THE in-house management team at Northern Rock has revised its terms in an attempt to win Treasury support at the eleventh hour by offering the government a stake of more than 10% in the bank.

The team, led by Paul Thompson, has said it will grant a warrant that could be converted into 10% of the group’s equity within a decade. The proposal, designed to let the government share in the bank’s recovery, is seen as more generous than what is being offered by a rival bid led by Sir Richard Branson’s Virgin Group.

But insiders at Northern Rock fear the “equity sweetener” may be insufficient to beat the Virgin consortium, which is proposing a bigger capital injection into the bank and to take management control. Virgin is offering the government warrants that will be geared to performance and could pay out between £100m and £200m within three years.

If the government rejects Thompson’s proposal it will ignite a show-down with two of the City’s most powerful hedge funds over the future of the stricken mortgage bank.

The bank’s two biggest investors, SRM Global and RAB Capital, have vowed to fight the government’s plans to nationalise the bank. They say they will also block a rescue of the bank by Branson’s Virgin Group.

SRM’s Jon Wood, who controls 12% of the company, has thrown his support behind an in-house management rescue and has said he intends to reject any other proposal.

“The best solution is for this company to stay independent,” he said.

“We are prepared to reject the Branson bid. We are prepared to reject nationalisation. We are prepared to go to court and to Europe if necessary. We are prepared to pursue this to the bitter end.”

Wood has written to Alistair Darling, the chancellor, saying the government’s decision to treat the bank’s bail-out as state aid is “misconceived”. SRM commissioned the leading law firm White Case and Professor Tim Congdon, a former Treasury adviser, to examine the state-aid ruling.

They concluded that the assistance by the government to Northern Rock should not fall under the European Union’s state-aid rules, but should be treated as a normal central-bank intervention in the financial markets.

The report contrasts the government and Bank of England’s actions with those of the European Central Bank. “Spanish banks are borrowing up to €44 billion (£33 billion) from the ECB . . . At no time has it been suggested such measures would amount to state aid,” the report said.

RAB’s Philip Richards said: “You really would think that the government would want to take responsibility for a company that has got into financial difficulties and to rebuild it for the benefit of all stakeholders.”

Times Recommends

• Minister in talks with Saudis to protect creditors
• Premier Inn hits back in £29-a-room row
• Bankers hit back at 'populist' bonus supertax