It is less than a year since Northern Rock was nationalised. But the legal action brought by investors against the Government has the feeling of another era about it.

At the time, the move was shocking, but as the credit crisis escalated, the Government had to bail out a string of other banks, hurting shareholders in the process. Now the idea that the Government may, at some stage, have to nationalise the entire banking sector is openly discussed without scaring the horses.

That is precisely why the legal action that starts in the Royal Courts of Justice next week will be watched so widely. Two of the bank's biggest former shareholders are challenging the legality of the way in which they will be compensated for their losses.

SRM Global and RAB Capital, which between them owned more than 20 per cent of Northern Rock, are questioning the terms of reference for Andrew Caldwell, the partner at BDO Stoy Hayward who is the independent valuer of the Rock shares. They are joined by the UK Shareholders' Assocation, which represents some of the tens of thousands of individual investors who lost money.

Legal & General, one of the City's biggest institutional fund managers, is on the sidelines but is likely to join a legal compensation claim if it builds a head of steam. The case hinges on whether the Government was right to instruct Mr Caldwell to base his valuation on the bank being in administration, rather than a going concern.

The answer could be worth up to £4 a share to Rock's investors, who otherwise are likely to get pennies.

The Government has been more generous in the subsequent case of Bradford & Bingley, where shareholders will be compensated on the basis of the value of the company just before it was nationalised.

If the Rock investors win, it will make it much more difficult for the Government to ignore shareholders' interests in future cases.

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