Exclusive by political editor Paul Francis

Kent County Council has suffered an unexpected setback in its efforts to recoup millions of pounds deposited with Icelandic banks.

The authority has been told that administrators for one of the banks, Glitnir, are not now regarding local councils as preferential creditors.

The development is an unwelcome one because if the position is maintained, it could place a question mark over the prospect of KCC getting all its money returned.

Any assets will have to be distributed among all the bank’s outstanding creditors, with UK councils among the 8,685 claims lodged with Glitnir for a total of 3.4billion Krona.

KCC has £15million tied up with Glitnir and only a fortnight ago, a report presented to councillors was optmistic that it was on course to recover 100 per cent of the money, partly because one of the other banks - Landsbanki - confirmed it was treating councils as priority creditors.

But that situation has unexpectedly changed in a move described as "inexplicable" by finance chiefs.

The development also has possible repercussions for Canterbury City Council, which has £2million on deposit with Glitnir.

Cllr John Simmonds (Con) KCC cabinet member for finance, said legal challenges to the priority status of councils were expected but that administrators had appeared to have pre-empted that possibility by effectively asking councils to prove why they should be considered a priority.

"We have just been informed that the Icelandic Bank Glitnir appears to have rejected depositor claims for priority status. Their most recent statement is in conflict with all discussions over the last year with the Icelandic government, legal advisers and the banks themselves," he said.

He added that the position of bank's adminstrators contrasted with Landsbanki, which KCC has £17million tied up in.

"The return of these deposits is a lengthy and complex process and challenges at this early stage were always expected. Our legal advisers are currently attempting to establish the reasons for this position which we find inexplicable following all previous discussions."

County Hall finance chiefs are travelling to Iceland on Wednesday for a creditor’s meeting and talks with the banks’ administrators, along with representatives from the Local Government Association and legal advisers.

Of the total of £50million KCC had on deposit, just under £3million has so far been returned.