The lord chief justice has warned police that they risk damaging their image of independence after Scotland Yard acted on behalf of big business in a private prosecution during which they received a promise of money.

Virgin Media offered the Metropolitan police a 25% share of compensation recovered from fraudsters the company had targeted in a private prosecution, in which the Met used its powers of arrest and search as part of the private prosecution.

Lord Thomas said it was essential that ministers, police chiefs and those supposed to hold them to account gave "very urgent consideration" to the practice.

In the judgment, Thomas, sitting with Mr Justice Foskett and Mr Justice Hickinbottom, said the agreement between Virgin and the Met risked damaging the police's reputation for independence.

He said: "It did in fact provide an incentive for the police to devote resources to assisting Virgin in their claim for compensation and gave rise to a perception that their independence was being compromised."

The most senior judge in England and Wales also warned about the possible dangers of more prosecutions being privatised as state funding is being cut for both the police and Crown Prosecution Service, writing: "There is an increase in private prosecutions at a time of retrenchment of state activity."

The Met also made sworn statements as Virgin Media sought criminal court orders for the confiscation of profits from the crime and compensation for its loss. The fraudsters were eventually convicted of defrauding Virgin Media of millions of pounds by selling set-top boxes to access the company's television services.

The court of appeal upheld the way the case against a fraudster was handled, and said it was right for Virgin Media acting as a prosecutor to seek to confiscate the proceeds of the crime it suffered as the judges criticised the financial arrangement with the Met.

Politicians responded to the lord chief justice's remarks by saying the Met's agreement with Virgin was a "creeping privatisation" of policing and risked the rich being able to buy justice that the poor can not afford.

Labour MP Tom Watson said: "This sounds like emerging two-tier policing where corporate interests can buy the time of the police, leaving those who can't offer remuneration losing out. This is creeping privatisation with big business hiring police powers."

Jenny Jones, London assembly member for the Green party, said: "I hate the thought that if you are rich you can buy more justice that if you are poor.

"It's private policing. Paid work could take priority over other very important crime. Police were not out catching other criminals."

The case began in 2008, and centred on set-top boxes being imported into the UK which gave access to Virgin services without the company being paid any fees.

Virgin Media estimated the fraud cost it £144m a year and decided on a private prosecution. It is believed that the CPS, which usually brings criminal suspects to court, was not approached.

The company enlisted the Met's help "for the arrests and obtaining search warrants", the appeal court said in its judgment.

"On 11 November 2008 Sergeant Smith of the Metropolitan police applied to the magistrates for warrants. He gave evidence as did an employee of Virgin. No one told the court that it was intended that Virgin would be the prosecutor."

Eight days later the fraudsters were arrested. On 25 November, the judgment says: "Virgin then entered into an agreement with the Metropolitan police authority under which Virgin agreed to make a cash donation ... of 25% of any sums recovered under a compensation order."

On 29 June 2011, the fraudsters were convicted. Munaf Zinga received eight years' imprisonment, and two other men were also convicted. They had sold 400,000 boxes over more than three and a half years.

Virgin, acting as a private prosecutor, then sought confiscation of the profits of the crime – which goes to the state – and compensation for its loss, to go to the company, which a Met team assessed. The compensation order was eventually dropped by Virgin.

This meant that in the end the Met received no money from its agreement, except for a £4,000 contribution Virgin made to the costs of overtime for its officers. An £8m payment was ordered to be confiscated from the fraudsters, which if paid will go to various state agencies.

In a statement Virgin Media said: "The courts have upheld both the conviction and the right to pursue confiscation proceedings. The court recognised there was no evidence of any abuse of process."

One advantage of pursuing a private criminal prosecution, the appeal court noted, was that it could be quicker than the civil courts. And, say some legal insiders, it offers more compensation for the victim – namely the company bringing the case.

The court of appeal noted that part of the attraction was that a successful private prosecution can lead to jail for the offender and compensation being awarded to the victim. It can also send a powerful deterrent message.

A previous judgment, cited by the appeal court, spelled out the dangers of the police "soliciting" finds from potential victims of fraud – which they had not done in this case – warning it was "fraught with danger. It may compromise the essential independence and objectivity of the police when carrying out a criminal investigation. It might lead to police officers being selective as to which crimes to investigate and which not to investigate. It might lead to victims persuading a police investigating team to act partially.

It might also lead to investigating officers carrying out a more thorough preparation of the evidence in a case of a 'paying' victim; or a less careful preparation of the evidence in the case of a non-contributing victim. In short, it is a practice which, in our judgment, would soon lead to a loss of confidence in a police force's ability to investigate crime objectively and impartially."

A Met police spokesperson said: "We will examine the judgment and carefully consider its contents."

The mayor of London's office of policing said it was unable to comment.

The Home Office also failed to respond to requests for comment.