Northern Rock’s small shareholders will take High Court action against the Treasury within weeks after the Government’s lawyers rejected their plea for compensation.

The Treasury is also thought to have dismissed similar compensation claims from SRM Global and RAB Capital, the Rock’s two biggest institutional shareholders.

The UK Shareholders Association (UKSA) said yesterday that it would submit an application to the Administrative Court, part of the High Court, by May 22 for a judicial review.

If the application is approved, a judicial review — which allows members of the public to challenge the legality of government legislation — could be heard within nine months.

Roger Lawson, a UKSA director, said: “The issues are so significant and there’s obviously a very substantial public interest in this, so we’re hopeful the application will be approved.”

Northern Rock was nationalised in February after months of being propped up by Bank of England loans.Under legislation introduced at the time of the nationalisation, compensation payouts for Rock shareholders are based on the assumption that the crisis-hit bank was unable to continue without public support.

With a £24 billion debt to the Bank, this would make shares in the Newcastle-based bank worthless. However, shareholders insist that the bank’s £110 billion of mortgage assets gave the company a net asset value of about 320p per share.

They want the legislation to be amended so that they receive higher compensation. The UKSA has raised £60,000 from members for its legal fight.

RAB Capital, which submitted its initial claim shortly after the UKSA, said yesterday that it had yet to decide whether to seek a judicial review.

Like SRM, it is understood to be watching the situation involving small shareholders closely.

SRM, the Monaco-based fund set up by Jon Wood, a former UBS trader, did not return calls seeking comment.

Sources close to Legal & General Investment Management, another heavyweight City investor in the Rock, said that the fund manager was considering declaring itself an “interested party”, meaning that it would take part in a case if it went to court, but would not bring a case itself.

All the institutions are thought to be nervous about suing the Government in what could become an expensive and protracted legal battle.

One big Rock shareholder said: “It’s one thing putting in a pre-action letter to the Treasury; it is quite another embarking on what could be — considering the way lawyers work — a two-year legal campaign.”

The Treasury has hired Lord Grabiner, QC, the Labour law lord, to defend it. Lord Grabiner is head of One Essex Court, the country’s leading commercial chambers.

Slaughter and May, the City solicitors, have been giving the Treasury legal advice since last autumn, led by the partner Charles Randell.

RAB Capital is relying on legal advice from Nabarro, the City solicitors. SRM is taking advice from White & Case, the Anglo-American legal giant.

SRM is understood to have hired David Pannick, QC, a leading human rights advocate, to join the White & Case legal team.

The UKSA is being advised by David Greene, of Edwin Coe. The Treasury will soon tender for independent arbitraters to value the Rock’s shares.

Yesterday a Treasury spokeswoman said that compensation legislation was fair and reasonable.

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