June 11 (Bloomberg) -- Northern Rock Plc investors aren’t entitled to compensation because the bank would have gone bankrupt had it not been nationalized, an attorney for the U.K. Treasury told a court in London.

Northern Rock shareholders are asking a U.K. appeals court to force the government to compensate them for shares rendered worthless when the bank was taken over last year, arguing their property was unfairly seized.

“Without public financial support, this company would have become insolvent and would have gone into administration,” Jonathan Sumption told a three-judge panel of the Court of Appeal in London today. “No companies were prepared to buy Northern Rock even at a knockdown price.” Administration is a U.K. form of bankruptcy.

Northern Rock, nationalized in February 2008, was the first U.K. casualty of the global credit crisis. The Newcastle, England-based lender nearly failed in 2007 after it had to seek emergency funding from the Bank of England and then suffered a run on its deposits.

Lawyers for the investors, including hedge funds SRM Global and RAB Capital Plc, told the court that the U.K. Treasury’s method of valuing their stock would result in a negligible payout at best and enable the government to unfairly profit when it eventually sells the bank. The three-day hearing is scheduled to conclude tomorrow after lawyers for shareholders respond to the government’s arguments.

Northern Rock shares, which were as high as 1,197 pence in October 2006, fell to 90 pence immediately prior to the suspension of trading on Feb. 15, 2008.

Judicial Review

The shareholders in February failed to convince a lower court they were entitled to compensation when a two-judge panel in London threw out a lawsuit by SRM Global, RAB and a group of private investors. They had sought a so-called judicial review of how the shares will be valued by a government-appointed expert.

SRM was Northern Rock’s largest shareholder with just over 48 million shares, or 11.5 percent of the bank’s ordinary share capital, according to the judgment. RAB owned around 34 million shares, or 8.2 percent of the stock, the lower court ruling said.

Judicial reviews in the U.K. examine the decisions of public agencies. While an authority may be ordered to reconsider an action, it is later allowed to draw the same conclusion provided all the procedures were correctly followed.

The U.K. has committed as much as 1.4 trillion pounds ($2.3 trillion) to bolster the nation’s banking system through direct investments, asset insurance and underwriting loans. The government nationalized Northern Rock and Bradford & Bingley Plc, and took controlling stakes in Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc.

To contact the reporter on this story: Jeff St.Onge at the Royal Courts of Justice in London at

jstonge@bloomberg.net.

Last Updated: June 11, 2009 11:14 EDT