Iceland to sue UK over frozen assets

Iceland's government risked re-igniting a simmering diplomatic row with Britain yesterday by saying it will fight to reverse the seizure by the Government of the UK assets of two of its biggest banks last year.

Iceland said it will bankroll court proceedings launched by Kaupthing's administrators to redress impounding of the bank's British holdings, and also examine whether to start action in the European Court of Human Rights against the freezing of Landsbanki's UK assets.

"Kaupthing has decided to sue the British Government, and has the full support of the government," said a spokesman for the Icelandic Prime Minister. Kaupthing has hired US-based City law firm Weil Gotshal & Manges to represent it in the case.

The Kaupthing process will take the form of a judicial review, challenging whether the Government was acting within its powers in freezing the bank's assets. The Icelandic bank would then push for compensation if a court finds in its favour. Iceland said it will also consider seeking redress at the European Court of Human Rights for Gordon Brown's use of anti-terror legislation to seize the British assets of Landsbanki.

The Icelandic government said it has received advice suggesting that it is unlikely to be successful if it uses the British judicial system because of the role played by anti-terror laws in this country.

The October crisis arose when Iceland's heavily indebted economy was hit hard by the financial meltdown that took place after the collapse of US investment bank Lehman Brothers. This forced the Icelandic government to take over Kaupthing and Landsbanki as well as Glitnir, a third Icelandic lender.

Kaupthing had bought British merchant bank Singer & Friedlander in 2005 to create Kaupthing Singer & Friedlander, while Landsbanki held British depositors' cash through its Icesave online savings bank and also operated in the UK through its Heritable subsidiary, which provided financing packages, including mortgages.

On 7 October, as the Reykjavik government took control of Glitnir and Landsbanki, the Financial Services Authority seized Heritable. A day later the UK took control of Kaupthing Singer & Friedlander and Landsbanki's remaining British assets. The Chancellor of the Exchequer Alistair Darling claimed at the time the move was necessary to protect British depositors. That same day, Iceland also took over Kaupthing while the accountant Ernst & Young was appointed in London as administrator to the Icelandic banks' UK businesses.

Iceland has long been angry at Britain's handling of the situation. Prime Minister Geir Haarde referred to the matter repeatedly in the weeks that followed, always holding out the possibility of a lawsuit. Iceland argues that Britain's actions helped bring about Kaupthing's failure prematurely. The matter had threatened to derail an aid package for Iceland from the International Monetary Fund and several European countries. The aid was agreed in November but only after a breakthrough on how to compensate savers in Icelandic accounts in Britain, the Netherlands and Germany. "In addition, the Government of Iceland reiterates its steadfast conviction that the... actions by the UK authorities were wrongful and unjustified, and has made a formal request to the UK authorities that the (Landsbanki) Freezing Order be cancelled," said the Mr Haarde's spokesman.