Northern Rock plc Compensation Scheme Order 2008

My Lords, I thank the Minister for introducing this order. We are not allowed to debate the main order which took Northern Rock into public ownership because the Government rejected the wise advice of the Delegated Powers Committee and insisted on the use of the negative procedure which means that even if a prayer to annul that Order were passed, it would be of no legal effect. The Government did accept that the compensation orders which could be made under various sections of the Banking (Special Provisions) Act 2008 would be subject to the affirmative procedure, which is why we are here this evening. The Merits of Statutory Instruments Committee of your Lordships’ House has drawn the attention of the House to the orders on the grounds that they give rise to issues of public policy likely to be of interest to the House. We are always grateful for the observations of the excellent Merits Committee, but I think that in this instance we were fully alive to the fact that this is not an order merely to be nodded through. I will focus my remarks on Article 6 of the order which lays down the valuation assumptions that the valuer is to use and restricts the valuer quite considerably. I would like to probe with the Minister why the Government chose to include Article 6, as well as what the Government intend to be the meaning of the Article. Section 5 of the Act makes it clear that in determining compensation it must be assumed that all financial assistance provided by the Bank of England or the Treasury has been withdrawn and that no future assistance would be provided—apart from ordinary market assistance. The Minister has already referred to that. If that were the only guidance available, a valuer would then have to see whether and to what extent any alternative sources of funds would have been available. From what little the Government have chosen to put in the public arena about the prolonged and abortive sale negotiations, it appears that there was no deal on offer which could have seen Northern Rock going forward without special financial assistance from the Bank of England or the Government. Therefore, if Treasury or Bank financial support were withdrawn, the likely next step would have been for Northern Rock to be placed in administration. It is not clear beyond peradventure, however, that Northern Rock is not a going concern in some form. Indeed, we must assume that the Government’s rationale for installing the expensive team led by Mr Sandler was to deliver an ongoing viable business. In that light, will the Minister say why the Government put Article 6 in the order, which requires the valuer to assume that the company is in administration and is not a going concern, rather than leaving the valuer to reach a judgment on the basis of the facts as they found them? Is the paragraph concealing some facts about the financial position of Northern Rock that would be relevant to a valuer but which the Government do not want in the public domain, in particular in relation to the ““going concern”” nature of the business? I turn to the detail of Article 6. I could not find a definition of the term ““in administration”” in the order, though I assume that the Government intend this to mean an administration within the Insolvency Act 1986 as amended by the Enterprise Act 2002. Perhaps the Minister could confirm that or indicate what the phrase is intended to mean. As I am sure the Minister is aware, an administrator is required by the 2002 Act to perform his functions with the objective of, "““rescuing the company as a going concern, or ... 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 ... realising property in order to make a distribution to one or more secured or preferential creditors””." Will the Minister explain how this definition of administration fits with Article 6 of the order? Does Article 6(a), which requires the valuer to assume that Northern Rock, "““is unable to continue as a going concern””," mean that our hypothetical administration must ignore any possibility of, "““rescuing the company as a going concern””," as set out in the 2002 Act? If the valuer must focus only on the second two legs of the 2002 Act—namely, achieving a better result for creditors as a whole or realising property for secured or preferential creditors—will the Minister say what this means in practice? I presume that achieving a better result for creditors might involve some corporate restructuring and creating positive value, which could in turn be sold as a going concern. That may be what Mr Sandler is now working on. I hope that the Minister can shed some light on this, both for the House tonight and for the benefit of the valuer when he or she is appointed and starts work. Whenever we in this House or my honourable or right honourable friends in another place raised the possibility of administration as an alternative to nationalisation, government Ministers always characterised administration as equivalent to a fire sale—the Minister has used those terms. We never believed that insolvency law provisions relating to administration could or should be seen in such a simplistic light, and I hope that the Minister will tonight confirm that the Government’s use of the assumption of administration in Article 6 is not intended as an instruction to the valuer to perform a fire sale valuation. I hope that the Minister can also answer a question which is relevant to any valuer and to your Lordships’ understanding of the company, which is now in public ownership. When will we be allowed to see the business plan of Northern Rock? I understand that the plan must be submitted to Brussels by next Monday, and so it must be ready or very nearly so. During the passage of the Act, the Minister referred to: "““The bank’s business plan, which will be developed in the coming weeks and must be agreed with the Government””." He went on: "““I can commit to keep the House fully informed as that planning work reaches a conclusion … a strategic plan will be communicated to the House in due course … there certainly will be no delay””.—[Official Report, 21/2/08; cols. 301-02.]" We have not yet seen the business plan. While we are on the subject of commitments made during the passage of the Act, perhaps the Minister will also tell the House when noble Lords may see the framework agreement which is to set out the Government’s relationships as both shareholder in and lender to Northern Rock. On 21 February, the Minister told my noble friend Lord De Mauley that the framework agreement would be published ““as rapidly as possible””, but I believe that, three weeks later, it has not yet seen the light of day. The Minister will know that the small shareholders, many of whom will have acquired their shares as members of the demutualised Northern Rock Building Society, feel aggrieved by Article 6. They have been confused by repeated assertions by the Government that Northern Rock was a going concern, with a good-quality loan book, and that it was solvent. The shares in Northern Rock continued to be traded on the London Stock Exchange until the Government finally announced their intention to nationalise it. The closing price before that announcement was 90p. Will the Minister put on the record for those small shareholders why the Government are taking away their shares on the basis of assumptions which are at odds with their repeated statements about Northern Rock during the autumn? Will the Minister explain to them how 90p compares with the valuation that they expect to be produced by their Article 6 assumptions? The Government showed disdain for small shareholders when they nationalised Network Rail—the Minister’s noble friend Lady Vadera famously referred to them as ““grannies in blouses””. I hope that the Minister will tonight eschew that disdain and set out fully and for the record why their chosen valuation process is fair and reasonable for small shareholders. At the other end of the investor spectrum are sophisticated international investors, including hedge funds, and they are equally unhappy about the valuation basis. All of us doubtless read in the weekend newspapers about the legal actions that they are contemplating, including human rights challenges and judicial review. I would not expect the Minister to be able to comment substantively on that today. However, I would like him to deal with a rather more generic issue which may have a bearing on the compensation settlements. Will he confirm that the UK has entered into a number of bilateral treaties with the aim of protecting investors from the effects of expropriation? Many of these treaties—I believe that there are about 85 in total—are with developing countries, and I expect that the driving force behind them was the desire to protect UK investors from foreign expropriation. But the treaties are bilateral and hence protect foreign investors in the UK in the same way. For example, one of the treaties is with the Hong Kong Special Administrative Region, which still has a dynamic financial community and is home to many hedge funds. Investors who bought Northern Rock shares through Hong Kong entities may well be able to use the bilateral treaty compensation principles which provide, in Article 5, for compensation based on, "““the real value immediately before the deprivation or before the impending deprivation became public knowledge whichever is the earlier””." That seems to set at 90p a compensation floor for any investors who can take advantage of such a treaty, but there will be a lot of scope for arguing that the ““real value”” referred to in Article 5 has to eliminate the extent to which the threat of nationalisation was already embedded in that price. A figure of £4 per share has been talked about in the press, but there are other plausible values—perhaps a pre-credit crunch value of £8 or £9 might be argued for. I do not expect the Minister to comment on these values. The crucial point about these bilateral treaties, on which I should value the Minister’s comments, is that disputes about compensation bypass the UK courts completely. For example, Article 8 of the Hong Kong treaty to which I have referred states that, if no settlement is reached, there is to be arbitration under the arbitration rules of the United Nations Commission on International Trade Law. Have the Government considered the impact of these bilateral treaties? Do they believe that it would be tenable to have two or more incompatible valuations proceeding in respect of the same class of shares? Or, perhaps more pertinently, do the Government believe that they can get away with an internationally arbitrated value for powerful institutional shareholders while paying a smaller sum to a small shareholder in the north-east, resulting from Article 6 valuation assumptions? I would now like to ask the Minister about the appointment of an independent valuer. As a member of the Institute of Chartered Accountants in England and Wales, I suppose that I should be flattered that that institute should be consulted. But, actually, I can see little point in this bit of the process, though it has been suggested that the Government needed the help of the institute to persuade people of quality to consider the job because of the reputation risk involved. Of much more importance is how the valuer will be selected. I hope that the Government will not think about making this appointment without a competitive tender. That is not the same as an ““expression of interest””, which is the phrase the Minister used when introducing the order. This contract will be valuable to the person appointed and his or her firm. The valuation process will doubtless drag on for years as all appeal avenues are exhausted—and time costs money . How will the Treasury determine value for money if it has not carried out a competitive tender? The Minister would not expect any debate on Northern Rock to take place without some reference to Granite. The Government have not explicitly included Granite within the nationalisation order, as has been debated at some length. The Chancellor asserted in his letter to Mr Vince Cable that: "““Granite and only Granite is liable to its bondholders under any scenario. The Government have not provided any guarantee arrangements to Granite's bondholders””." It now appears that the Government were being economical with the truth. The analysis by the Office for National Statistics given last week to the Treasury Select Committee in another place is as follows: "““The securitisation structure leads ... to the financial risks and rewards associated with [Granite's] assets remaining with Northern Rock plc””." Since Northern Rock plc is owned by the Government, Granite’s liabilities are now de facto those of the Government. Will the Minister confirm that this valuation process cannot ignore Granite, and, indeed, will have to reflect the full amount of Granite’s assets and liabilities? Since we are talking about the liabilities of Northern Rock, will the Minister confirm—what has been widely reported in the press—that the Chancellor in his Budget statement tomorrow will try to ignore or footnote Northern Rock's liabilities? The Minister may try to wriggle out of this and tell me to wait until tomorrow. But the Minister will know that if the Chancellor does try to ignore the fact that Northern Rock’s liabilities are those of the public sector, as the ONS has already determined, he will be unmasked as the biggest fiddler of figures of all time. His predecessor, the Prime Minister, was adept at cooking the books but never on such a large scale. Our party’s plans are for independent auditing of fiscal rules which would stop any such cynical manipulation. We look forward to the day when we can restore decency in Government reporting.