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Kaupthing is planning to sue the British government over the Icelandic bank's collapse.

The bank claims a decision by the British government to seize savers' cash in UK subsidiary Kaupthing Edge and transfer it to Ing Direct may have tipped the bank over the edge.

The following day, the Icelandic government took control of Kaupthing and suspended its shares on the country's stock exchange.

Kaupthing has now hired London-based law firm Grundberg Mocatta Rakison to fight the case.

The firm said Michael Tackley and Richard Beresford, both Partners at Grundberg Mocatta Rakison, and John Jarvis QC flew out to a meeting with the bank in Reykjavik on Wednesday.

Mr Jarvis told Icelandic newspaper RUV: "I think it's safe to say we have formed some initial views. We are surprised that the order that was made, was made pursuant to an act which is commonly known now as the Northern Rock Act 2008."

"It seems to be, to us at the moment, outside the purpose of that act that the order was made and there is a possible remedy there for a gain to the English court to have that order declared unlawful.

"We are also looking to see whether there are the civil remedies for damages for such torts under English law as misfeasance in public office and negligence," Mr Jarvis concluded.

The amount of compensation sought could run to "billions of pounds", the law firm said.