The Government is to block plans to reform Britain’s “chilling” libel laws and to prevent large companies from silencing their critics with the threat of being sued.

The attempt by ministers to water down the Defamation Bill when it returns to the House of Commons tomorrow was condemned by academics, scientists and libel reformers. They warned it would allow big companies to continue to “hound” their critics with the threat of crippling libel fees and cement Britain’s reputation as the defamation capital of the world.

Their reaction came after ministers announced last night that they would seek to overturn a cross-party consensus in the House of Lords that companies should have to show financial damage before they can sue a journalist, academic or blogger. They are also seeking to block proposals that would prevent private companies which provide public services paid for by the taxpayer from suing.

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The changes will mean that, while a prison run directly by the Government can be criticised without fear of defamation, a prison run by a private contractor such as G4S cannot.

The Conservative move is being backed by the Liberal Democrats despite the fact the party specifically supported the reforms in its manifesto. The amendment will replace a similar one tabled by the Conservative MP and libel barrister Sir Edward Garnier last week, which also met with anger from reformers.

Tonight Simon Singh, the science writer who led the campaign to reform Britain’s defamation laws after he was sued for criticising the “bogus treatments” offered by some alternative medicine providers, said he was deeply disappointed by the Government’s stance.

He pointed out that, if successful, the Government amendment would mean people like him would still have no protection to make similar statements. He was sued by the British Chiropractic Association, which is registered as a company.

“My own case is not atypical,” he said. “Lots of cases which people think are unfair and unreasonable have involved large companies suing individuals and corporations.

“The only clause in the Bill that would have helped me would have been if the British Chiropractic Association had had to demonstrate financial loss, because that would have been impossible for them. Corporations have huge influence on society and that’s why we need to tip the balance in favour of free speech.

“All we’re looking for is a moderate barrier and for the Conservatives to tear it out at this stage is appalling. For the Liberal Democrats to do it is even worse as they are going back on a manifesto commitment.”

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Campaigners also expressed concern that private companies providing public services could potentially be able to use taxpayers’ money to sue their critics – even though public bodies cannot.

In 2011 the Government’s welfare-to-work contractor Atos successfully closed an internet forum run by the pressure group Carer Watch, after comments were posted criticising its state-funded testing of whether disability claimants are fit for work.

Index on Censorship said that Atos’s lawyers sent a legal threat to myfreeforum.org which hosted the site which – fearing an expensive libel action – pulled the plug.

Kirsty Hughes, chief executive of Index on Censorship, said: “At present we have an absurd situation where local councils and government departments cannot sue citizens, yet the companies who win outsourcing contracts are free to censor people who criticise their performance.

“The Defamation Bill had a sensible clause to correct this anomaly so why are Conservative MPs seeking to maintain the inequitable status quo?”

Labour’s shadow Justice Secretary Sadiq Khan said it would oppose the Government’s plans. “It’s outrageous that at this late stage the Government wants to water down the Defamation Bill,” he said. “Labour will oppose attempts that would mean big institutions could continue to use their might to intimidate scientists and academics. And we’re calling on Liberal Democrats to honour their manifesto commitment and support us in protecting free speech.”

Jo Glanville, the director of English PEN, which represents writers, said it was vital the corporations demonstrate some tangible loss before being able to sue. “Companies do not have feelings, yet wealthy corporations routinely use the libel laws to silence any criticism, however slight,” she said. “It is reasonable to ask companies to show financial loss before they sue. It is bizarre that the Government may not countenance even this modest restraint on corporations.”

A Liberal Democrat spokesman said the party would be instructing their MPs to vote with the Government. “Unfortunately we are in a Coalition and this was one of those areas where we could not get our Conservative colleagues to agree with us,” he said.

The Department of Justice insisted that, even as amended, the Bill would address the “chilling effect” on freedom of expression caused by threats of libel action, whilst “ensuring people can continue to protect their reputation when they are genuinely defamed.”