin proposal entailed the highest levels of subsidy for all three scenarios. The highest of all on Goldman Sachs' figures was £2.8bn for the Virgin proposal on the recession scenario; the lowest was £0.45bn for the nationalisation option on the market upside scenario.
26. It is important to be clear that these figures are not firm predictions of losses which the government would incur in the various scenarios; they are accounting constructs based as I have indicated on a series of assumptions. Their purpose was to provide an objective foundation, so far as accountancy expertise might do it, for selecting the "exit route" from Northern Rock which would cost the taxpayer least. There is nothing in Goldman Sachs' documents which points to any profit to the government upon the company being sold back into the market at a future date. To the contrary, the projection on the nationalisation option is for net subsidy in all three scenarios even assuming (as the calculations do) no payment to the existing shareholders in consideration of the transfer of their shares. Whether in fact there would be a profit on a future sale no doubt depended, and indeed depends, on there being sufficiently favourable market conditions to generate a price for the company which would exceed the amount of actual subsidy paid out by the government. But such an outcome, or its possibility, did not figure in Goldman Sachs' prognostications.
27. In addition to the alleged anticipation of profit it is also Lord Pannick's case that the government effectively ran no risk in subsidising Northern Rock, either before or after nationalisation; that was (it is said) the effect of various government pronouncements and in any event the support advanced was backed by substantial security. Goldman Sachs' assumptions allowed for an exposure to risk. Again, I shall address this point in dealing with the parties' submissions.
28. And so Northern Rock's nationalisation went ahead. On 22 February 2008 the entire share capital of the company was transferred to the Treasury Solicitor as nominee of the Treasury.
29. I must next give an account of the legislation under which that was done, and which also made provision (as I have foreshadowed) for the scheme which established the basis of assessment of any compensation to be paid to the shareholders.

THE LEGISLATION

30. The 2008 Act passed into law on 21 February 2008. On the same day the Northern Rock plc Transfer Order 2008 ("the Transfer Order") was made pursuant to s.3 of the Act. It came into force on 22 February and by paragraph 2 effected the transfer of Northern Rock's share capital to the Treasury Solicitor as at the beginning of that day.
31. The following provisions of the 2008 Act are material:

"2(1) The power of the Treasury to make an order under—

(a) section 3 (transfer of securities issued by an authorised UK deposit-taker), or

(b) section 6 (transfer of property, rights and liabilities of an authorised UK deposit-taker),

is exercisable in relation to an authorised UK deposit-taker if (and only if) it appears to the Treasury to be desirable to make the order for either or both of the following purposes...

(2) The purposes are—

(a) maintaining the stability of the UK financial system in circumstances where the Treasury consider that there would be a serious threat to its stability if the order were not made;

(b) protecting the public interest in circumstances where financial assistance has been provided by the Treasury to the deposit-taker for the purpose of maintaining the stability of the UK financial system.

...

3(1) The Treasury may, in relation to all or any securities of a specified description that have been issued by an authorised UK deposit-taker, by order make provision for or in connection with, or in consequence of, the transfer of the securities to any of the following—

...

(b) a nominee of the Treasury;

...

5(1) The Treasury must by order—

(a) in relation to an order under section 3 that transfers securities only to the public sector, make a scheme for determining the amount of any compensation payable by the Treasury to persons who held the securities immediately before they were so transferred;

...

(4) In determining the amount of any compensation payable by the Treasury by virtue of any provision in an order under this section, it must be assumed—

(a) that all financial assistance provided by the Bank of England or the Treasury to the deposit-taker in question has been withdrawn (whether by the making of a demand for repayment or otherwise), and

(b) that no financial assistance would in future be provided by the Bank of England or the Treasury to the deposit-taker in question (apart from ordinary market assistance offered by the Bank of England subject to its usual terms).

...

9(1) An order under section 5... may in particular make provision—

(a) for the manner in which any compensation or consideration is to be assessed, including provision as to methods of calculation, valuation dates and matters to be taken into, or left out of, account in making valuations;

...

(2) The provision that may be made by virtue of subsection (1)(a) includes the making of assumptions as to any matter, including in particular the making of one or more of the following assumptions about the authorised UK deposit-taker in question—

(a) that it is unable to continue as a going concern;

(b) that it is in administration;

(c) that it is being wound up.

(3) Subsection (1)(a) is subject to [section] 5(4)..., but [that subsection does] not—

(a) prevent the inclusion of provision requiring the making of the assumptions mentioned in [that subsection] in any case where they are not required to be made by [that subsection]; or

(b) otherwise restrict the provision that may be made by virtue of subsection (1)(a).

...

13(1) Orders and regulations under this Act are to be made by statutory instrument.

...

(3) A statutory instrument which contains an order under section 5... (whether alone or with other provision) may not be made unless a draft of the instrument has been laid before, and approved by a resolution of, each House of Parliament.

...

(5) A statutory instrument containing an order under this Act to which subsection (3) does not apply is subject to annulment in pursuance of a resolution of either House of Parliament."

32. On 12 March 2008 the Northern Rock plc Compensation Scheme Order 2008 ("the Compensation Scheme Order") was made pursuant to s.5 of the 2008 Act and came into force on the following day. It contains the following provisions:

"3(2) The amount of compensation payable to a person shall be an amount equal to the value immediately before the transfer time of all shares in Northern Rock held immediately before the transfer time by that person.

...

6 In determining the amount of any compensation payable by the Treasury to any person in accordance with paragraphs 3 to 5, it must be assumed (in addition to the assumptions required to be made by section 5(4) of the Act (compensation etc. for securities transferred etc.)) that Northern Rock —

(a) is unable to continue as a going concern; and

(b) is in administration.

7(1) The Treasury shall appoint an independent valuer for the purposes of this Scheme.

(2) The valuer so appointed shall determine the amount of any compensation payable by the Treasury in accordance with Part 2 of this Scheme.

...

10(1) The valuer may make such rules as to the procedure in relation to the assessment of any compensation (including the procedure for the reconsideration of any decisions relating to the assessment of compensation) as he or she considers appropriate.

..."

Under paragraph 13 the Treasury and the affected shareholder are entitled, if dissatisfied with any revised assessment notice issued by the valuer, to refer the matter to the Financial Services and Markets Tribunal. We are not concerned with the details relating to that.

33. In setting out the relevant legislation I should include the text of A1P1:

"Protection of property

Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.

The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties."

THE ISSUES

34. Lord Pannick QC for the first appellant, Mr Beloff QC for the second and Mr de la Mare for the third each advanced distinct submissions, which were in turn adopted by the other two. The case thus naturally falls into three parts. I will call Lord Pannick's argument "the principal issue", Mr Beloff's "the regulatory issue" and Mr de la Mare's "the procedural issue". As will shortly be apparent the real issue in the case in my judgment (with respect to the other two) is the first one.

THE PRINCIPAL ISSUE

35. Lord Pannick submits that the assumptions which the valuer of the Northern Rock shares is required to make pursuant to s.5(4) of the Act mean that the appellants will have been deprived of their shares for nothing (or a derisory amount), and that in those circumstances their rights under A1P1 will have been violated.
36. I should first describe the common ground. There is no contest but that the appellants' shares were possessions for the purposes of A1P1 and that by reason of the Transfer Order the appellants were deprived of those possessions within the meaning of the first paragraph of A1P1. It is also accepted that the nationalisation of Northern Rock was itself lawful: both as being in the public interest as A1P1 requires, and also justified within the terms of s.2(2)(b) of the 2008 Act. The challenge is only to the effect, on the facts, of the s.5(4) assumptions. I should add that the further assumptions required to be made under paragraph 6 of the Compensation Scheme Order are the fifth wheel of the coach; it is accepted that in the circumstances they add nothing to the case on the s.5(4) assumptions.
37. It will serve for clarity if I first give an outline of the parties' cases and then provide an account of the relevant learning. Lastly I will as necessary confront the detailed arguments, and set out my conclusions.

The Arguments in Outline

38. Lord Pannick submits that at all material times up to the vesting date (that is, the date of transfer – 22 February 2008) Northern Rock was a solvent company, with valuable assets and a sound mortgage book. It suffered only from "short-term liquidity difficulties". The government, moreover, had provided financial support on terms by which it was well rewarded. The loans were at penal rates of interest and well secured. By the vesting date such repayments as had fallen due had been made. No guarantees had been called in. The support had thus been given at no risk and no cost. The absence of risk to the taxpayer had been repeatedly asserted – Lord Pannick might say trumpeted – by the government. The company's valuable assets, which had not of course been supplied by the government, were a material factor (alongside the Treasury's support) in the company's capacity to continue trading and would remain so if and when Northern Rock came to be re-sold into the market.
39. Accordingly Lord Pannick submits that it was "manifestly disproportionate" for the State, upon the company's nationalisation, to take the whole benefit of its value, and potentially to collect a handsome profit on re-sale, leaving the shareholders effectively with nothing. Yet, so the argument goes, that is the result which the s.5(4) assumptions (and, for good measure, the assumptions required by paragraph 6 of the Compensation Scheme Order) produce. Their consequence is that the shares in the company fall to be valued for the purposes of compensating the deprived shareholders on the basis of a "fire sale" – a forced sale of the assets of a company in liquidation (or other form of insolvency procedure); circumstances in which, notoriously, the return obtained is very depressed. Lord Pannick says there is uncontradicted expert evidence, from Mr Ashton and Mr Katz, that on the statutory assumptions the valuer appointed under the Compensation Scheme Order would most likely conclude that the value of the shares was nil.
40. In all these circumstances Lord Pannick says that the application of the s.5(4) assumptions violates his client's rights under A1P1.
41. Mr Sumption QC for the respondent submits in effect that Lord Pannick's picture of the facts is tendentious and inaccurate, and I shall in due course have to consider some of the factual nuance. Mr Sumption's overall case is that the object of the 2008 Act (so far as concerns the compensation provisions) was to put the shareholders in the position they would have occupied if the company had received no financial support from government, and that is precisely what the Compensation Scheme Order achieved. His skeleton argument states:

"7(2)... In principle, the proprietors should not be compensated for value attributable to public financial support to which the institution was not entitled as of right, and which was given not for the proprietors' benefit but in the public interest...

(3)... [S]o far as the business thrives in public ownership and the state subsequently obtains value for it (eg on a resale to the private sector), that value is no more than the reflection of the risks which had to be run to achieve it."

More tersely, Mr Sumption submitted in court that if the statutory assumptions produce a nil value, that is only because the business was worthless without government support.

42. Against the background of these sketches of counsel's submissions, I may introduce the relevant learning.

Three Principles Established by the Authorities

43. As it seems to me the jurisprudence has established three governing principles all of which are engaged in the present case. They are (1) the need for a fair balance to be struck between public interest and private right; (2) the principle of proportionality; (3) the doctrine of the margin of appreciation.
44. The first of these principles has been articulated many times in the case-law of the European Court of Human Rights. The learning shows that inherent in the whole of the Convention there is an imperative search for a fair balance between the demands of the general interest of the community and the requirements of the protection of the individual's fundamental rights: see for example Sporrong and Lönnroth v. Sweden (1983) 5 EHRR 35 paragraph 69. Sporrong was an A1P1 case, as were Jahn v Germany (2006) 42 EHRR 49 and Ukraine-Tyumen v Ukraine (Application no. 22603/02, 22 November 2007), in which the principle was re-iterated. But it has been applied and repeated in the context of other Convention rights, as in Soering (1989) 11 EHRR 439 (see paragraph 89: Soering was an Article 3 case). Note also the decision of their Lordships' House in Razgar [2004] 2 AC 368 at paragraph 20 (an Article 8 case). Examples are legion but it is unnecessary to multiply them further.
45. The need to strike such a balance between public interest and individual right is a general principle of Convention law. That is important; the principle's very generality demonstrates the breadth of potential concerns to which a court, adjudicating upon a claim of violation of a Convention right, may have to pay attention. It is a unifying principle, which rationalises the variety and divergence of outcomes which the cases present.
46. The second principle established by the cases is the requirement of proportionality. Proportionality plays a significant part not only in the application of A1P1 but also, as is well known, in relation to other Convention rights, notably what might be called the political rights guaranteed by Articles 8 – 11. The second paragraph in each of these Articles allows controlled intrusions into the right in question in pursuance of a legitimate aim; but in every case the intrusive measure must be proportionate to the aim in view.
47. And in every case it is through the catalyst of proportionality that the first principle, the striking of the balance, begins to take concrete form. This is so for all of the rights to which the first principle applies. As regards A1P1 the Strasbourg court said this in Ukraine-Tyumen v Ukraine:

"55.  The Court reiterates that an interference with the peaceful enjoyment of possessions must strike a 'fair balance' between the demands of the general interest of the community and the requirements of the protection of the individual's fundamental rights (see, among other authorities, Sporrong and Lönnroth v. Sweden...). The concern to achieve this balance is reflected in the structure of [A1P1] as a whole, including therefore the second sentence, which is to be read in the light of the general principle enunciated in the first sentence. In particular, there must be a reasonable relationship of proportionality between the means employed and the aim sought to be realised by any measure depriving a person of his possessions (see Pressos Compania Naviera S.A. and Others v. Belgium, judgment of 20 November 1995, Series A no. 332, p. 23, § 38)."

48. But the requirement of proportionality by no means implies that the erstwhile owner of property taken by the State must always be compensated at full value if a violation of A1P1 is to be avoided. Such a rule would frustrate, not fulfil, the search for the fair balance. In Holy Monasteries v Greece (1994) 20 EHRR 1 the court said this:

"71. Compensation terms under the relevant legislation are material to the assessment whether the contested measure respects the requisite fair balance and, notably, whether it does not impose a disproportionate burden on the applicants. In this connection, the taking of property without payment of an amount reasonably related to its value will normally constitute a disproportionate interference and a total lack of compensation can be considered justifiable under [A1P1] only in exceptional circumstances. [A1P1] does not, however, guarantee a right to full compensation in all circumstances, since legitimate objectives of 'public interest' may call for less than reimbursement of the full market value (see the Lithgow and Others v. the United Kingdom judgment of 8 July 1986, Series A no. 102, pp. 50-51, para. 121)."

As regards the case where nothing is given in return by the State, it is interesting to note that there has only been one instance where the Strasbourg court has sanctioned the deprivation of property without any compensation at all: Jahn v Germany (2006) 42 EHRR 49. The court made it clear that this result was only justified because of "the unique context of German reunification" (paragraphs 109-117, 125).

49. The first two principles, the balance to be struck and the doctrine of proportionality, march with a third. This is the doctrine of Convention law known as the margin of appreciation. The cases are replete with references, but Lord Hope of Craighead's summary of its effect in Kebilene [2000] 2 AC 326, 380, will with respect suffice for present purposes:

"The doctrine of the 'margin of appreciation' is a familiar part of the jurisprudence of the European Court of Human Rights. The European Court has acknowledged that, by reason of their direct and continuous contact with the vital forces of their countries, the national authorities are in principle better placed to evaluate local needs and conditions than an international court: Buckley v. United Kingdom (1996) 23 EHRR 101, 129, paras. 74-75. Although this means that, as the European Court explained in Handyside v. United Kingdom (1976) 1 EHRR 737,http://www.bailii.org/eu/cases/ECHR/1976/5.html 753, para. 48, 'the machinery of protection established by the Convention is subsidiary to the national systems safeguarding human rights', it goes hand in hand with a European supervision. The extent of this supervision will vary according to such factors as the nature of the Convention right in issue, the importance of that right for the individual and the nature of the activities involved in the case.

This doctrine is an integral part of the supervisory jurisdiction which is exercised over state conduct by the international court. By conceding a margin of appreciation to each national system, the court has recognised that the Convention, as a living system, does not need to be applied uniformly by all states but may vary in its application according to local needs and conditions."

50. In James and Others v UK [1986] 8 EHRR 123, which is referred to in the Lithgow judgment, these three aspects of the Strasbourg jurisprudence – the balance to be struck, the requirement of proportionality and the margin of appreciation – appear in constellation with each other. The case accordingly repays particular attention. The applicants in James were trustees acting under the Will of the Second Duke of Westminster. The case concerned the terms on which tenants holding residential property under long leases were permitted pursuant to the Leasehold Reform Act 1967 to "enfranchise" their property, that is, acquire the freehold interest from the landlord. The Westminster Estate was the freeholder of many such properties in central London. The applicants' complaint was that they were required to give up the freehold to the tenant for much less than its market value (the price payable was effectively based on site value only), and that accordingly their rights under A1P1 were violated.
51. Leasehold enfranchisement had, as the court said (paragraph 18), been part of Labour Party policy for some years. It was regarded as a necessary social reform, required to right an injustice. A White Paper was published in 1966 explaining the policy. After the Labour government's re-election to office in the same year a Bill was introduced into Parliament which became the 1967 Act. The fact that the subject-matter of the application fell within this context of high social policy greatly influenced the Strasbourg court, and did so in two interlocking ways. First, it meant that the doctrine of the margin of appreciation was applied particularly broadly. The court said:

"46. Because of their direct knowledge of their society and its needs, the national authorities are in principle better placed than the international judge to appreciate what is 'in the public interest'. Under the system of protection established by the Convention, it is thus for the national authorities to make the initial assessment both of the existence of a problem of public concern warranting measures of deprivation of property and of the remedial action to be taken... Here, as in other fields to which the safeguards of the Convention extend, the national authorities accordingly enjoy a certain margin of appreciation.

Furthermore, the notion of 'public interest' is necessarily extensive. In particular, as the Commission noted, the decision to enact laws expropriating property will commonly involve consideration of political, economic and social issues on which opinions within a democratic society may reasonably differ widely. The Court, finding it natural that the margin of appreciation available to the legislature in implementing social and economic policies should be a wide one, will respect the legislature's judgment as to what is 'in the public interest' unless that judgment be manifestly without reasonable foundation. In other words, although the Court cannot substitute its own assessment for that of the national authorities, it is bound to review the contested measures under [A1P1] and, in so doing, to make an inquiry into the facts with reference to which the national authorities acted."

Secondly, the political context furnished a particular justification for the basis upon which the price to the tenant for the freehold, notably less than market value, was fixed under the statute. The court said:

"54… Like the Commission, the Court observes that under the legal systems of the Contracting States, the taking of property in the public interest without payment of compensation is treated as justifiable only in exceptional circumstances not relevant for present purposes. As far as [A1P1] is concerned, the protection of the right of property it affords would be largely illusory and ineffective in the absence of any equivalent principle. Clearly, compensation terms are material to the assessment whether the contested legislation respects a fair balance between the various interests at stake and, notably, whether it does not impose a disproportionate burden on the applicants (see the above-mentioned Sporrong and Lönnroth judgment… paras. 69 and 73).

The Court further accepts the Commission's conclusion as to the standard of compensation: the taking of property without payment of an amount reasonably related to its value would normally constitute a disproportionate interference which could not be considered justifiable under [A1P1]. [A1P1] does not, however, guarantee a right to full compensation in all circumstances. Legitimate objectives of 'public interest', such as pursued in measures of economic reform or measures designed to achieve greater social justice, may call for less than reimbursement of the full market value. Furthermore, the Court's power of review is limited to ascertaining whether the choice of compensation terms falls outside the State's wide margin of appreciation in this domain (see paragraph 46 above).

…

56… [T]he 1967 basis of valuation, the effect of which is that the tenant pays approximately the site value but nothing for the buildings on the site, clearly and deliberately favours the tenant… On the view that Parliament took, it logically follows that 'in equity' the tenant should only be required to pay for that part of the property which he has not already paid for, that is the value of the ground. The 1967 basis of valuation, although it excludes the 'merger value'…, does compensate the landlord for the existing investment value of his interest in the ground. The objective pursued by the leasehold reform legislation is to prevent a perceived unjust enrichment accruing to the landlord on the reversion of the property. In the light of that objective, judged by the Court to be legitimate for the purposes of [A1P1], it has not been established, having regard to the respondent State's wide margin of appreciation, that the 1967 basis of valuation is not such as to afford a fair balance between the interests of the private parties concerned and thereby between the general interest of society and the landlord's right of property."

52. Lithgow and Others v. the United Kingdom (1986) 8 EHRR 329) (referred to in the citation set out above from Holy Monasteries v Greece) possessed certain similar features. It concerned nationalisation measures taken under the Aircraft and Shipbuilding Industries Act 1977. The applicants, previous owners of the nationalised assets, claimed that the compensation they received was grossly inadequate and discriminatory, so that the United Kingdom was in violation of A1P1 taken alone and in conjunction with Article 14. The court dismissed an argument to the effect that the nationalisation measures under the 1977 Act should be treated for the purpose of A1P1 in much the same way as a compulsory purchase order:

"121... [T]he applicants contended that, as regards the standard of compensation, no distinction could be drawn between nationalisation and other takings of property by the State, such as the compulsory acquisition of land for public purposes. The Court is unable to agree. Both the nature of the property taken and the circumstances of the taking in these two categories of cases give rise to different considerations which may legitimately be taken into account in determining a fair balance between the public interest and the private interests concerned. The valuation of major industrial enterprises for the purpose of nationalising a whole industry is in itself a far more complex operation than, for instance, the valuation of land compulsorily acquired and normally calls for specific legislation which can be applied across the board to all the undertakings involved. Accordingly, provided always that the aforesaid fair balance is preserved, the standard of compensation required in a nationalisation case may be different from that required in regard to other takings of property.

53. This approach opened the door to a broad application, in line with the reasoning in James, of the margin of appreciation:

"122. Whilst not disputing that the State enjoyed a margin of appreciation in deciding whether to deprive an owner of his property, the applicants submitted that the Commission had wrongly concluded from this premise that the State also had a wide discretion in laying down the terms and conditions on which property was to be taken. The Court is unable to accept this submission. A decision to enact nationalisation legislation will commonly involve consideration of various issues on which opinions within a democratic society may reasonably differ widely. Because of their direct knowledge of their society and its needs and resources, the national authorities are in principle better placed than the international judge to appreciate what measures are appropriate in this area and consequently the margin of appreciation available to them should be a wide one. It would, in the Court's view, be artificial in this respect to divorce the decision as to the compensation terms from the actual decision to nationalise, since the factors influencing the latter will of necessity also influence the former. Accordingly, the Court's power of review in the present case is limited to ascertaining whether the decisions regarding compensation fell outside the United Kingdom's wide margin of appreciation; it will respect the legislature's judgment in this connection unless that judgment was manifestly without reasonable foundation."

54. There are other cases which engage the three first rank Strasbourg principles I have described, that is the balance between public interest and private right, the requirement of proportionality, and the margin of appreciation. They include The Former King of Greece (2001) 33 EHRR 21 and Scordino v Italy (No 1) (2007) 45 EHRR 7. With respect they do not, I think, add anything of substance to James and Lithgow and I need not cite the judgments.

Relation Between the Three Principles

55. The importance of these authorities lies in what they tell us about the constellation (as I have put it) between the three first rank principles. I would express it in this way. The overarching principle is the first, the need to strike a balance between public interest and private right. The other two, proportionality and the margin of appreciation, provide the means by which the balance is struck. In the context of A1P1 the application of proportionality to a confiscation will ordinarily mean payment of an amount reasonably related to the value of the property taken, so as not to impose a disproportionate burden on the person deprived. However the relation between proportionality and the first principle is qualified by the third, the margin of appreciation. Its effect is that that relation is not rigid or constant. It must acknowledge the claims of government policy on democratic grounds, albeit within the frame of the Convention rights. As no doubt one might expect, the balance between public interest and private right will be struck, now more in favour of one, now more in favour of the other: depending in each case on the nature of the interest and the right.
56. For the purpose of A1P1 this process takes concrete form as follows. The paradigm case of a reasonable relationship between compensation and the property's value arises, no doubt, where full market value is paid. In that case the relationship between the two is one of identity. That or something not far off is likely to apply in what may be called a "micro-economic" setting, where for example a single property is taken to achieve a specific and limited local objective. In such a case proportionality is likely to require market value or something close to it, and the margin of appreciation may offer little or no scope to justify the deprivation of property for less. But there will be other cases in which the objective of the deprivation is much broader: perhaps a matter of high politics. In such instances the policy aim of the measure in question may be diminished or undermined or even contradicted by a requirement of full market value. The measure's intention may be to re-distribute wealth, or to achieve a necessary social reform, goals which are or may be perceived to be inconsistent with full compensation payable to the previous owner. In these cases, the margin of appreciation allows a flexible approach to the right protected by A1P1 which may give place to those aspects of the policy which override the case for payment of full value.

A Note on the Margin of Appreciation

57. The margin of appreciation is, of course, the doctrine of an international court: it recognises a certain distance of judgment between the Strasbourg court's overall apprehension of the Convention principles and their application in practice by the national authorities. As between the States Parties different and varying social and political exigencies will arise; and different and varying solutions will commend themselves. As Lord Hope said, "the national authorities are in principle better placed to evaluate local needs and conditions than an international court". The Convention principles cannot always be applied uniformly between one State and another. The margin of appreciation accommodates this circumstance.
58. Since it is a doctrine of an international court, how can the margin of appreciation inform our decision, the decision of a municipal court? Our duty under the HRA is to enforce the Convention rights, and by s.2(1)(a) we are obliged to "take into account" the jurisprudence of the Strasbourg court. In fulfilling this duty it seems to me that we ought, if we can, to ascertain the scope of the discretion – the width of the margin – which the Strasbourg court would be likely to accord to the legislature in enacting the compensation provisions of the 2008 Act. If they lie within the margin, other things being equal there will be no violation of A1P1.
59. It is to be noted that the rationale of the margin of appreciation is not limited to the relative disadvantage suffered by an international court in the task of evaluating local needs and conditions. It has a close affinity with a municipal doctrine: the margin of discretion, or deference (now a less favoured expression), which our courts will pay to the judgment of public decision-makers in matters of discretion or policy. In Kebilene, after describing the margin of appreciation, Lord Hope referred to "an area of judgment within which the judiciary will defer, on democratic grounds, to the considered opinion of the elected body or person whose act or decision is said to be incompatible with the Convention". This "margin of discretion" is given on democratic grounds; it respects the elected arms of government. But this is also an element, and an important one, in the margin of appreciation. I have already cited paragraph 46 of the James decision. A careful reading of that text discloses two dimensions of the margin's justification. The first, to be sure, is the international court's relative disadvantage. But interwoven with this is the democratic imperative. Let me repeat an extract from paragraph 46:

"[T]he decision to enact laws expropriating property will commonly involve consideration of political, economic and social issues on which opinions within a democratic society may reasonably differ widely. The Court, finding it natural that the margin of appreciation available to the legislature in implementing social and economic policies should be a wide one, will respect the legislature's judgment as to what is 'in the public interest' unless that judgment be manifestly without reasonable foundation."

60. It is Mr Sumption's case that the test for Convention compliance which should be applied to the s.5(4) assumptions should be the same: are they "manifestly without reasonable foundation"?

Conclusions on the Principal Issue: Application of the Three Principles to the Facts

61. In my judgment the government support accorded to Northern Rock from September 2007 onwards amounted to an LOLR operation which entirely fulfilled the conditions for such an exercise described by Lord George at the LSE. So much, I think, is undisputed. It was done strictly and exclusively for the protection of the banking system (and thus the general economy) as a whole, and not at all in the interests of Northern Rock itself or its shareholders. It fulfilled all the conditions set out in the LSE lecture: last resort, selectivity, unpredictability, no comfort for the shareholders, clear exit. It was as I have made plain always intended as a short-term operation. The exit chosen was the company's nationalisation. The decision to take the company into public ownership was a strategic exercise of government policy, intended to preserve for the sake of the national economy the benefits won by the LOLR operation at the least possible cost to the taxpayer. As I have said, the legality of the nationalisation itself is not challenged.
62. The government was, I think, plainly entitled to seek from Parliament terms for the nationalisation of Northern Rock which would not undermine the effects and influences of the LOLR operation. There is a very close affinity between the public interest purposes set out in s.2(2) of the 2008 Act and the strategic purpose of LOLR – the protection of the national economy – as described by Lord George. Both constitute the setting or context of the assumptions provided for in s.5(4). Mr Sumption submitted that the purpose of the assumptions was to put the shareholders in the position they would have occupied had no LOLR support been provided. In my judgment that is correct. If the shareholders had received more favourable treatment than was furnished by these arrangements, the LOLR operation would (through the prism of the government's exit strategy, the company's nationalisation) have been the source of a specific benefit conferred on them. That would not be consistent with a governing principle of LOLR, namely its deployment only in the interest of the financial system as a whole. And it would encourage for the future – at least this would be the risk – the very moral hazard which the LOLR scheme is carefully constructed to avoid. It is not to be forgotten that Northern Rock is not the only company nationalised pursuant to the terms of the 2008 Act. In 2008 Bradford and Bingley plc's mortgage book was taken into public ownership under the same provisions.
63. What lends Lord Pannick's case its seductive force is the undoubted fact that Northern Rock's substantial assets must have played their part in the company's ongoing commercial activity as surely after September 2007 as before; if the LOLR support was vital to its continuing as a business, so also were the assets. Accordingly, when the company is sold back into the market, the assets will be as much a contributor to the sale price as will the support put in by government. Yet in the result the shareholders are altogether stripped of the assets' value, save for whatever net sum a fire sale in the course of a liquidation or other administrative procedure might bring: which is likely to be nothing.
64. Mr Beloff, supporting Lord Pannick on the principal issue, drew attention to an analogy suggested by Lord Scott of Foscote in Yeoman's Row Management Ltd v Cobbe [2008] 1 WLR 1752. This was a case in which there was a question whether A had been unjustly enriched by the effort and expenditure of B in obtaining planning permission to develop A's land. Lord Scott said:

"41. But what is the extent of the unjust enrichment? It is not, in my opinion, the difference in market value between the property without the planning permission and the property with it. The planning permission did not create the development potential of the property; it unlocked it. The appellant was unjustly enriched because it obtained the value of Mr Cobbe's services without having to pay for them. An analogy might be drawn with the case of a locked cabinet which is believed to contain valuable treasures but to which there is no key. The cabinet has a high intrinsic value and its owner is unwilling to destroy it in order to ascertain its contents. Instead a locksmith agrees to try to fashion a key. He does so successfully and the cabinet is unlocked. As had been hoped, it is found to contain valuable treasures. The locksmith had hoped to be awarded a share of their value but no agreement to that effect had been concluded and the owner proposes to reward him with no more than sincere gratitude. The owner has been enriched by his work and, many would think, unjustly enriched. For why should a craftsman work for nothing? But surely the extent of the enrichment is no more than the value of the locksmith's services in fashioning the key. Everything else the owner of the cabinet already owned. So here."

This reasoning, submits Mr Beloff, supports the appellants' argument that where an owner's (here the shareholders) property would have been lost or dissipated but for the intervention of another (here the government), as a matter of fairness the intervener should by no means become entitled to the whole value of the property saved.

65. In the same context Mr Beloff also relied on certain aspects of the law of salvage. The salvor of a stricken vessel does not take the whole value of what is saved. Neither is he regarded (there being no contract) as a mere volunteer entitled at law to nothing, though it seems that that would be the case under the general common law. By the law of salvage, he is entitled to an award of reasonable remuneration. The Law of Salvage (Kennedy and Rose, 6^th edition) has this at paragraph 1457:

"'The value of the property saved is a most material and important consideration' [The Lindfield (1894) 10 TLR 606], 'for in proportion to that value is the benefit to the owners, and that is one of the primary principles in settling the amount of remuneration' [The Ewell Grove (1835) 3 Hagg. 209, 221], but 'the court must not be induced by it to award a sum which is out of proportion to the services of the salvors' [The Glengyle [1898] P 97, 103, affirmed ibid. 103 (CA), [1898] AC 519 (HL)].

Mr Beloff submits that this aspect of the law of salvage together with Lord Scott's analogy of the locked cabinet illustrate a general principle of justice, namely that a reasonable balance should be struck between what is paid to the rescuer of endangered property and what is kept by the property's owner; and this is directly comparable to the Strasbourg balance between public interest and private right.

66. As it seems to me, however, there is a critical difference between these instances and the present case. The locksmith and the salvor do their work as a service to the property owner, from whom they expect a reward. As is stated in Brice on Maritime Law of Salvage (4^th edn):

"2-154 It must always be remembered that the underlying purpose of salvage is to confer a benefit on the owner of the salved property: if the amount of the award is such a high percentage of a salved fund that the owner of the salved property in effect receives close to nothing out of it then he will not have benefited."

But the underlying purpose of assistance by way of LOLR, and the nationalisation of the company, was categorically not to confer a benefit on the shareholders of Northern Rock. The service which those measures provided was a service to the national economy, and nothing else. The "rescue" of Northern Rock's shares was not of itself the purpose of the exercise, which was to prevent damage or further damage to the banking system as a whole. To confer any benefit attributable to the rescue upon the shareholders would as I have indicated have been inconsistent with the very nature and purpose of the LOLR scheme. Mr Beloff's analogies are useful only to expose the chasm between them and the reality of the case before us.

67. I was, with respect, not assisted by Mr Beloff's further argument (supported by Mr de la Mare, though deployed by him in a somewhat different context: skeleton argument paragraph 16.3) to the effect that it would have been an improper and therefore unlawful exercise of public power for the government to have withdrawn support for Northern Rock. This proposition was advanced as a riposte to the Divisional Court's plainly correct view (paragraphs 122 – 140) that none of the appellants enjoyed any private law right or legitimate expectation that government support for Northern Rock would be continued. The argument was that, while the company was solvent and meeting its obligations, the withdrawal of support could not have been done for a proper purpose and thus would have violated the Padfield principle (Padfield v Minister of Agriculture [1968] AC 997). Even if this submission were correct I cannot see what light it throws on the legality or otherwise of the s.5(4) assumptions. But I do not think it can be correct. While no doubt the withdrawal of support would be an exercise of public power in principle subject to the judicial review jurisdiction, in this field of national economic policy it is wholly impossible for a court to conclude that there might not be circumstances which would justify it being done.
68. I turn to Lord Pannick's submissions that the rescue involved no risk for the government, and the terms of the compensation scheme were actuated by a profit motive. Do they lend his case any force? As for profit, the submission is I think somewhat constrained by the fact that there is no challenge to the nationalisation itself. In the absence of such challenge Lord Pannick accepts, or must be taken to accept, that the nationalisation was done for one or both of the purposes mentioned in s.2(2) of the 2008 Act, uninfected as regards those purposes by any profit motive. But I apprehend his argument is not that the statutory purposes for the nationalisation were not met, but that the compensation scheme could not accommodate both an intention to generate profit and compliance with the first legal principle I have described, the need to strike a balance between public interest and private right. If from first to last the government had been determined to take a profit out of the nationalisation of Northern Rock by keeping to itself any proceeds of an ultimate sale back into the market, it may be difficult to see how it can have directed its mind to the striking of the balance. Looked at in that way, there is perhaps some force in the submission.
69. However I would acquit the government of being motivated by profit in seeking the terms of the statutory scheme which the 2008 Act provided. The direct testimony of Mr Kingman is that there was no such motive. The Goldman Sachs documents gave no advice on profit; they contemplated the need for a subsidy. As for the materials relied on by Lord Pannick, the Prime Minister's comment of 23 January 2008 was as I have said made in a context concerning potential private bids, as regards which the government had indicated it would expect to take an equity share. Paragraph 43 of the Chancellor's statement on 17 February 2008 says nothing about profit. It looks to the government's eventual receipt of the proceeds of sale back into the market "in return for bearing the risks in this period of market uncertainty". This is consistent with Goldman Sachs' advice received the same day, that the nationalisation option, assuming no payment to the shareholders (an assumption which, as I shall show, may not be borne out in fact), would deliver the least expensive outcome for the taxpayer.
70. As for Lord Pannick's submissions on risk, or the lack of it, again the argument has in my judgment limited room for manoeuvre. If more favourable treatment of the shareholders by way of compensation would have offended or undermined the principles of LOLR, not least in relation to moral hazard, that vice would be just as egregious whether or not the exercise involved any risk of loss to the Treasury. However Lord Pannick would I think contend that this is too simplistic an approach. He submitted that if the LOLR operation were in truth undertaken at no financial risk to the government, that is a fact which surely should have been recognised in the elaboration of a compensation scheme for the shareholders. For the government to take the whole of the company's value, having run no risk in supporting it, must have been disproportionate – a failure to ensure a reasonable relationship between the compensation to be provided and the value of the property taken.
71. It may be (though I think it doubtful) that if indeed there was no risk this argument might perhaps serve, in the context of A1P1's proportionality requirement, to temper the justifications for the strict conditions of LOLR policy. On the facts Lord Pannick assembled a number of statements by the Chancellor of the Exchequer between November 2007 and February 2008 which he says demonstrate that the government's own view was that the operation carried no risk. There were references to the strength of Northern Rock's mortgage book; the conditions and controls imposed "to ensure that our interests are protected"; an expectation that "we will get [our money] back"; and the fact that the guarantees "have not had any cost to the taxpayer". On 17 February 2008 the Chancellor stated:

"[I]t is my clear assessment that under the approach we are taking the taxpayer will see its outstanding loans to Northern Rock repaid in full, with interest..."

72. In my judgment Lord Pannick puts his case too high. Inevitably these statements have a political edge. It is I hope no undue pedantry to observe that they do not in fact deny risk; they state good outcomes so far, and predict the same to come. More telling for the point at issue, however, is the fact that no party other than government would put money into Northern Rock. As the Divisional Court said (paragraph 148):

"It is common ground that the financial support provided by the Treasury and the Bank of England was not available elsewhere. There was no market in which such support could be obtained."

And as we can see from Lord George's lecture, LOLR would not have been provided if support had been available in the market. Moreover as regards the exit from LOLR, no commercial entity was prepared to acquire Northern Rock save on terms that government continued to provide support and bear the risk of default by the company. The economic reality is all one way. Supporting, or acquiring, Northern Rock was not a sound commercial proposition. Lord Pannick's submission that the enterprise involved no risk is not made out.

73. What, then, is the correct conclusion on the principal issue? We have to decide whether the s.5(4) assumptions struck the balance, required by the ECHR, between the demands of the general interest of the community and the requirements of the protection of the individual's fundamental rights: the first of the three front rank principles which I have described. The question returns us to the constellation between these three principles. Proportionality and the margin of appreciation provide as I have said the means by which the balance enshrined in the first principle is to be struck. In the context of A1P1, proportionality will ordinarily require payment of an amount reasonably related to the value of the property taken. But the margin of appreciation will mean that the relation between proportionality and the first principle is not rigid or constant.
74. Mr Beloff submitted (skeleton, paragraphs 82 – 83) that the cases in which the bar for the State's margin of appreciation is set at the point where the court perceives the impugned measure to be "manifestly without reasonable foundation" (James and Lithgow) are far different from the present: they were instances of expropriation on grounds of political ideology. Here, we are faced with a purely practical measure. At paragraph 166 the Divisional Court stated:

"In the absence of authority, we should have thought that the margin of appreciation in the present case was narrower than that applicable in cases such as James, Lithgow and Mellacher. The decisions made as to the public financial support provided to Northern Rock were certainly made in the exercise of responsibilities and powers concerned with broad economic and social policies. However, the decision to nationalise Northern Rock was made on narrower economic grounds, by comparing the financial benefits to the taxpayer of nationalisation with the alternatives available."

75. In fact the Divisional Court applied the "manifestly without reasonable foundation" test in any event, because it appears to have considered (paragraph 167) that Katikaridis v Greece (2001) 32 EHRR 6 was authority for the proposition that this test is always the margin of appreciation's touchstone. That cannot, I think, be right. The discretion which the margin confers on the State varies according to the subject-matter, and I do not consider that Katikaridis (which with great respect I need not cite) holds differently. However although the action impugned in the present case was not taken on grounds of political ideology, it certainly arose in the context of macro-economic policy. The provision of LOLR was a measure which the Tripartite Authorities considered was objectively required to protect the banking system and thus the national economy. Their concerns were strategic and the outcomes of what was done likely to be profound. The nationalisation of Northern Rock cannot, I think, be separated out from these matters. It was the chosen means of exit from short term LOLR. The s.5(4) assumptions were as I have explained in line with the conditions on which LOLR is provided. In reality they were an application of policy considerations which, as Lord George explained, underpinned LOLR. In these circumstances the margin of appreciation must be in my judgment be a wide one. As in James and Lithgow, the court would only interfere if it were to conclude that the State's judgment as to what is in the public interest is manifestly without reasonable foundation.
76. Applying that test, it is I think important to appreciate that the facts are more nuanced than Lord Pannick would have us accept. Thus it would be wrong simply to write off the likely results of the valuation under the 2008 Act as yielding a nil or next to nil return without recognising that if the assumptions indeed produce a nil value, that can only be because the business is shown to be worthless without the support put in by government. Nothing in the evidence (expert or otherwise) gainsays this; it is anyway a matter of logic, once one sees what the statutory assumptions involve. Yet more obvious is the linked proposition that there will be some residual value in the assets if on a fire sale what is got for them exceeds the company's liabilities (the administrator or liquidator being obliged to obtain the best price). A major element in Northern Rock's assets is its loan book; there is nothing in the assumptions to prevent the valuer attaching a premium value to the loan book if he is sufficiently impressed with its quality. It is of course true, as was stated in Parliament and acknowledged in argument by Mr Sumption, that a fire sale depresses asset value, in some cases very greatly. The goodwill of a business so disposed of may well be worth nothing. Fixed assets, however, may largely retain their value: the Picasso in the boardroom is not worth less because the company is insolvent, though the timing of the sale may perhaps make a difference. Mortgage assets will not do so well, but are at least likely to fetch better returns than goodwill.
77. In these circumstances I would by no means accept the suggestion – floated if not pressed by Lord Pannick – that the compensation scheme, and in particular the statutory assumptions, were 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. As I have said the purpose of the assumptions was to put the shareholders in the position they would have occupied (vis-à-vis the value of the shares) had no LOLR support been provided. That objective was achieved. Once the whole context in which it was evolved is understood, it can by no means be characterised as manifestly without reasonable foundation.
78. I would reject the appellants' case on the principal issue.

THE REGULATORY ISSUE

79. With respect to Mr Beloff and Mr de la Mare, I may deal with this issue and the procedural issue much more shortly. Mr Beloff cites Beyeler v Italy (2001) 33 EHRR 52, paragraphs 114 and 121, and Broniowski v Poland (2005) 40 EHRR 21, paragraph 151, for the proposition that in weighing the balance to be struck the court will consider the conduct of the parties including the means employed by the State to achieve whatever is its purpose. Building on that, he submits that the regulatory authorities, including the FSA, were guilty of a series of culpable errors, admitted by them, in their regulation of Northern Rock. He says this was wrongful conduct by the expropriating State and should have been taken into account in setting the terms of the nationalisation.
80. It is not necessary to describe the detail of the regulatory failures alleged (they are helpfully set out in an appendix to Mr Beloff's skeleton) in order to address the point. The Divisional Court rejected it on three principal grounds:

"113. First, the primary responsibility for the insolvency of Northern Rock lay with its management. Its management was answerable to its shareholders, who could have removed the directors and appointed other directors if they considered that the business model adopted by the company was inappropriate or unsafe...

114. Secondly... if there was any failure on the part of the regulatory authorities, it was not in any duty owed to the shareholders of Northern Rock. Neither the Bank of England nor the FSA owed any duty to the shareholders...

115. Thirdly, and fundamentally, the allegations of regulatory failure cannot assist the First or the Second Claimants, or those of the small shareholders who acquired their shares after 13 September 2007 (if not an earlier date). This is because any loss of value of the shares caused by any regulatory failure had already occurred..."

I agree. In addition it is by no means demonstrated that any regulatory failings were an effective cause of Northern Rock's difficulties. This, too, is acknowledged by the Divisional Court: paragraph 116.

81. Mr Sumption also submits that the learning relied on by Mr Beloff, Beyeler and Broniowski, does not assist him. They are cases in which the conduct of State authorities was itself the genesis of the loss complained of under A1P1. This seems to me to be right: see Beyeler paragraphs 119 – 122 and Broniowski paragraphs 181, 185. Again with respect I will not lengthen this judgment with citations of the text. Lastly Mr Sumption submitted that the regulatory failures could only be relevant, or required to be treated as relevant, to the assessment of compensation if they gave rise to a cause of action against the FSA in Northern Rock's hands, which formed part of Northern Rock's assets. This, I think, does not advance the respondent's case. I can see that the existence of such a cause of action might affect the amount of compensation to be paid on the footing of the existing s.5(4) assumptions. Clearly there is in fact no such cause of action. But Mr Beloff's case is that the statutory assumptions might not have been required to be made had these failures been taken into account. Mr Sumption's cause of action point does not go to that possibility, which however I would reject essentially for the reasons given by the Divisional Court.

THE PROCEDURAL ISSUE

82. Mr de la Mare submits that recent case law of the Strasbourg court shows that an interference with A1P1 property rights will not be lawful unless there are in place procedures, fulfilling the standards of independent and impartial justice set by ECHR article 6, by which the merits of the expropriation in issue may be tested. He cites Hentrich v France (1994) 18 EHRR 440, Capital Bank AD v Bulgaria (2007) 44 EHRR 48 and Forminster Enterprises Ltd v Czech Republic (Application No 38238/04). His case is that the s.5(4) assumptions prevent the valuer from hearing argument on behalf of the small shareholders as to the merits or otherwise of the terms on which their shares were to be taken.
83. Mr Sumption accepts that the jurisprudence requires in the context of A1P1 that there be a requirement of procedural fairness, for the avoidance of arbitrary expropriations. If the assumptions prevented the valuer from ascertaining the correctness or otherwise of some relevant assertion of fact which ought to be examined in order to test the expropriation's compliance with the standards of the Convention, that would be one thing: there might well in such a case be an unlawful procedural failure. But the s.5(4) assumptions are not in that category. They are not assumptions of facts which might or might not be true, and whose truth or otherwise ought to be examined. They constitute the policy according to which the valuation will proceed. This is plainly right.
84. The answer to Mr de la Mare's argument is that the procedural requirement inherent in A1P1 is met. So far as his (and the other appellants') assault is upon the assumptions themselves for violation of A1P1, it is met by the availability of judicial review. The judicial review court is amply equipped to receive all the material, fact or law, that might properly be required to mount such a challenge. It therefore possesses what in the cases is sometimes called "full jurisdiction": see for example Albert and Le Compte v Belgium (1983) 5 EHRR 533, paragraph 29, and Alconbury [2003] 2 AC 295 paragraph 29. So far as it may be intended to take factual points within the framework of the assumptions (for example, as to the value to be attributed to fixed assets), the valuer has full jurisdiction to enter into any factual issues that may call to be decided. His conclusions will be impartial and independent. All he is prevented from doing is to decide the merits of the policy, constituted by the assumptions, within which he is to carry out his task. But given the availability of judicial review nothing requires him to do so.
85. I would reject the appellants' case on the procedural issue.

CONCLUSION

86. For all the reasons I have given I would dismiss this appeal.

Lord Justice Waller:

87. I agree.

The Master of the Rolls:

88. I also agree.