Icelandic bank chiefs have repaid millions of pounds of Surrey County Council’s and Reigate and Banstead Borough Council’s money frozen there for more than three years.

The county council has been paid back more than £8 million and the borough council more than £5 million.

Borough council leader Joan Spiers said she was “absolutely delighted” at the return of £5.4 million to the council's coffers.

The millions invested with the Icelandic bank Glitnir had been frozen since the collapse of Iceland's banks in 2008.

Along with many other UK local authorities, the county and borough councils had invested the millions of pounds in Icelandic accounts to gain interest in an agreement by which the cash was locked away for a set period, with early withdrawal incurring severe financial penalties.

Surrey County Council invested £20 million, while the borough council invested £6.5 million on deposit with Glitnir, and £9 million with another Icelandic bank, Llandsbanki.

However, the millions were frozen when both banks were caught up in the Icelandic banking crisis.

But last November, following test cases taken to the Icelandic Supreme Court by a small number of UK local authorities, hopes rose when that court ruled that organisations which invested in the Icelandic banks that collapsed were to receive 98% of their investments back.

The financial implications for hard-pressed councils around the country, looking at having to make swingeing cuts in services and laying off staff in the current period of austerity, were viewed as crucial.

Responding to the announcement that the administrators of Glitnir had transferred £180 million to local authority bank accounts, Mrs Spiers, said: “We are absolutely delighted that a further £5.4 million of our investment in Icelandic banks has just been returned to us.”

She said: “This is great news for our taxpayers.

“Our joint action with the Local Government Association (LGA) and other local authorities has paid off, and we have been able to recover a significant amount of the money we held in Glitnir bank at the time of its collapse.”

But Coun Spiers added: “Despite this success, we are conscious that the job isn’t finished, and we will continue to work with the LGA to get back our outstanding funds.”

The Glitnir payment brings the total amount recovered by the borough council from Iceland’s failed banks in the last few weeks to nearly £8.3 million.

A borough council spokeswoman said the remainder is to be returned over time.

She said: “So far we have received payments of £5.4 million from Glitnir and £2.9 million from Llandsbanki.

“We expect the remaining £7.2 million of our original investment to be returned in instalments over the next few years.”

Last November's ruling from the Icelandic Supreme Court stated that UK local authorities and other UK wholesale depositors’ claims for funds held with Llandsbanki and Glitnir had priority status over other creditors' claims.

The spokeswoman said: “This means we will be among those paid first when it comes to getting our money back, and will recover almost all of the money on deposit with the failed Icelandic banks.”

Following the Icelandic Supreme Court's ruling, Coun Spiers said: “Securing priority status in the administrations of Llandsbanki and Glitnir could save the council taxpayers as much as £470 million nationally.”

She said the cost of the legal action taken by the UK authorities up to that time amounted to less than 1% of the amount they expected to recover.

A Surrey County Council spokesman said: "We can confirm that we have received £8.4 million from the Icelandic bank, Glitnir."