Treasury seeks to head off legal action

The Government will try to head off legal challenges to nationalisation from Northern Rock shareholders by appointing an independent arbitrator to value the battered lender.

The Treasury will appoint the adjudicator in the next few days and their decision would be legally binding. The method of valuing a company is common in disputes between owners of businesses but has not been used in a nationalisation.

The Chancellor, Alistair Darling, said: "The Bill will provide for an independent arbitrator to value the shares. He or she will do it on the basis that the company does not have Government support."

Northern Rock's shares were suspended today, before the market opened and will be delisted under the Bill before Parliament. Its shares closed at 90p on Friday.

SRM Global, the hedge fund that is Northern Rock's biggest shareholder, has threatened to sue the Government if it nationalised the bank without compensating shareholders adequately. SRM has said that the shares are worth £4. Jon Wood, the head of SRM, wrote to the Chancellor on Friday attacking his classification of the Government's support for the bank as state aid under European rules.

SRM and RAB Capital, the bank's second-biggest shareholder, had supported the proposal from Northern Rock's management to inject capital and keep the bank as a going concern. They vehemently opposed a rival proposal from Richard Branson's Virgin Money.

Philip Richards, the chief executive of RAB, said: "I am disappointed and surprised that they took the decision. We will have to seriously consider what action we can take."

Mr Richards said he did not believe the decision was in the interests of the Government, the company or its employees. He declined to comment on the use of an independent arbitrator.

Arbitrators typically come from major accountancy firms. The Treasury said it would consult professional bodies to ensure the person chosen had the necessary professional standing.

Shareholders have never been one of the Government's top priorities in settling the Northern Rock crisis and the Chancellor dismissed their interests early on. But the increasingly aggressive actions of SRM prompted the Treasury to ask bidders to include compensation for investors in their plans. This condition helped to deter the private investment firm JC Flowers, which quit the race late last year.

Northern Rock has about 180,000 small shareholders, many of whom are based in the North-east and received their shares when the former building society demutualised 10 years ago. There is no way for the Government to distinguish between these investors, who hold about 20 per cent of the bank's stock, and hedge funds who took bets after the Bank of England's emergency support was announced. The nightmare scenario for the Government would be the kind of bitter row with shareholders that ensued after Railtrack was put into administration. Corporate recovery experts have suggested that the independent arbitrator could benefit the Government by deciding that Northern Rock would be worthless without Government support.

The Government's legislation will allow it to take any financial institution into public ownership for the next 12 months. The Chancellor said the measure was only aimed at Northern Rock. The Treasury said that a Bill specifically dealing with Northern Rock would have taken far longer to enact. But senior bankers have said the general measure could further undermine confidence outside Britain in the country's banking regulation.

Ron Sandler, the former chief of Lloyd's of London, will be the bank's new executive chairman.

The British Bankers' Association said: "It is important for the confidence of customers and in the UK's financial services sector that the Northern Rock episode is finally brought to a close. We now need to work together to put in place a considered framework to prevent such a situation happening again ."