Equitable Life policyholders take their claim for compensation to the Royal Courts of Justice on Tuesday in a bid to overturn a Government ruling that gives them a fraction of what they say is a fair entitlement.

The Equitable Members Action Group (Emag), whose 24,000 members have already spent £250,000 on their bid for compensation, will begin a four-day hearing that is expected to lead to a judgment in the autumn.

Paul Braithwaite, Emag’s general secretary, said policyholders were challenging the Government’s decision to make payments only to those policyholders who have been “disproportionately affected” by Equitable’s near collapse.

He said that Emag, which has secured the backing of 321 MPs for a Parliamentary debate on the issue, believes that an independent tribunal should be set up to establish a fair compensation level for policyholders. Mr Braithwaite said that he was not happy with the Treasury decision to choose Sir John Chadwick, a retired judge, to preside over compensation payments.

More than 1 million Equitable customers lost an estimated £4 billion when Europe’s old mutual society was forced to shut its doors to new business in 2001. The previous year, the House of Lords ruled that it had to honour guaranteed annuity policies, leaving it with a liability of about £1.5 billion.

A year ago Ann Abraham, the Parliamentary Ombudsman, published a damning report into the problems at Equitable, finding the Government and regulators guilty of a “decage of regulatory failure” and ten counts of maladministration.

Although the Government apologised to Equitable members for their losses, it rejected four of the Ombudsman’s central findings. Earlier this year, Ms Abraham urged the Government to rethink its position and adopt her recommendation to set up a compensation fund.

“It is deplorable the Government has obliged impoverished policyholders to go to Court and has ridden roughshod over Parliament’s prerogative to vote on the Ombudsman’s recommendations,” Mr Braithwaite said.

The Treasury said that it could not comment on the specifics of tomorrow's court hearing, but defended the Government’s approach to compensation. It also stood by Sir John. A Treasury spokesman said: “Sir John is fully aware of the need to bring this matter to a conclusion and will provide his advice to the Government as quickly as he is able."

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