Andy Burnham is under further pressure to take control of ailing Thames Water from a cross-party group of MPs who are calling for ministers to break off talks with the US hedge funds who are effectively running the company.

Adding their voices to demands that the prime minister takes public control of the company, which has debts of £20bn and is being controlled by a group of 100 hedge funds and distressed-debt investors, the MPs said in a report that ministers should consider emergency legislation to take control of its financial affairs to stabilise the company.

Alistair Carmichael, the chair of the environment, food and rural affairs committee (Efra), said it was unbelievable that the special administration regime (SAR) for insolvent or failing water companies could not be triggered for Thames Water on performance grounds alone.

Angela Eagle, the environment secretary, has suggested that an SAR – effectively temporary public control – cannot be triggered under the current law because of the way the US hedge funds that bought Thames Water’s debt have kept it running while seeking a deal to renegotiate its liabilities.

The report said Ofwat and the government should withdraw from negotiating with the consortium of distressed-debt specialists who lacked the proper expertise to turn around a vital public service.

Carmichael said the creditors were operating in an opaque way, seeking relief from environmental penalties and dragging out negotiations while reaping millions of pounds in debt interest.

“Thames Water’s 16 million customers have largely lost faith in it,” he said. “They are sick of seeing their waterways polluted, their bills going up, and drinking water gush through broken pavements while supplies run low. We believe Thames Water can be turned around, but not by giving the keys back to the people who have been joy-riding 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.”

The report said ministers should explore all potential alternative options, including an SAR or using fresh legislation to draw a line under the debacle and restore stability to the sector by putting Thames Water on a sound footing for new buyers.

Carmichael said putting the company into special administration once its money ran out could be the only way to reset its fortunes. “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,” he said.

The intervention comes after 64 MPs debated a 200,000-strong petition, set up by the campaigner Ash Smith of Windrush Against Sewage Pollution, to hold a referendum on putting the privatised water industry back into public ownership.

MPs on the Efra committee said they were concerned that not enough regulatory due diligence had been carried out on the US-led consortium that bought Thames Water’s debt.

Elliott Investment Management is one of the leading creditors in the group that includes Silver Point Capital, BlackRock and M&G. Elliott’s founder and co-chief executive is Paul Singer, a Trump donor whom Bloomberg has described as “the most feared investor in the world”.

The consortium of hedge funds – known as London & Valley Water – is attempting to take over Thames in a multibillion-pound restructuring. It is seeking relief from environmental fines which could be worth up to £1bn, requesting leniency on environmental measures including pollution, leakage and other performance targets imposed a year ago.

MPs said: “Their demands demonstrate that they will not prioritise the swift turnaround in performance that Thames Water so desperately needs.

“Whilst keeping the company in limbo by drawing out negotiations, these creditors are simultaneously reaping millions in debt interest and fees. We have grave concerns … L&VW is an opaque consortium which is failing to live up to the transparency the public expects of the water sector.”

The committee said it was difficult to see why SAR had not already been instigated for Thames Water. “Thames Water is at the end of the road. The company’s performance and the behaviour of its creditors are unacceptable. Their investment strategies are based on extracting value through debt rather than ensuring long-term success.”

A spokesperson for the London & Valley Water consortium said: “Our enhanced proposal will address all feedback from Ofwat and ministers and is the fastest route to fix Thames Water’s complex problems.

“The plan will write off billions of pounds of debt to achieve an investment grade rating and provide £10bn of new capital from experienced investors to improve and upgrade Thames Water’s infrastructure and clean up local rivers.

“All fines Thames Water faces will be paid, all profits will be reinvested, and no dividends will be taken until the company is turned around and returned to the public markets. There will be no cost to the government or taxpayers, and customers will be protected from the costs of Thames Water’s restructuring.

“A new board with specialist expertise will oversee Thames Water’s transformation and work tirelessly to drive the turnaround and rebuild trust. We are committed to ensuring Thames Water provides the service that customers and local communities deserve. This group of investors has never been in control of the company and has never received a dividend from Thames Water. They have stepped in to fund a significant revenue shortfall to ensure Thames Water’s record capital investment programme can continue without disruption.”