Large bonuses due to be paid to Thames Water executives from an emergency £3bn loan have been “withdrawn”, the environment secretary, Steve Reed, said, after the Guardian revealed the chair of the company wrongly told parliament creditors had “insisted” on the payments.

Reed told the environment, food and rural affairs (Efra) committee on Tuesday that the retention payment plan had been withdrawn by Thames Water. He said: “I am very happy indeed that Thames have now dropped those proposals. It was the wrong thing to do. They have now withdrawn their proposal to make those payments.”

The Guardian previously revealed that ministers were planning to use a new ban on performance-based bonuses to block bosses from Thames Water taking the bonuses, worth hundreds of thousands of pounds.

Reed said at the parliamentary committee on Tuesday that Thames Water had “appeared to be attempting to circumvent that ban, calling their bonuses something different so they can continue to pay them”.

In a statement that followed Reed’s comments, a Thames Water spokesperson said: “It has never been the Thames Water board’s intention to be at odds with the government’s ambition to reform the water industry. Following recent discussions the board has decided to pause the retention scheme and await forthcoming guidance from the regulator in relation to the implementation of the relevant aspects of the special measures act, to ensure our approach supports both our turnaround objectives and broader public expectations.”

In a letter read out at the same committee session on Tuesday, the Thames Water chair, Adrian Montague, admitted he may have “misspoken” when he told the Efra committee last week that large bonuses to be paid to senior bosses out of an emergency £3bn loan were “insisted” upon by creditors.

Sir Adrian told the select committee last week that the lenders “insisted” that “very substantial” bonuses of up to 50% of salary should be paid to company executives from the controversial loan in order to retain key staff. The proposed bonuses had provoked fury as the company had said its finances were “hair raising” and that it had come “very close to running out of money entirely” last year.

The Guardian revealed earlier on Tuesday that sources with knowledge of the details of the agreement, the term sheet for the loan, and court documents suggested that while the bonuses were agreed to by the creditors, they were not necessarily proposed by them.

After the Guardian approached Thames to ask why its chair claimed the lenders “insisted” bonuses were paid, Montague wrote to the Efra committee to clarify his comments.

“Following the session we have been approached by the Guardian who we understand intend to write a story suggesting that we misled the committee in relation to the company’s management retention plan,” he wrote in the letter made public by the Efra committee. I appreciate that in the heat of the moment I may have misspoken when I stated that the creditors insisted on the management retention plan.”

He added that the management retention plan, which included the bonuses, “rose from our discussions related to our liquidity extension transaction”, adding: “It was agreed that a retention plan was important to retain the people best placed to deliver the improved outcomes our stakeholders rightly expect during this current period of uncertainty and this was reflected in the term sheet we agreed with our creditors.”

In a judgment in February approving the loan, Mr Justice Leech cited evidence by Thames’s then finance director, Alastair Cochran, that the retention plan “was a matter for the board and the retention committee”. Leech said there was no evidence that it had to be approved by the lenders.

The Guardian revealed last week the bonuses could be the first to be blocked under the government’s water (special measures) bill, which gives the regulator Ofwat powers to ban financial rewards for executives presiding over a failing company. Thames Water could be classed as such, as it is presiding over record sewage spills, heavily laden with debt, and on the brink of financial collapse.

A spokesperson for the Department for Environment, Food and Rural Affairs said: “Following robust and urgent discussions with Thames Water, we are pleased that the company has decided to pause the payment of retention payments.

“For too long, customers’ money has been spent on unjustified payouts, rather than investing in vital improvements to the water system. This government has been clear that the era of profiting from failure is over.”