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Northern Rock shareholders have lost a judicial review into compensation following the nationalisation of the lender.

A group headed by hedge funds SRM and RAB along with the Northern Rock Shareholders Association, representing the thousands of small shareholder who held shares from when Northern Rock demutualised, had argued the terms of the valuation of the lender were unfair.

Some 125,000 small shareholders held some 25 per cent of the shares of Northern Rock.

They claimed the lender should be valued as a going concern – as although it was in receipt of government funds it was not going bust - and that the government was looking to make a profit out of the sale of Northern Rock.

The former shareholders were also angry at the claims by the chancellor before it was nationalised that it was a stable bank.

An SRM spokesman explained the ruling was "extremely bad news for shareholders of other banks that have taken government support" - as it lays down a precedent were the government can take shares in any bank offered help with no compensation.

"The effect of today's decision is that the government is legally entitled to nationalise any institution in receipt of any financial assistance where it is solvent but temporarily illiquid but for no, or virtually no compensation.

"This judgement is therefore also a negative one for shareholders in other banks, notably RBS and Lloyds Banking Group."

The judicial review by Lord Justice Stanley Burnton found: "We have come to the conclusion that the provisions made for the compensation of the shareholders of Northern Rock do not infringe their rights."

He added: "We have some sympathy for the position of the former long-term shareholders of Northern Rock, who doubtless believed they had an investment in a reliable bank.

"Ultimately, however, they entrusted their investment to the hands of the management of the company. As it turned out, their business plan was flawed and could not survive the unprecedented circumstances of the latter part of 2007."

The valuation of Northern Rock by accountants BDO Stoy Hayward is currently taking place, but with the lender being assessed as not being a going concern, compensation for former shareholders is expected to be low.