The court also heard that civil servants had failed to minute a key meeting between Stephen Byers, then the Transport Secretary, and John Robinson, chairman of Railtrack.

The lack of a contemporaneous note of the meeting, on July 25, 2001, is embarrassing for the Government because Mr Byers has claimed that Railtrack asked for financial assistance at that meeting - a claim denied by the company.

The Prime Minister made his preference for a takeover known to Mr Byers early in August 2001 in a handwritten note on a document that laid out the options for restructuring Railtrack.

Mr Blair wrote: "None of these are easy. Instinctively I prefer (a) the takeover plus (b) a radical restructuring of the system and (c) crucially altering the crazy system of regulation."

Keith Rowley, QC, who is representing 50,000 former Railtrack shareholders, said: "The Prime Minister's preference was for a takeover. But a takeover was one option for which no time was given."

The Prime Minister was advised at the beginning of August that the three main options for Railtrack were restructuring along the lines proposed by the rail company, negotiating a friendly takeover within the private sector or turning Railtrack into a not-for-profit trust.

However, civil servants clearly favoured forcing the company into administration, the court heard in the third day of the action brought by shareholders, who accuse Mr Byers of misfeasance in public office.

The court heard that Mr Byers had received detailed legal advice in July 2001 on what rights shareholders would have if the Government opted to renationalise Railtrack.

The claimants allege that Shriti Vadera, the Treasury's special adviser, was one of the main advocates of forcing Railtrack into administration. In a note of July 31, she wrote: "Renationalisation - Can we engineer the solution through insolvency - finding the balance between not having triggered it and therefore avoid compensation of Human Rights Act but enough to be seen to have acted decisively rather than reacting to a failed privatisation that we refused to see and deal with earlier."

A footnote added to the memo also asks: "Should we be approving Renewco [the company's restructuring plans] at this point in time when it could enable Railtrack to avoid insolvency for a while and rob us of a cleaner insolvency trigger than we might get for a while?"

Senior civil servants who attended meetings with Railtrack's bankers also made sceptical notes on the company's proposals, the court heard.

The case continues.