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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 >> Harbinger Capital Partners v Caldwell (As the Independent Valuer of Northern Rock Plc) & Anor (Rev 1)  EWCA Civ 492 (09 May 2013)
Cite as:  EWCA Civ 492
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ON APPEAL FROM THE UPPER TAX TRIBUNAL
(TAX AND CHANCERY CHAMBER)
Mr Justice Warren President, Judge Andrew Bartlett QC and Sandi O'Neill
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE LEWISON
LORD JUSTICE BEATSON
| HARBINGER CAPITAL PARTNERS
|- and -
|(1) ANDREW CALDWELL
(As the Independent Valuer of Northern Rock plc)
(2) H M TREASURY
WordWave International Limited
A Merrill Communications Company
165 Fleet Street, London EC4A 2DY
Tel No: 020 7404 1400, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
MR W WILLSON (instructed by Brown Rudnick LLP) for the Appellant
MR M HOWARD QC, MR M CHAMBERLAIN & MR J DAWID
(instructed by Mayer Brown International LLP) for the First Respondent
Hearing dates : 22 and 23 January 2013
Crown Copyright ©
Lord Justice Lewison:
"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that all financial assistance provided by the Bank of England or the Treasury to the deposit-taker in question has been withdrawn (whether by the making of a demand for repayment or otherwise), and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)."
""financial assistance", in relation to any person, includes—
(a) assistance provided by way of loan, guarantee or indemnity,
(b) assistance provided by way of any transaction which equates, in substance, to a transaction for lending money at interest (such as a transaction involving the sale and repurchase of securities or other assets), and
(c) assistance falling within paragraph (a) or (b) provided indirectly to or otherwise for the benefit of the person (including the provision of assistance within paragraph (a) or (b) to any group undertaking of that person),
whether provided in pursuance of an agreement or otherwise and whether provided before or after the passing of this Act."
"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."
"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."
The factual background
"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."
i) The aid must consist of liquidity support in the form of loan guarantees or loans at a proper interest rate. Any loan must be reimbursed and any guarantee must come to an end within a period of six months after the disbursement of the first instalment to the firm.
ii) The Member State notifying the aid must undertake to communicate to the Commission not later than six months after the rescue aid has been authorised:
a) A restructuring plan or liquidation plan or;
b) Proof that the loan has been reimbursed in full and/or that the guarantee has been terminated.
"The Commission expects your authorities to respect their commitment to communicate to the Commission, not later than 17 March 2008, a credible and substantiated restructuring plan or a liquidation plan or proof that the aid measures have been repaid in full and that the guarantees have been terminated."
"… it was incumbent on the authorities to receive actual repayment of any loans given by way of financial assistance on or after 17 September 2007 in the absence of either an appropriate restructuring plan or a liquidation plan."
"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."
"The Financial Services Authority continue to assure me the bank is solvent. It believes that Northern Rock's mortgage book is of good quality."
"The assumptions are that all financial assistance provided by the Bank of England or the Treasury has been withdrawn; and that no further public assistance would be provided to the deposit-taker (apart from ordinary market assistance on its usual terms). Any announcement by the Treasury that they would, if necessary, put guarantee arrangements in place would also be disregarded. These assumptions ensure that any value that is dependent on public support provided to the deposit-taker is disregarded when compensation is determined."
"If the shareholders are only compensated on the basis of an independent valuation of the company without any State support, the purchase of the shares from the existing shareholders does not constitute State aid."
"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)"
i) The assumption means that it is to be assumed that the Bank of England and the Treasury have called in all outstanding loans, but that it need not be assumed that they have actually been repaid by the transfer time; alternatively
ii) If it is to be assumed that all outstanding loans have been satisfied, they must be assumed to have been satisfied by the transfer in specie to the Bank of England or the Treasury, as the case may be, of assets to the value of the outstanding loans; and that the value of the assets in question is to be taken as their book value in Northern Rock's accounts.
i) The hypothesis is only a mechanism for enabling one to arrive at a value of particular property for a particular purpose. It does not entitle the valuer to depart from the real world further than the hypothesis compels: Hoare v National Trust, 380 (Schiemann LJ). The various hypotheses must be taken no further than their terms make strictly necessary: Cornwall Coast County Club v Cardgrange Ltd  1 EGLR 146, 152. It is necessary to adhere to reality subject only to giving full effect to the hypothesis: Hoare v National Trust, 387 (Peter Gibson LJ).
ii) Giving effect to the hypothesis may require a legal impediment to the implementation of the hypothesis to be ignored or treated as overridden; but only to the extent necessary to enable the hypothesis to be effective: IRC v Crossman  AC 26; The Law Land Company Ltd v Consumers' Association Ltd  2 EGLR 109; Walton v IRC  STC 98.
iii) The world of make-believe should be kept as near as possible to reality: Trocette Property Co Ltd v GLC (1972) 28 P& CR 408, 420 (Lawton LJ); Hoare v National Trust, 386 (Peter Gibson LJ). Reality must be adhered to so far as possible: Cornwall Coast County Club v Cardgrange Ltd, 150 (Scott J). The valuer should depart from reality only when the hypothesis so requires: Hoare v National Trust, 388 (Peter Gibson LJ).
iv) Where the hypothesis inevitably entails a particular consequence, the valuer must take that consequence into account: East End Dwellings Co Ltd v Finsbury BC  AC 109, 132.
v) But there is a clear distinction between hypotheses expressly directed to be made and assumptions allegedly consequential on the express hypotheses. Where the alleged consequence is not inevitable, but merely possible (or even probable), then the consequence cannot be assumed to have happened: Cornwall Coast County Club v Cardgrange Ltd, 149 (Scott J).
vi) The reality principle applies as at the valuation date. Events which postdate the valuation date cannot generally be taken into account. But the purchaser will have regard to future possibilities, and it is his perception of the future possibilities that matters. There is, in this respect, a clear difference between events before and after the valuation date. What has happened before the valuation date is either known (because it really happened) or is required by the hypothesis to be assumed to have happened. But the future is unknowable. Assumptions about the future should not be made. Nor can a tribunal make findings of fact about the future. So all that a purchaser (and by extension a valuer) can do is assess the effect on current value of future possibilities.
"It [i.e. the rent review clause in that case] should be construed with reality in mind and unless the words are clearly to the contrary to reflect that reality."
"… it is important again to remind ourselves of what is meant in the language of this part of the law by the presumption of reality and the effect that that has upon the construction of rent review clauses. "
Reality at the transfer time
The valuer's interpretation
"I propose to proceed on the basis that the withdrawal of the BoE funding is achieved by the realisation of assets immediately prior to the Valuation Date, i.e. outside the scope of the assumed administration. It is clear that in the context of the Valuation Assumptions there is likely to have been a marked discount to the book value of the majority of those assets on any realisation. This is because of the:
- requirement for immediate realisation;
- likelihood that there would be a limited number of buyers (with lack of available funding) and no ready market; and
- perception of a distressed sale."
"I propose to assume that the best quality assets are realised and that the remaining assets on the balance sheet are of lower quality as they have more inherent risks."
i) That the Bank of England had called in the loans (which it had not);
ii) That Northern Rock had sold assets of a net value sufficient to repay the loans (which it had not);
iii) That Northern Rock had repaid the loans (which it had not);
iv) That the Bank of England had ceased to be a creditor of Northern Rock (which it had not); and
v) That Northern Rock was balance sheet insolvent (which it was not).
i) The meaning of "assistance … provided;"
ii) The meaning of the words in parenthesis in section 5 (4) (a);
iii) The meaning of " assistance … withdrawn;"
iv) The purpose of the legislation both domestically and at the European level;
v) The reality principle.
"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)."
The Tribunal's decision
"In the context of loans, an actual loan will, in most commercial banking situations, commonly be made by drawing-down a facility. It can be said that the granting of the facility is "financial assistance" but even if that is so, the actual draw-down on the facility, thereby creating a relationship of creditor and debtor, is itself provision of financial assistance. It seems to us, therefore, that when section 5(4)(a) speaks of withdrawal of financial assistance it is speaking not only of withdrawing the facility but also of withdrawing the loan itself." (§ 116)
"In the case of Northern Rock, it may have been that the facility afforded by the Bank had been fully drawn-down. But in other cases that may not be so. Withdrawing financial assistance may then encompass two elements, first the withdrawal of the facility so that further draw-down is prohibited and secondly, the withdrawal of the loan itself. We consider that the ordinary meaning of the word "withdraw" in relation to such a loan (and given that the word is, as we have said, used in a portmanteau phrase covering all types of financial assistance) is that the loan is no longer in place, in other words it has been satisfied. It would be a fallacy, in our view, to focus on the words "financial assistance" without regard to the nature of the particular financial assistance concerned. In the case of loan, it can, we accept, sensibly be argued that "assistance" is withdrawn when a demand for payment is made. But when one acknowledges that "financial assistance" is referring to particular types of support (eg a guarantee or a loan) the question is what is meant by withdrawing that support ie the guarantee or the loan. To withdraw a loan is not the same thing as to demand repayment of a loan. Indeed, the support or financial assistance which a loan gives in practice is not altogether withdrawn by a demand since the debtor still has the use of the money until it is repaid. If one were to ask whether a debtor had the benefit of a loan following a demand for payment but before actual repayment, the answer would clearly be Yes, in our view: financial assistance continues and it has not been "withdrawn" in the context of the Withdrawal Assumption." (§ 117)
"We have considered why the draftsman considered that it was helpful to insert the words in parenthesis. Harbinger's contention would suggest that part of the purpose of the words was to make clear that, in the case of a loan, the making of a demand was sufficient on its own to count as a withdrawal, and thus that actual repayment was not required. We cannot accept this. If this had been the draftsman's intent, much clearer words would have been required. We have some doubt as to the draftsman's actual purpose. We think the most likely explanation is that the words in parenthesis were included as a precaution. He was seeking to make clear that the assistance had to be assumed to be withdrawn whatever its nature or terms. So, for example, in the case of an on-demand loan, the method of withdrawal would be the making of a demand, so as to obtain repayment. But if (contrary, perhaps, to general expectations) some form of assistance had been given which could not be terminated immediately, the assistance must still be treated as withdrawn, even though in the real world the lender might not be able to withdraw it immediately." (§ 119)
"assistance provided by way of loan…"
"(a) is unable to continue as a going concern; and
(b) is in administration."
"The administrator of a company must perform his functions with the objective of –
(a) rescuing the company as a going concern, or
(b) achieving a better result for the company's creditors as a whole than would be likely if the company were wound up (without first being in administration), or
(c) realising property in order to make a distribution to one or more secured or preferential creditors."
"The administrator must perform his functions with the objective specified in sub-paragraph (1)(a) unless he thinks either:
(a) that it is not reasonably practicable to achieve that objective, or
(b) that the objective specified in sub-paragraph (1) (b) would achieve a better result for the company's creditors as a whole."
"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." (§ 39) (Emphasis added)
"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." (§ 63) (Emphasis added)
"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)." (§ 76) (Emphasis added)
Lord Justice Beatson:
"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."
Lord Justice Mummery:
The Repayment Interpretation
The Demand Interpretation
The Repayment-in-Kind Interpretation
Approach to valuation
Challenge to valuation
Ambit of s.5(4)
East End Dwellings
"If you are bidden to treat an imaginary state of affairs as real, you must surely, unless prohibited from doing so, also imagine as real the consequences and incidents which, if the putative state of affairs had in fact existed, must inevitably have flowed from or accompanied it…The statute says that you must imagine a certain state of affairs, it does not say that having done so, you must cause or permit your imagination to boggle when it comes to the inevitable corollaries of that state of affairs."
The reality principle
Parenthetic demand for repayment
State aid and interpretation compatible with EU law and ECHR
Balance sheet solvency
Over- interpretation and over-simplification