The government has made a U-turn by announcing it will pay back thousands of disability benefit claimants in full after “shoddy administration” meant up to 70,000 people were underpaid.

The Department for Work and Pensions (DWP) announced on Wednesday that arrears for sick and disabled people who lost out when their benefits were transferred to employment and support allowance (ESA) would be backdated to the date they moved to ESA.

Initially, the government said there would be up to £150m which may never be paid back because arrears would only be accounted for as far back as 21 October 2014, the date of a legal tribunal ruling – meaning some would never have been reimbursed.

It follows legal action which challenged the DWP’s original decision to limit backdating of the arrears to the date of a tribunal decision, arguing that the oversight had been one which ministers knew to have been a mistake before the Upper Tribunal decision and as such counted as “official error”.

Campaigners welcomed the announcement but said it shouldn’t be necessary to take a government department to court in order to achieve justice for people who have been failed by officials making “avoidable” errors.

In a ministerial statement on Wednesday, work and pensions secretary Esther McVey said: “The Department has analysed the relationship between ‘official error’ and section 27 of the Social Security Act 1998 in regulating how and to what extent arrears can be paid. As a result of the conclusions of this analysis, we will now be paying arrears to those affected back to their date of conversion to ESA.

“My department will be contacting all those identified as potentially affected as planned. Once an individual is contacted, and the relevant information gathered, they can expect to receive appropriate payment within 12 weeks.”

She also confirmed that once contacted, claimants would be provided with a dedicated free phone number on which they can make contact with the department.

Responding, Carla Clarke, solicitor for Child Poverty Action Group, which launched the legal action, said: “Poor and inadequate DWP processes left up to 70,000 disabled individuals without the support they should have received to help them with their additional costs.

“Justice required that the DWP error was corrected in its entirety for the people affected, many of whom are owed arrears from 2011. We are pleased that the DWP agreed that this was correct following our legal action.