THE British and Dutch governments are preparing court action against Iceland to recover 4bn euros (£3.5bn) lost when the country's banking system collapsed.

It follows a referendum in Iceland which rejected a repayment plan.

This latest development comes as Kirklees Council faces a tough battle to recover £200,000 owed to it by an Iceland bank.

The results of the national Icelandic referendum saw the ‘no’ side gain more than half the votes – a reflection of enduring anger over the economic havoc wrought by Iceland’s risk-taking bankers.

Kirklees had invested £1m of taxpayers’ money in the Iceland bank Landsbanki when it went bust in 2008.

But the authority managed to claw back £800,000, thanks to lobbying by the Local Government Association.

The issue will now be referred to an international court, the European Free Trade Association Surveillance Authority, a process which could take several years.

Backers of a ‘yes’ vote had argued the repayment deal was the best way to resolve the issue in terms of cost and risk to Iceland.

More than £1bn of taxpayers’ money held by 100 councils was in danger after Landsbanki and another Icelandic bank, Giltnir, collapsed in October 2008.

The UK said it was “disappointed” by the ‘no’ vote, while the Dutch finance minister said the time for negotiations was “over”.

Iceland’s Finance Minister Steingrimur Sigfusson said that resolving the row in court would take at least a year.