The government has sounded the death-knell on the beleaguered firm Railtrack which has lurched from one financial crisis to another over the past year.

Having been granted a High Court order placing Railtrack in administration, the government is seeking to replace it with a non-profit making company.

The move became necessary after Railtrack bosses told transport minister Stephen Byers that more public funds were needed to prevent the company becoming insolvent.

Byers refused the request on Friday saying he had pumped enough state aid into the company.

As Railtrack sunk under the weight of its £3.3 billion debt, Byers said he was seeking to replace the privatised firm with a non-profit making private company that would reinvest its profits in the rail industry.

He also pledged there would be sufficient funding for the administrator to ensure that the railway continues to run normally until Railtrack's licensed activities are transferred of out of administration as a going concern.

"The government cannot justify any more additional public money for Railtrack. We provided a substantial package of financial assistance in April, but the company came to me in July asking for additional public subsidy. They subsequently also requested suspension of the regulatory regime," said Byers.

Highlighting the parlous financial state of the company, he said the company faced costs and poor service penalties that were likely to exceed theregulator's October 2000 estimate and the government's April rescue package by over £2 billion over the next five years.

In addition, there were the costs of the post-Hatfield emergency network repairs and the west coast main line upgrade which could cost up to £7 billion compared to the £2.3 billion original estimate.

Following the granting of the court order on Sunday, Byers said: "I intend to put forward a scheme for a new private company without shareholders, which will put proposals to the railway administrator to acquire Railtrack's core business. This will be a private sector company, working in the interests of the whole industry."

Byers sought to emphasise that his proposals did not amount to bringing Railtrack back into the public sector.

"This is not renationalisation. The new private company without shareholders to be proposed to the administrator would have members initially appointed by the Strategic Rail Authority who will include key industry stakeholders," he said. "Unlike shareholders, these members would not receive dividends or other returns and any financial surplus would be re-invested in the network. This proposal would create a business independent of government operating on a fully-commercial basis."

The minister also said he planned legislation to rationalise the regulatory structure, reduce interference in the industry and scrap "a self-defeating system of penalties and compensation".

Following the winding up of Railtrack, the Conservatives said the government must shoulder some of the blame.

Shadow transport spokesman Eric Pickles said: "The government must accept its role in bringing Railtrack to its knees. They are responsible for creating an adversarial climate by setting Railtrack, the Strategic Rail Authority and the regulator at each others' throats. This has resulted in important investment decisions being delayed."

But the Rail Passengers Council, the passengers' watchdog, welcomed what it called the government's "bold step".

The RPC's chairman, Stewart Francis, said: "We have been advocating radical evolution since the truly rotten state of parts of the rail industry became apparent. Almost a year ago we floated the idea of Railtrack becoming a public trust, and now we hope that the inclusion of regulators, train operators and passenger representatives on the board will help bring about the joined-up railway we need."

Calling for stability to ensure the expansion of the industry, he added that continuing private investment was necessary. "The railway needs sustained investment, and for many years to come. It seems unlikely that the farebox and taxpayer will be able to foot the bill alone," said Francis.

The move has also been welcomed by the Lib Dems' transport spokesman Don Foster who said: "At last there is recognition by the government that action needs to be taken over Railtrack. The part of Railtrack directly related to running the railways should be held in not-for-profit public investment company. The obscene conflict between passenger safety and shareholder profit would be over."

Unions have backed the government's move, saying that Railtrack had focussed too much on shareholders' interests and less on building a safe and efficient rail network.