Angry Claims Direct franchisees are threatening to take legal action after months of negotiation failed to bring a settlement.

In a letter leaked to Insurance Times, Class Law Solicitors has written to Claims Direct on behalf of up to 40 claims managers and dissatisfied shareholders. The letter, which is due to be sent out this week, calls for a meeting, formal mediation process or a group litigation order if no settlement is reached.

In July 2000 Claims Direct floated, but its share price plummeted from an issue price of 180p to 8p following adverse publicity. Franchisees and shareholders are now taking legal action against the company's former executives, directors and professional advisers. They allege the firm's prospectus did not contain information showing its business model had potentially serious flaws.

In 2001 approximately 300 franchisees, many of whom were shareholders, were offered "exit packages" to cut ties with the company.

Last week Claims Direct warned it would make a £22m full-year loss for the year ended 31 March 2002, anticipating the franchisee pay-offs and arbitration costs would be around £3.5m.

But up to 40 franchisees have refused to accept the settlement and have formed an action group.

Claims Direct litigation committee chairman Mark Jenkins said: "Our objective is to obtain a reasonable settlement, as the exit package did not reflect the work, value, commitment and investment put in by the claims managers."

Jenkins said if he had accepted the package, his initial £30,000 franchisee fee investment would not have been reimbursed.

In its letter, Class Law will call for a "without prejudice" meeting to resolve the matter. The solicitors have requested the appointment of a qualified mediator by no later than the end of June if no agreement can be reached.

If this fails, Class Law will make an application for a group litigation order.

Class Law partner Wynne Edwards said legal action would be offered to Claims Direct's 2,500 shareholders and was worth an estimated £10m to £20m.

He said: "It is becoming more and more prevalent that shareholders who have lost money are seeking compensation."

The committee has also gained the support of MP Andrew Dismore. In the House of Commons last month, he asked the Secretary of State for Trade and Industry Melanie Johnson to make a statement regarding her department's inquiries into the flotation of Claims Direct.