A Melbourne council has dropped all charges against a catering business that was shut down over a slug in its kitchen.

The family-owned I Cook Foods was shut down in February after health officials claimed it was linked to a listeria-related death of an elderly woman in hospital.

The closure saw 41 people lose their jobs and cost the business $26 million.

Inspectors for the City of Greater Dandenong charged I Cook Foods with 48 breaches of food laws including the presence of a slug in the kitchen.

This was despite tests showing acceptable levels of listeria in the business, which also had a good food standards record.

I Cook Foods, which supplies food to Meals on Wheels services, hospitals and nursing homes, had maintained its innocence, alleging that the slug was planted as part of a campaign to close them.

In July, a former council health inspector said the council appeared to be intent on shutting down the business.

While council officers knew within days of the closure in February that levels of listeria found at the factory were within a safe range, but did not allow I Cook Foods to reopen until a month later.

By that time, I Cook Foods had lost all its clients.

Some former clients signed contracts with catering company Community Chef, which is partly owned by the council.

Dandenong council health inspector Kim Rogerson collected the initial samples from I Cook Foods at the time of the listeria scare.

Ms Rogerson says she has “never seen Dandenong council go after a business with such ferocity”.

“It was full-on. Absolutely full-on. It shouldn't have been that way,” she said in July.

Prosecutors had promised to fight all charges in court, but have now dropped all charges.

They gave no reason for the sudden halt to the legal action.

“After discussion between the two parties and noting their compliance, Council will not be proceeding with the prosecution of this matter under the Food Act,” said acting chief executive of the City of Greater Dandenong, Jody Bosman.

“Both parties have agreed to go forward on a mutually non-disparaging basis.”

Former I Cook Foods employee Lisa Hodges said outside court this week that she was “wild inside” when she heard the charges had been dropped.

“I started crying and shaking. They put the company though this for seven months and 'boom,' the charges are dropped,” she said.

“I feel great but I feel sad for what Ian and I Cook Foods have gone through, for what the council have done to them, [it] devastated the business of thirty years. How can they do that?”