When a charity objected to plans for a pig factory for up to 25,000 animals, they expected a fight. But now the battle looks likely to intensify after the leading London lawyers Carter-Ruck threatened libel proceedings.

The organic farmers' group the Soil Association objected to an application from Midland Pig Producers (MPP) for an intensive pig farm in Foston, Derbyshire, last summer, raising concerns in general terms about disease, antibiotic resistance and animal welfare in large pig herds.

The application to South Derbyshire district council was withdrawn after it was ruled that it needed to go to the county council instead. MPP expects to reapply in the next few weeks.

However, the Guardian has learned that the Soil Association has received a threatening letter from Carter-Ruck, acting for MPP, saying its objection is defamatory and should be withdrawn.

"It had a chilling effect," said Lord Melchett, the Soil Association's policy director. "Your first thought is, these are incredibly rich and powerful people; we have no assets, we will have to back down, not because we think we are wrong but because we don't have the resources. It's taken a lot of time to feel we can risk standing up to them."

Marked "private and confidential, not for publication or broadcast", the letter said that the Soil Association's objections should not be further disseminated and that to do so "would risk incurring considerable liability". A Carter-Ruck solicitor, Magnus Boyd, told the association that it should instead withdraw its objection from the planning process and meet the company.

In a paragraph seen as particularly vicious by the association, Boyd also included a veiled threat that its share in a £16.9m Big Lottery Fund grant for improving school food could be jeopardised.

Article 19, the group that campaigns for libel reform, denounced MPP's response and Carter-Ruck's letter as an abuse of the libel process that amounted to "legal bullying" which would stifle public debate.

MPP and Carter-Ruck deny that they are trying to silence opposition and maintain that MPP's main concern was that debate should be accurate. The company says the association's objections are not relevant to its proposal and are defamatory.

MPP plans to house 2,500 breeding sows and as many as 25,000 pigs and piglets on one site. Following applications for mega-dairies in Lincolnshire and elsewhere, Foston is becoming the focus of a fierce fight over fundamentally opposing visions for British farming.

By trying to use British libel laws, which are themselves the subject of heated debate, the pig company has raised the stakes.

For Midland Pig Producers, which supplies leading supermarkets through Tulip processors, the new factory represents the future of livestock farming in the UK. Pig farmers have been squeezed by falling prices for their meat and rising costs. The UK herd shrank by more than 40% in the decade to 2007 as cheaper imports pushed many pig farmers out of business.

Intensive pig farming has also attracted global criticism for its capacity to pollute on a grand scale, the greenhouse gases it produces, the outbreaks of disease from swine flu to foot and mouth in which it has played a part, and its abuse of animal welfare.

MPP thinks its proposals have the answer to those criticisms while setting out an economic model that would enable British farmers to survive.

Its chief executive, Martin Barker, who was Waitrose pig farmer of the year in 2009, said that the new factory would be based around a "green cycle" – slurry produced by the thousands of pigs would be mixed with plant and food waste trucked in to the site before being fed into an anaerobic digester. It would then produce fertiliser for the land that grows grain for the company's pig feed, while also generating energy from the methane gas for a profit.

Animals would be indoors all their lives in a closed system, so that many of the problems associated with intensive pig farming, notorious particularly on large US farms, such as smells, airborne viruses, bacteria and water pollutants, would be contained, he told the Guardian. "We started from the standpoint that we wanted to be at the forefront of animal welfare and we consulted welfare groups like Compassion in World Farming before coming up with innovations. Instead of getting fertiliser from Russia and soya from Brazil, we are looking to take waste which is on the road already to generate fertiliser for local use and to produce energy. It's cost effective and carbon efficient, but it needs a critical mass to make the investment of £15-£20m worthwhile."

MPP set the limit on its proposals at 2,500 sows and 25,000 pigs in total, not because it thinks it could not efficiently farm more, but because a larger herd would create enough waste to classify the site as a power station, which would require different permissions, he added.

Although the local planning department and the Soil Association believe Foston would be the largest pig unit in the country, MPP disputes this, and says an indoor unit of 3,000 breeding sows already exists in the UK.

For the Soil Association and many of the other objectors – 2,800 people worldwide objected to the first application – mega- farms represent precisely the opposite of a sustainable future.

They argue that the application represents a pivotal moment in which British farming is in danger of making another leap in intensification, squeezing out smaller mixed farms that they believe are more environmentally and animal friendly. Richard Young, the Soil Association's expert on livestock disease, said: "There are a lot of pig diseases that can pass to humans – salmonella, campylobacter, E coli, MRSA, streptococcus suis, which can cause meningitis in humans, to name a few. With many of these we are seeing new strains that are multi-antibiotic resistant. Some are already in the UK herd, others are being found in herds abroad. The H1N1 virus [swine flu] is an amalgam of different strains of flu from pigs, poultry and humans; it's now being seen in UK pigs.

"Our basic concern is that there is lots of research showing that the more pigs you have together the greater the risk of disease and the greater the potential for amplification of any problems.

"In theory they are proposing a very clever system, but it's gold-plating a fundamentally flawed one. Past experience shows this brave new world approach to problems usually goes wrong and when it does the consequences for humans are very serious," he said.

Compassion in World Farming acknowledges it has worked with the company, but said it is also concerned by the scale of the proposed factory.

Its chief executive, Philip Lymbery, said: "We are troubled by the sheer size. We are opposed to all mega farms. While we have engaged with the company and understand it is looking at innovations that could provide some level of improvement for animal welfare, in principal, industrial models of keeping animals highly intensively cause immense suffering and squander finite resources such as water and grain."

CiWF will look at the proposal when it is resubmitted and if it represents further intensification, the organisation would "vigorously oppose it", it said.

MPP disputes that the risk of disease from pig farming relates to size of herd and has taken issue with many of the Soil Association's points.

Melchett has said he is happy to meet the company, but is alarmed by the way it has chosen to respond to his group's objections. "It's the first time to my knowledge that a group like ours has been threatened for taking part in the democratic planning process, which is meant to be where citizens and those who represent different interests have the opportunity to air their case. If [big companies] are going to use libel laws to silence opposition, it does not bode well for the future of our food and farming industry."

Article 19 said that the company's response and Carter-Ruck's letter offered a prime example of why the libel laws needed urgent reform.

Its senior legal counsel, David Banisar, said: "The Soil Association submission is clearly not defamatory. They raise important science and policy issues and while some of the issues that they raise may not be directly relevant to the immediate application, that does not make them defamatory."

In his view the demands from MPP and Carter-Ruck amount to legal bullying. "Libel law is intended to protect an individual's human right to a good reputation from someone who is trying to deliberately wreck it. It should never be used to prevent criticism in a public process of a plan by a large agribusiness which may have serious heath effects on the community."

Banisar says the correct response from the pig company if they had legitimate disagreements would have been to submit the letter to the council, not as a legal threat, but as a response to the submission. The council would have been required to take both submissions into account.

"Carter-Ruck appears to be attempting to bypass the process by sending it to the Soil Association and the planning official as a legal threat. There should be sanctions for this sort of attempt. In the US, anti-SLAPP (strategic litigation against public participation) laws specifically prohibit this kind of legal bullying."

When MPP was asked why it had chosen to use the libel laws against the Soil Association, it said the association had made comments not relevant to the specific planning application.

"We were concerned that this could lead to misunderstanding of the facts," it said. "We requested the Soil Association's research to back up these claims and asked if we could meet them to discuss the situation. Disappointingly we did not receive a response until we sent a letter from our solicitor. MPP has used a completely open and transparent approach and we have always made it clear that we respect people's right to their own opinion. With regard to libel laws, we are not qualified to comment."

Carter-Ruck said: "Our client was concerned by the Soil Association's use of the planning process as a platform to raise concerns about issues of policy which were not directly relevant to its specific planning application. The allegations were defamatory and as such our client had a right to defend itself. Our client's rebuttal made clear that it was not seeking to influence the views of the Soil Association or to stifle debate [but is committed to ensuring that] and that all sides of the debate are as accurate and informed as possible. Our client was not seeking to silence opposition but to engage with it."

• The article was update on 19 January 2011 to correct the spelling of a name and organisation.