Ruling due for ex-Rock shareholders

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

Former shareholders in nationalised bank Northern Rock are to learn whether they have succeeded in their renewed legal challenge to the Government's "zero return" compensation scheme.

Individual shareholders - including current and retired employees of the Newcastle-based bank - and representatives of two hedge funds which also stand to lose out, have attacked the scheme as "unlawful, unfair and manifestly disproportionate".

At a recent hearing, Lord Pannick QC, for major investor SRM Global, told the Court of Appeal in London that the Treasury's argument attempting to justify a scheme which would result in a nil valuation of Northern Rock shares was "superficial and of no substance".

He urged three judges, headed by Master of the Rolls Lord Clarke, to rule that the scheme, introduced by statute when the bank was taken over by the Government in February last year, infringes the human rights principle that the taking of property by the state must be balanced by compensation reasonably related to its value.

In an earlier unsuccessful High Court action, shareholders alleged the Government deliberately set out to make a profit from its nationalisation of the bank at their expense. They claimed that the compensation scheme was 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.

The High Court upheld the Government's argument that, but for support from the Bank of England, 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. The private shareholders, including existing and former Northern Rock employees - many at risk of losing their retirement "nest egg" shares - are backed by the UK Shareholders Association. The shareholders insist that their shares should be valued at more than £4 each.

The small investors, headed by former Northern Rock employee Dennis Grainger, 62, who personally lost £114,000 in shares when the bank was nationalised, say they stand to lose the vital provisions they made for retirement and personal planning such as funeral payments.

The Government argued that the State's £54 billion bail-out of Northern Rock in the form of loans and guarantees was at considerable cost and risk to the taxpayer. It was therefore right that, if the bank thrived under public ownership, the State should benefit when it was sold off to the private sector.

Government lawyers insisted there was no evidence that the statutory compensation scheme under which shares were valued was an "opaque attempt" to make sure shareholders got nothing.