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MPs have warned that the “chaos” of Thames Water’s meltdown must never be repeated. The cross-party Environment, Food and Rural Affairs Committee said the Government should also reject offers from the company’s creditors, who have suggested they could invest in the business – but asked for relief from fines for pollution and poor service in return.

Alistair Carmichael MP, the Committee’s chair, said debt-laden Thames Water’s 16 million customers have “largely lost faith in it” amid rising bills. He added: “They are sick of seeing their waterways polluted, their bills going up, and drinking water gush through broken pavements while supplies run low.”

He added: “We believe Thames Water can be turned around, but not by giving the keys back to the people who have been joyriding in the family car. The government should reject offers from the company’s creditors in return for relief from fines for pollution and poor service. We do not believe this opaque consortium of 100 hedge funds and others has the interests of the public, the company or the environment at heart.

“This will likely see Thames Water placed in special administration once its money runs out at the end of the year. But this may be the only way to reset the fortunes of this company and put it on a sustainable footing in the long-term. Liabilities that the government will face in the short-term may be offset by a future sale of Thames Water once a new buyer can be found.”

The special administration regime (SAR) allows the government and regulator Ofwat to appoint an administrator to take over management of a water company’s services if it becomes insolvent or fails to carry out basic functions.

But the Lib Dem MP called it “unbelievable” that the Government could not put a firm into special administration on performance grounds alone and called for the regime to be strengthened so a future regulator can intervene earlier and with legal certainty “where it sees chronic failure”.

Mr Carmichael added: “A loophole that allows bondholders to take control of a water company without oversight must also be addressed. The chaos of another Thames Water-style saga must not be repeated, and steps must be taken to stop the ‘doom loop’ that besets some companies, where fines for failure compound their inability to improve and lead to increased customer bills.”

Thames Water is currently in £20billion of debt and has found itself in a “doom loop” of fines for poor performance.

The firm will likely get over £900 million in penalties over the next five years, estimates have suggested.

Thames Water has been contacted for comment.