British Steel has gone into liquidation, putting 5,000 jobs directly at risk and endangering thousands more in the supply chain after talks with the UK government failed to reach an agreement on emergency funding.

The high court on Wednesday ordered compulsory liquidation and control of the company passed to the official receiver – an employee of the Insolvency Service. Accountancy firm EY will assist with the liquidation.

The official receiver, David Chapman, said the company would continue to trade and supply its customers as it tries to find a buyer. Sources with knowledge of the process said they expected the government to stand behind the process for as long as it takes to find a new owner. If a buyer cannot be found and the steelworks shuts down the UK would in future be forced to rely on overseas producers for certain types of steel used in construction and on the railways.

The company has not announced redundancies, and staff have been paid their salaries for May. British Steel employs about 5,000 people in total, of whom more than 3,000 are at its Scunthorpe steelworks.

Theresa May told parliament on Wednesday the Treasury had “agreed an indemnity for the official receiver to enable British Steel to continue to operate in the immediate future”.

“We will be working with the company and the official receiver in the days and weeks ahead to ensure that we pursue every step to secure the operations at Scunthorpe, Skinningrove and Teeside,” she said.

The government declined to give details of the size of the indemnity offered.

Rebecca Long-Bailey, Labour’s shadow business secretary, said: “The government must act quickly to save this strategically important industry and the livelihoods and communities of those who work in it, by bringing British Steel into public ownership.’’

In parliament, Clark said the government was not able to agree terms with its owner, the private equity firm Greybull Capital, in talks on emergency funding which began as early as 15 April.

Clark said: “I would have much preferred to have given the opportunity of this loan rather than go the route that it has, but that is the requirement.”

Legal advice published by the government on Wednesday said that any offer of support to British Steel would have been illegal under EU state aid laws, including full nationalisation.

The advice stated “we do not believe there is currently any level of investment government could make […] that could be deemed commercial and so legal.”

The collapse of the company, which blamed its woes partly on Brexit-related uncertainty deterring customers, will add to pressure on the government in the run-up to the European parliament elections on Thursday.

It also prompted renewed scrutiny on Greybull, which paid £1 for the business from Indian-owned Tata Steel in June 2016.

Within a year of the purchase Greybull appeared to have completed a rapid turnaround as the newly renamed British Steel reached profitability.

However, in recent months it has struggled. The government was forced to give British Steel a £120m loan at the start of May when it faced a large bill for EU carbon emissions credits, after the company sold its own allowances.

British Steel then asked for another £30m in government support after Greybull and lenders also agreed to inject £30m. The company had initially sought £75m from the government.

British Steel has paid Greybull £9m in management fees in the past three years, while it will also count as a secured creditor in the liquidation.

Nic Dakin, the Labour MP for Scunthorpe, told the Guardian that there were “questions to be asked as to whether Greybull has been a good steward for this business”, but said that he was focused at the moment on finding a route forward for British Steel.

Greybull said in a statement: “The turnaround of British Steel was always going to be a challenge, and yet the business overcame many difficulties, and until recently looked set for renewed prosperity.

“The workforce, the trade unions and the management team have worked closely together in their determination to strengthen the business. However, the additional blows dealt by Brexit-related issues have proven insurmountable.”

British Steel counts Network Rail, Liberty Steel, Caterpillar, and multiple European railway operators among its major customers. A Network Rail spokeswoman said it had increased orders and brought orders forwards, as well as paying invoices quicker, in an attempt to help its ailing supplier.

In Scunthorpe, British Steel workers contemplated another period of uncertainty over their jobs, three years after the last new owner.

As one worker drove out after his shift, he said: “We’ve had a quick briefing but they’ve not said much. They’re looking for someone to buy the company so fingers crossed.

“I’m gutted, worried. I’ve got a mortgage to pay for, bills to pay.”

Another, who has been at the steelworks for 8 years, said: “The atmosphere is not very good today, there’s been 20-30 people from our lot sent home. We’ve been told that we’re alright for now unless anything else happens.

“People are just annoyed really.”

The company’s insolvency also puts at risk at least 20,000 jobs in its supply chain.

One of the company’s major suppliers, Durham-based logistics firm Hargreaves Services, warned on Wednesday morning that 170 jobs could be affected.

The firm manages the transport of raw materials to Scunthorpe from the Immingham bulk terminal on the Humber, loads it into the furnaces and moves finished product into British Steel’s warehouses.

Hargreaves said it faces a £9m hit this year if British Steel cannot be saved, while next year’s revenue would fall by a further £11m, reducing pretax profit by £1.5m.

Unions called for the government to support British Steel for as long as it takes to find a new owner. Unite assistant general secretary Steve Turner said he had received assurances that the government would support the company, meaning that wages and suppliers will continue to be paid.

“While it does not represent the move into public ownership that Unite was seeking, it does place British Steel on a secure footing until a buyer for this world-class business can be found,” he said.

Roy Rickhuss, the general secretary of Community, another union representing steelworkers, said: “While the coke ovens keep burning and the steel assets remain there continues to be hope both for steelmaking at Scunthorpe and for its downstream operations. What is needed is the right ownership.”

Greybull has invested £20m in British Steel since buying it for £1 in 2016. Aside from the £9m it has collected in management fees it has also accrued around £50m on a high-interest £154m loan it made to the company, meaning it is owed more than £200m.

How much of that it might get back will depend on the insolvency proceedings. The government’s Official Receiver has first call on any cash raised from a sale of the company or its assets. Its bank lenders rank next, followed by Greybull Capital.