Northern Rock’s leading shareholders are preparing to vote down a rescue proposal from Sir Richard Branson's Virgin Group despite the looming threat that the beleaguered mortgage bank will be nationalised if a deal fails.

It is understood that RAB Capital and SRM Global, the two hedge funds that are the Rock’s largest investors, will oppose the Virgin offer when it comes to a shareholder vote. Between them, the two firms hold a 19.68 per cent stake in the bank.

“If it were a two-way competition between Virgin and nationalisation, we would vote for nationalisation,” said a source close to one of the leading shareholders yesterday.

Legal & General Investment Management is the third-largest owner of Rock shares, with a stake of 4.79 per cent. Together, the three investors are within a whisker of owning the 25 per cent required to block a Virgin-led rescue.

RAB Capital bought a further 180,000 shares yesterday and the hedge fund has been a regular buyer over recent days.

The only way the Government could bypass a Northern Rock shareholder vote would be to force the bank into administration, but that would be a legal minefield.

L&G holds its Rock stake through its activist fund, run by the respected fund manager Mark Burgess. City sources said L&G was likely to back Northern Rock’s management, who have put forward their own rescue proposal that would see the bank remain independent and install Paul Thompson as chief executive.

This plan also appears to have the support of SRM, which will today formally challenge the view that the Government’s existing loans to Northern Rock amount to state aid. An official European Union ruling will be made on 17 March.

In a formal submission to the Treasury, SRM will argue that the Bank of England was acting as a central bank liquidity provider and that any move to nationalise the bank would be an “abuse of power”.

The defiance on the part of Rock shareholders underscores the high stakes involved as the saga surrounding the future of the Tyneside lender moves into its closing stages.

A final government decision on its future could come as early as this weekend. SRM has taken legal advice that has concluded that if the Government nationalises Northern Rock, it must pay shareholders the book value of the bank, estimated to be 400p a share.

This runs counter to the Government’s legal advice, which states that shareholders should receive the market value of the bank, less the value of support so far offered through emergency loans from the Bank of England.

The Bank has lent about £26 billion so far and has taken an estimated £91 billion in liabilities on to its balance sheet.

Meanwhile, it was reported last night that the Government is asking Virgin Group for a £200 million fee in the event the bidder succeeded in turning round Northern Rock within three years.

The money would be in return for the use of its guarantee of the Bank of England’s £25 billion loan. Rock shares closed ¾p higher at 96p yesterday, valuing the bank at just over £402 million.

L&G declined to comment on its preferred outcome. RAB declined to comment. SRM Global did not return calls.

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