Northern Rock shareholders are today expected to lodge a legal challenge to claim back compensation they allege they are owed from the nationalisation of the Newcastle-based bank.

The UK Shareholders Association and SRM Global, the hedge fund run by former UBS trader Jon Wood, will submit an application for a judicial review into the terms of Northern Rock's nationalisation. If the application for review is approved, the case will come to court in about nine months time.

Shareholders believe that the Government has fixed the terms by which they are to be compensated, meaning that they will receive practically nothing. At present, shareholders are set to receive what their shares would have been worth had the Government not propped up the bank.

However, shareholders want an independent valuer to assess a fair compensation level and argue that this could value the bank's shares at £5. At this level, the Government faces a compensation bill of around £2.1 billion.

Around 15 shareholders have signed up to the application, representing around 8,000 investors who are backing the action. RAB Capital, another hedge fund with a large holding in Northern Rock prior to nationalisation, is also expected to join the legal action.

The case will argue that the Government nationalisation was a breach of human rights law.

Northern Rock was nationalised in February after the credit crisis forced it to seek emergency funds from the Bank of England. The move triggered the first run on a UK bank in more than a century.

Prior to nationalisation, Northern Rock's shares were suspended at 90p, valuing the bank at around £380 million.

David Greene, a partner at Edwin Coe, the law firm which brought the Railtrack shareholders' action against the Government three years ago, is representing some of the shareholders.

He believes that without the legal challenge, shareholders would get almost nothing for their stake. "Right to the end, there were private bidders who were willing to purchase Northern Rock," he said.

"Shareholders had no reason to believe there would be nationalisation," Mr Greene said.

At the time of nationalisation, the Government tried to head off a legal challenge by promising to appoint an independent valuer.

However, three months down the line there has been no appointment amid suggestions from industry sources that accountants, investment banks and other potential valuers are wary of taking on the job because of the potential legal and reputational risks involved.

SRM Global and RAB Capital argued before nationalisation that Northern Rock was worth at least £4 a share.

Times Recommends

• ‘Lame duck’ fear for FSA as chief quits
• Storm over bailout of EU's most ailing economy
• Northern Rock to drop 100% savings guarantee