The law firm claiming to represent Northern Rock's private investors has promised to fight the Treasury all the way to the High Court if it tries to pay them next-to-nothing through nationalisation.

David Greene, litigation partrner at Edwin Coe, the City solicitors, told Times Online that while any government could pass legislation to nationalise a company, "in doing so European legislation requires they pay value for assets".

The Treasury has said that it will appoint an independent arbitration panel to value Northern Rock as a business and then place a value on its shares, but all on the basis that the bank had no taxpayer support to prop it up.

The Government has already loaned Nothern Rock an estimated £25 billion of emergency funding since September.

The Treasury also agreed last month to guarantee between £25 biliion and £30 billion worth of bonds to be issued if a private sector bid had gone ahead, which provided support to the bank's recent share price.

Mr Greene said: "The Government is not entitled to say we can value [Northern Rock] without accounting for the money put in. They look as though they are trying to set a criterion which attempts to value it at nil — I don't think they are entitled to. European standards have set what is payable in nationalisation."

Northern Rock shares were today suspended at Friday's close of 90p. Less than a year ago they traded at £12.

He added: "There is potential litigation. I am not one to rush off to court. Settlement is the best way of achieving a return for everyone. If they try to set a base at nil then I think there will be a a fight."

Mr Greene said he would be looking to value Rock shares "over the three years they traded with the company as a going concern."

The long period reflected, Mr Greene added, the length of time the vast majority of small shareholders had held their stakes in the bank.

Mr Greene, who last sued the government on behalf of small shareholders over the collapse of Railtrack, said he was prepared to rely on similar legal principles relied on in the Railtrack litigation.

There would be a case for arguing a potential breach of human rights and European case law governing compensation in cases of nationalisation.

"Article one of the protocol [of human rights] governs the right to property and there is established [case law] authority that regards shares and the right to hold them as property, " Mr Greene said.

The European Economic Community (EEC), the forerunner to the European Union, established in the 1950s and 1960s sets out rights for those holding assets subject to nationalisation, Mr Greene added. The law would have been set before the UK joined the EEC in 1973 but those rights would apply to UK nationals once the UK became a European member state.

Northern Rock has about 144,000 small shareholders. Mr Greene has been instructed to act on behalf of the Northern Rock Small Shareholders Group since October.

Should the small shareholders group decide to mount a formal legal challenge over compensation, they may have to contribute extra to a "fighting fund" similar to the millions of pounds raised by retail investors in Railtrack when they took the government and Stephen Byers, the then transport minister, to court.

But Anthony Maton, a London-based partner at Cohen, Milstein Hausfeld & Toll, said talk of litigation could be premature because the Government’s announcement that it will pay compensation following an independent valuation of Northern Rock.”

“It will be very difficult to go to court until the valuation is done and the levels of compensation are announced. It’s an obvious but important point: you can’t sue for inadequate compensation until you know what’s on offer,” he said.

Since the Government has already agreed to pay compensation, any subsequent legal action is likely to centre on the amount paid out.

But Andrew Head, a partner at Forsters, warned: “In practice, given that the Government will no doubt choose very eminent arbitrators, any challenge is unlikely to succeed.”

Lawyers said the other mooted tactic, arguing that shareholders’ human rights had been breached, would also present obstacles.

”Given that Northern Rock shares are likely to have been worthless if the government had not stepped in with its guarantees, the chances of such an action succeeding would seem to me to be close to zero.”