About 40,000 people lost money when the company, based in Bath, folded in July with debts of pounds 12m. Customers were not eligible for a refund because the firm was not a bonded member of an organisation such as the Association of British Travel Agents.
The legal action is being co- ordinated by Tim Elliott, of the solicitors Lindleys, in Bristol. Mr Elliott has a register of thousands of Land Travel customers and aims to issue a High Court writ claiming that the Department of Trade and Industry was negligent and in breach of its statutory duty under the Companies Act.
He is doing so on the grounds that the DTI knew of Land Travel's financial difficulties a year before it collapsed and should have wound up the company.
Land Travel specialised in low- cost coach tours. Among its creditors were thousands of pensioners and people on low incomes. Mr Elliott has applied for legal aid to pay for the action and is optimistic it will be granted by Christmas.
Val Tjolle, the chairman of Land Travel, was arrested and questioned after the company crashed. At a stormy meeting of creditors during the summer, one man who had lost his money threw a jug of water in Mr Tjolle's face.