The Treasury took over the shares when Northern Rock was nationalised a year ago, and it has appointed BDO Stoy Hayward as independent valuer to set the appropriate level of compensation.

But shareholders argued that the government has wrongly compelled the independent valuer to assume that Northern Rock was a failed bank, leaving the share value at little more than zero.

The government's claim is that without state support, Northern Rock was unable to stay in business, so it should not be valued as a going concern. The share-holders are contesting that assumption, but the court ruled in the government's favour.

"We have come to the conclusion that the provisions made for the compensation of the shareholders of Northern Rock do not infringe their rights," said Lord Justice Stanley Burnton, who heard the case with Justice Stephen Silber.

The court denied the share-holders' petition for a full judicial hearing, but granted them per-mission to appeal the decision.

Nationalisation

The British government pumped 27 billion pounds ($38.6 billion) in loans and assumed contingent liabilities of £29 billion in an effort to keep Northern Rock afloat, before resorting to nationalisation.

The case was brought by SRM Global, RAB Capital, and some 150,000 private shareholders who held up to a quarter of bank shares.

The government argued that the two hedge funds, SRM and RAB, bought their shares when the bank was clearly in trouble, in some cases after the government announced in January any compensation in the case of nationalisation would be on the basis that all government financial assistance had been withdrawn.

RAB bought 1.64 million shares last February and SRM bought 5.529 million shares in February.

"Clearly, they were speculating on the basis of their view that nationalisation would not take place. They must knowingly have taken the risk that nationalisation would take place on the terms that had been announced," the court's judgement said.

The judges said they "have sympathy for the small share-holders of Northern Rock, particularly those whose shares formed part of their pension funding."

"However, all shareholders, large or small, professional or private, are investors in the fortunes of the company through the shares of which they hold, and the small shareholders had the misfortune to hold investments in a company that by 13 September 2007 was cash flow insolvent."

- AP