The Government is squaring up for a showdown with Northern Rock’s banking advisers over fees owed for advice on the failed sale of the stricken mortgage bank.

The news comes as it emerged that shareholders were preparing last night to hit the Government with a double whammy, challenging its decision to nationalise Rock and the plan it proposes for valuing the bank’s shares.

Sources said that the three advisers — Merrill Lynch, Citigroup and Blackstone – are holding out for their full share of £75 million in agreed fees, despite the fact that the Government did not follow their advice to sell the bank. “The reality of it is that they all had letters that had a base amount and a ‘success’ amount,” one source said.

The base amount was understood to be £50 million, with £25 million set aside as an additional “success” fee.

Yet the definition of “success” has become a sticking point, sources said, with the advisers telling the Treasury as recently as last Friday that they would view success as either a sale to Virgin or Olivant or nationalisation.

Sources close to the Treasury have said that the Government has no intention of paying the full amount of fees. One said: “The Treasury is saying: ‘You must be joking. How can you possibly think we’re going to pay you for this outcome?’ ” The Government is already on the hook to pay a fee of between £15 million and £20 million to its own advisers, Goldman Sachs and the legal firm Slaughter and May. It is understood that Slaughter and May, whose top lawyers can be paid as much as £600 an hour, will receive the bulk of the up-front payment, while Goldman Sachs will receive fees worth “low-single digit” millions of pounds. The US investment bank, Wall Street’s top advisory firm, will also receive associated success fees as and when the Government is paid its money back.

The Treasury has also agreed to pay £5 million to each bidding team to cover the costs of their banking advisers, lawyers and accountants. In total, the bill could be worth as much as £100 million or more.

The Times understands that shareholders, including the hedge fund SRM Global, have hired two leading London QCs to bring a judicial review of the Government’s nationalisation legislation, which comes into force tomorrow. The Treasury believes that Northern Rock’s shares are worthless and it plans to appoint an independent panel to decide the value of the company and what compensation, if any, should be paid to shareholders.

The valuation will be made as if Northern Rock had never received government support, which sources say effectively renders the institution bankrupt. Shareholders, led by Jon Wood, of SRM, have argued that the shares are worth at least £4. One legal source said: “The Government’s going to be hit by an awful lot of litigation.”

A source close to the Government insisted: “The shareholders will get nothing, that was one of the reasons the Government insisted on going down every single avenue with the bidders to make sure no stone was left unturned.”

The Government’s Northern Rock bill could creep up further if it decides to pay out a clutch of so-called Tier 1 and Tier 2 bondholders, which between them own Northern Rock bonds worth about £2.5 billion.

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