Govia, the rail operators who run the Southern, Thameslink and Gatwick Express franchises through East Croydon, have been stripped of their Southeastern operation and face a possible Serious Fraud Office investigation into the withholding of £25million of payments going back seven years that were due to the Department of Transport.

Other rail franchises have been effectively re-nationalised in recent times, but this would be the first where such action has been taken over “a serious breach of good faith”.

The move has seen the Labour Party call for the end of the flawed rail franchise system, with Govia accused of “playing fast and loose with their financial commitments”, and a transport union chief raising “serious questions about the viability” of the Thameslink service.

Contracts between rail operators and the government were effectively abandoned during the pandemic, as lockdown saw passenger numbers, and fares revenue, plummet. It appears that the issue at Southeastern was discovered while the contracts were being renegotiated and scrutinised.

Southeastern runs the trains from Kent and parts of East Sussex through south-east London into Victoria, Charing Cross, London Bridge and Cannon Street, serving stations along the way including Brixton, Beckenham Junction and Penge East.

This morning,  Grant Shapps, the transport secretary, said the Operator of Last Resort would take over the running of the services. “We won’t accept anything less from the private sector than a total commitment to their passengers, and transparency with taxpayers.”

Labour described the decision as “yet another example of the complete failure of the franchise model, which prioritises private company profits over passengers and service”.

Huw Merriman, the Conservative MP for Bexhill and Battle MP and the chair of the cross-party Commons Transport Select Committee, told the BBC that the Serious Fraud Office had been called in.

Grant Shapps: taken Tory government seven years to spot it was missing £25m

A statement from the Department for Transport said it had found evidence that since October 2014 historical taxpayer funding of £25million, which should have been returned, had not been declared.

It added the money has now been reclaimed, with more investigations being carried out and further action, including financial penalties, possible.

Operation of all Southeastern services would transfer from London South Eastern Railway (LSER) to SE Trains Limited on October 17, promising passengers “business as usual with no immediate changes”.

All tickets will remain valid after transfer and new tickets can continue to be purchased in the usual way.

Manuel Cortes, the general secretary of TSSA, the Transport Salaried Staffs Association, said: “The days of rail franchising must now be well and truly over.

“Time and time again we see the private sector fail and taxpayers ride to the rescue.”

Off the rails: Govia’shandling of Southeastern has prompted questions about their running of other services

Rail, Maritime and Transport union general secretary Mick Lynch said, “This latest public sector rescue of a privately operated rail service should kill off the risky and expensive nonsense of rail privatisation once and for all.

“It appears that this collapse is all about Govia playing fast and loose with their financial commitments and raises serious questions about the viability of their other operations including the busy Thameslink services.”

Read more: U-turn on the railway as Govia reinstate services for September

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