Ex-Rock shareholders lose legal bid

Northern Rock has cut its mortgage rates for the fourth time in just over a month

Former shareholders in nationalised bank Northern Rock have failed in a renewed legal challenge to the Government's "zero return" compensation scheme.

The Court of Appeal in London dismissed an appeal by individual shareholders - including current and retired employees of the Newcastle-based bank - and two hedge funds which also stand to lose out, who had attacked the scheme as "unlawful, unfair and manifestly disproportionate".

They claimed the compensation scheme was deliberately based on false criteria which would lead to shares being valued at zero so the Government would inevitably make a profit when the bank was eventually sold off.

But Lord Justice Laws, sitting with Master of the Rolls Lord Clarke and Lord Justice Waller, rejected any suggestion that the scheme was "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".

The scheme was reasonably designed to put shareholders of the ailing bank in the position they would have occupied, vis-a-vis the value of their shares, had no financial support been provided by the Bank of England and the Treasury, the judge said.

The judges upheld the Government's argument that, but for that support, Northern Rock would have been unable to pay its debts as they fell due and would have had to cease business.

It was not unreasonable that shares should be valued on that basis.

The case was brought by two hedge funds, SRM Global and RAB Capital, and up to 200,000 private shareholders.

They said they would pursue the case in the Supreme Court and, if necessary, the European Court of Human Rights in Strasbourg.

The small investors, headed by former Northern Rock employee Dennis Grainger, 62, who personally lost £114,000 in shares when the bank was nationalised, were backed by the UK Shareholders Association.