The Competition and Markets Authority ordered Teletext Holidays to pay back £7 million owed to customers for cancelled holidays or it will take legal action.
Some customers have complained of dates promised when refunds would be issued but deadlines were pushed back.
"The firm must now comply with the law and commit to refunding its customers. If it does not do so, we will not hesitate to pursue this case in court," the CMA said.
The company says it is trying to process refunds as ‘quickly and practically as possible.’
"We have been in continuous dialogue with the CMA providing evidence of why the refund process has been delayed," it said.
It said the watchdog seemingly ignores the reality of the challenges we face through no fault of our own.’
During the pandemic, the CMA has been in communication with about 100 holiday firms to reaffirm their obligations to comply with consumer protection law.
The latest action against Teletext Holidays was welcomed by Which?
Rory Boland, Which? Travel Editor, said: "We have received countless complaints from Teletext Holidays customers who have been battling for refunds for cancelled holidays for more than a year."
"Teletext is one of many holiday providers that have attempted to shirk their legal responsibilities to refund customers for cancelled trips, highlighting the need for industry-wide reform."
