Northern Rock's army of small shareholders took their campaign for compensation to the courts yesterday as they accused the Government of abusing their human rights by nationalising the stricken mortgage lender.

At the same time, SRM Global, a Monaco-based hedge fund that is the biggest institutional owner of the Rock, served notice to the Treasury that it was launching a legal action of its own. SRM also plans to question the legality of the nationalisation with the European Commission.

Yesterday's two-pronged assault on last month's Rock nationalisation could be the first of a wave of legal actions as aggrieved shareholders try to salvage at least part of their investments. One closely involved in the process said: “By the time this gets to court, the Government will have a huge number of shareholder actions on their plate.”

RAB Capital, the Rock's second-largest shareholder, has not reached a decision about whether it will join the legal fray. The Legal & General Investment Management (LGIM) activist fund, with a substantial holding in the bank, has also signalled that it is exploring its options. Sources close to a big Rock shareholder said: “We are watching developments with interest.”

SRM, RAB Capital and LGIM all declined to comment.

Roger Lawson, chairman of the UK Shareholders' Association, said that he had been in contact with 7,000 Rock shareholders who believed that their holdings would end up being worthless based on last month's nationalisation plan.

Mr Lawson said that his association had raised an initial £30,000 fighting fund to help to foot a legal bill likely to run to hundreds of thousands of pounds. He called on other shareholders, including City institutions, to join his lawsuit, which he said was “simply trying to get a fair deal for shareholders. Fair compensation should be paid when a company is taken into public ownership. In this case, instead of putting in place a fair process, the Government is rigging the valuation. In our view, the compensation will be very little.”

Mr Lawson said that it was difficult to value Northern Rock, but he suggested that a figure of £4 to £5 a share sounded sensible. Some reports have suggested that the Government plan could leave shareholders with only 5p.

Some of the bank's most powerful investors believe that they are deeply out of pocket after the Government took control last month, having first agreed to underwrite all of the bank's near-£100billion of liabilities. The Government is preparing to appoint an independent valuer over the next few weeks to set a compensation level for shareholders but it has said that the valuation will not take into account the Government's financial support.

The Treasury declined to comment on any legal claim but defended the nationalisation process. “We have set out clearly the basis for valuation of the company in legislation that has been discussed and passed by Parliament. It will be a matter for an independent valuer to establish the value in accordance with that legislation,” a Treasury spokesman said.

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