FULL recovery of the money Havering Council lost when the Icelandic economy crashed has been thrown into doubt this week as bank administrators mount a legal challenge on repayments.

But council representatives are optimistic they will recover the ‘lion’s share’ of the �12.5m lost in October 2008.

The council was one of 145 local authorities whose money is tied up following the collapse of four Icelandic banks - Heritable; Kaupthing, Singer, Friedlander (KSF); Glitnir; and Landsbanki.

It was ruled UK authorities were entitled to priority repayment over other creditors - but now bank bosses are challenging this in the district court, in Reykjavik, this week, and in another case next month.

If the challenges, from Landsbanki and Glitnir administrators, are successful, Havering stands to lose around �4m.

Baroness Margaret Eaton, chairman of the Local Government Authority (LGA) - overseeing the recovery – said: “Losing priority status in the administrations of [banks] Landsbanki and Glitnir, could cost council tax payers across the country as much as �400m.

“This money is particularly important at a time when local authorities need to maximise resources to help fund the efficiencies needed to cope with the toughest local government finance settlement in living memory.”

The legal challenge is being made by bondholders and debt speculators who stand to make less money if local authorities are paid first and get back the full value of their claims.

Havering Council has already recovered �3.5m from Heritable.

The legal costs are expected to reach �1.8m – of which Havering will pay more than �26k.