VTEC is the third private operator to fail to complete the full length of a contract to run services on the East Coast route.
Transport Secretary Chris Grayling told Parliament that temporary state ownership would provide the smoothest transition to a new operator.
The East Coast service, which has been operated by Stagecoach Group and Virgin Trains since 2015, will be rebranded the London and North Eastern Railway (LNER) from June 24. It will be run as a wing of the Department for Transport under the leadership of the consultants Arup for up to two years.
Grayling said that while there'll be no nationalization, East Coast will be recast as a partnership between public and private sectors.
Scottish Labour transport spokesman Colin Smyth said: "Just hours before the UK Government confirmed its failed privatisation experiment had come undone, SNP transport minister Humza Yousaf brazenly shrugged his shoulders and said he doesn't even care whether the east coast rail franchise is in public hands or not".
He expected the majority of the enhanced services planned by Virgin and Stagecoach for delivery by 2023 to be implemented by LNER, although this would largely depend on the ability of infrastructure manager Network Rail to deliver them.
Mr Grayling said at the time it was clear the franchise would only continue in its current form for a "very small number of months" and the option of the Department for Transport stepping in was "very much on the table".
The government said in February that Stagecoach had overbid for the contract, meaning that its profits were below forecast, resulting in a financial covenant breach, and costing it 200 million pounds. The pressure to avoid any further franchise collapse - or to see Stagecoach-Virgin emerge as operators again, with a diminishing market of bidders - could see the government struggle to get a new operator in place.
He insisted taxpayers had not lost out, adding: "Only Vtec and its parent companies have made losses at this time".
However, Stagecoach and VTEC which have run the line since 2015, will not be in the running for the new contract. Under the changes, Stagecoach, which owns 90 per cent of the route, would step down three years early.
The rail companies have blamed their problems on Network Rail, saying it had failed to upgrade the line which would have allowed them to run more frequent services. They have advised that there is also no suggestion of either malpractice or malicious intent in what has happened.