L1T FM Holdings v Chancellor of the Duchy of Lancaster: Forced divestment and Article 1 Protocol 1 compensation

The Court of Appeal has dismissed an appeal challenging the lack of compensation following a forced divestment order under the National Security and Investment Act 2021. The case clarifies when full compensation is required following state-imposed property deprivation on national security grounds.

The appellants, companies within the LetterOne Group, were required to divest their entire shareholding in Upp Corporation Limited, a fibre broadband company. The Secretary of State made the order because the ultimate beneficial ownership by certain Russian nationals created vulnerability to leverage by the Russian state, posing a national security risk.

Following the forced sale to Virgin Media O2, the appellants received the sale proceeds but argued they suffered financial loss because prospective buyers knew the sale was compelled by government. They contended that Article 1 of the First Protocol to the ECHR required compensation beyond the distressed sale price.

The compensation principle

The Court of Appeal confirmed that whilst the taking of property without payment reasonably related to its value normally constitutes disproportionate interference, full compensation is not guaranteed in all circumstances. The European Court of Human Rights recognises that legitimate public interest objectives may call for less than full market value reimbursement.

Lord Justice Singh, delivering the leading judgement, explained that the governing principle requires a "reasonable relationship of proportionality" between property value and compensation. What constitutes full compensation depends on context—in this case, fair market value rather than reimbursement of past investment or lost future profits.

Wide margin of judgement

The court emphasised the wide margin afforded to Parliament and the executive in national security contexts. This applies equally to compensation questions as to the underlying property interference. Parliament had chosen not to include a compensation scheme in the NSIA, despite doing so in other contexts such as leasehold reform and nationalisation legislation.

The statutory scheme includes section 30, providing for financial assistance following final orders. This provision allows mitigation measures where appropriate, contributing to the overall proportionality assessment.

Deprivation versus control

Whilst the court proceeded on the basis that the order amounted to property deprivation rather than mere control of use, the distinction was not determinative. Viewed holistically, the scheme regulates who can be shareholders where national security risks arise—the divestment requirement is the means of protecting national security, not an end in itself.

The appellants could conduct an open market sale and retain proceeds. They could choose the buyer, provided that person posed no national security risk. Although the sale was forced and timing imposed, these circumstances did not destroy the reasonable relationship of proportionality.

Practical implications

The decision confirms that forced divestment under the NSIA, without compensation beyond sale proceeds, does not breach Convention rights. The court rejected arguments that sophisticated investors should receive full market value compensation when forced to sell. The presence of ultimate beneficial owners posing national security risks justified the interference, notwithstanding the corporate veil separating appellant companies from those individuals.

Requiring assessment of "fair market value" beyond actual sale proceeds would introduce complicated, lengthy processes potentially impeding urgent national security measures. The absence of directly applicable Strasbourg authority supported restraint in extending compensation requirements beyond established principles.

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