In fiction, James Bond drew quite judiciously upon his licence to kill, bumping off just 38 adversaries in a dozen Ian Fleming novels. In each case, the individual received his or her just deserts.

In real life, MI6 insists its officers do not kill anyone. "Assassination," its former head Sir Richard Dearlove has said, "is no part of the policy of Her Majesty's government" and would be entirely contrary to the agency's ethos.

But there can be circumstances in which MI6 officers do have a licence to kill or commit any other crime, enshrined in a curious and little-known law that was intended to protect British spies from being prosecuted or sued in the UK after committing crimes abroad.

Section 7 of the 1994 Intelligence Services Act offers protection not only to spies involved in bugging or bribery, but also to any who become embroiled in far more serious matters, such as murder, kidnap or torture – as long as their actions have been authorised in writing by a secretary of state.

And as such, the section is certain to come under intense scrutiny in the months ahead, as detectives and human rights lawyers pore over the details of the secret rendition operations that MI6 ran in co-operation with Muammar Gaddafi's regime in 2004.

Last month Scotland Yard and the Crown Prosecution Service announced that the operations, in which two leading Libyan dissidents were abducted and taken to Tripoli with their families, were to be the subject of a criminal investigation.

A few days later lawyers for both families began civil proceedings against Sir Mark Allen, the former head of counter-terrorism at MI6, accusing him of complicity in their "extraordinary rendition", torture and inhuman and degrading treatment. Proceedings against the government, MI6 and MI5 are to follow.

The case is based in large part upon a batch of documents discovered in an abandoned Libyan government office last September. These showed that the abductions were plotted with the help of MI6: it was all part of the rapprochement between Gaddafi and the UK and US that saw the dictator abandon his WMD programme and open oil and gas exploration opportunities to western firms.

When a researcher for Human Rights Watch stumbled upon the documents, no attempt was made to deny MI6 involvement in the rendition operations they described.

Instead, Whitehall sources immediately said the operations were part of "ministerially authorised government policy". The statement was intended as a clear signal that a secretary of state had signed off a "clause 7 authorisation" under the Intelligence Services Act.

Section 7 is entitled Authorisation of Acts outside the British Islands, and says: "If, apart from this section, a person would be liable in the United Kingdom for any act done outside the British Islands, he shall not be so liable if the act is one which is authorised to be done by virtue of an authorisation given by the secretary of state under this section."

It adds that liable in the United Kingdom "means liable under the criminal or civil law of any part of the United Kingdom".

The "acts" can take place only overseas and remain illegal both under the laws of the country where they are committed and possibly under international law. But, section 7 says, with the stroke of a pen a secretary of state can rule that no UK law can be brought to bear.

The act had been drafted as a consequence of a series of European court judgments in the 1980s that forced Britain's ultra-secretive intelligence agencies to emerge into the daylight of the public domain.

Before then, the agencies had always been, in the Whitehall language of the day, disavowed: there was no official acknowledgment of their existence.

First a Swedish citizen brought proceedings against his nation's security service, and the European commission of human rights said that intelligence agencies should be avowed and put on a statutory footing.

The Swede's case was followed by two more, one brought by a Surrey antiques dealer whose phone had been bugged, the second by Harriet Harman and Patricia Hewitt, the future cabinet ministers, who had discovered they had been under lengthy surveillance while running Liberty, the civil rights body.

MI5 was first to be placed on a statutory basis by legislation that set out its functions. And then, in 1992, John Major publicly avowed MI6. The prime minister also named its chief, Sir Colin McColl, saying it was time to "sweep away some of the cobwebs of secrecy which needlessly veil too much of government business".

With avowal came a legal conundrum. Britain's spies are crown servants, and as such had for decades been subject – in theory – to section 31 of the 1948 Criminal Justice Act.

This extends English law to cover the conduct of crown servants in whichever country they serve. As long as the agencies' existence had not been acknowledged, their officers could never be admitted to be crown servants, and so were effectively exempt from that law.

But with public avowal came the possibility, however remote, that some of the tricks of the espionage trade could land one or two of its practitioners in the dock.

The solution was section 7. David Davis, a junior minister in the Major government at the time when the bill was passing through parliament, says many MPs believed it was intended to authorise the three Bs: bugging, burglary and blackmail.

Few MPs expected it to cover "extraordinary rendition", a measure whose very name had not been invented. This is not how it was seen by senior officers at MI6. They always intended that a clause 7 authorisation could extend to any crime whatsoever, on the grounds that they could never see what was over the horizon.

Indeed, the question of whether section 7 offered a licence to kill was raised when the bill was discussed in a Commons committee.

A Foreign Office minister, Douglas Hogg, who talked of the act "disapplying" UK law, was asked by one MP whether it could ever be employed to authorise "lethal force".

Hogg pointed to the Falklands conflict and recent Gulf war and said: "There clearly are circumstances within the conditions contemplated by the honourable gentleman when lethal force would be justified … the secretary of state would not, in ordinary circumstances, issue a clause 7 authorisation in respect of the use of force.

"I say ordinary circumstances because I can conceive of circumstances … when it would be right to do so. Examples would be serious emergencies or crises causing great damage to Great Britain or her citizens."

When the bill received its second reading in February 1994, section 7 was barely mentioned.

Jack Cunningham, the shadow foreign secretary, welcomed the decision to avow MI6, "since everyone in London could see the building of the wonderful new headquarters just down the river from here, it was hardly credible to maintain the fiction that the organisation did not exist".

Cunningham's main concern about section 7 appeared to be that Britain's spies had been operating without its protections for many years.

Other MPs were concerned more by the new oversight body established by the act – the intelligence and security committee – believing it had too few powers and was insufficiently independent of government.

There was recognition too that section 7 signalled an advance, in that intelligence officers should in future be able to commit only those "acts" that had been considered and agreed by senior ministers.

One of the few who voiced any concern about the sweeping nature of section 7 was the recently elected member for Hartlepool, Peter Mandelson.

The number of requests for authorisations grew rapidly after 9/11, and in one year, 2009, MI6 asked that 500 be signed off.

There is no suggestion that MI6 officers have exercised their licence to kill since the act passed into law. Stephen Dorril, author of a history of MI6, believes its last assassination was in about 1961. Dorril says George Kennedy Young, the deputy director of MI6, "who openly talked of assassination in front of the CIA guys", ordered a killing in Iran without consulting the chief, Sir Dick White.

In addition, the inquest into the death of Princess Diana heard that an MI6 officer had suggested assassinating an unnamed Balkan warlord in the early 1990s. Dearlove told the hearing that the proposal had been "killed stone dead" by the officer's line managers.

But there were warnings at the time the act was passed that it could be used to authorise torture. John Wadham, then legal director of Liberty, wrote in an article for the Modern Law Review that it did not make clear whether torture was considered acceptable, and that action against a British citizen abroad could also be placed outside the law.

A number of sources familiar with the wording of section 7 authorisations have told the Guardian that they do not cover the signatories: a secretary of state who signs a piece of paper that disapplies UK law in advance of a criminal act is not beyond accusations that he or she has committed an offence.

One former secretary of state who has signed quite a few authorisations in his time says he believes that he could not have been committing an offence as he was carrying out his duties in accordance with an act of parliament. "And the acts then authorised are not crimes, they become lawful acts. But don't quote me – I'm not a lawyer."

But when section 7 was drafted, MI6 had always understood that a secretary of state who signed an authorisation for certain operations could be putting the UK in breach of article 3 of the European convention on human rights, which prohibits torture. Article 3, according to this understanding, would then "disapply" the authorisation.

With the Yard's criminal investigation now underway, and litigation against MI6 and its former officers moving towards the courts, this question of whether another law may "trump" section 7 is exercising a great many legal minds.

Government lawyers are expected to argue that section 7 trumps all: that the words "he shall not be so liable if the act is one which is authorised to be done by virtue of an authorisation given by the secretary of state" cannot be bettered by any other piece of legislation.

But in considering what happened to the Libyans and their families – who included a pregnant woman – much attention will be paid to another passage in section 7 which decrees: "Nothing will be done in reliance on the authorisation beyond what is necessary for the proper discharge of a function of the intelligence service."

Furthermore, the Libyans' lawyers will argue that section 7 is trumped by section 3 of the 1998 Human Rights Act – which says legislation "must be read and given effect in a way which is compatible with the [European] convention rights – and by the 2001 International Criminal Court Act, which sets out the circumstances in which individuals shall be sent to The Hague to stand trial.

Sapna Malik of the law firm Leigh Day says: "Our view is that the Intelligence Services Act is subject to and superseded by both the Human Rights Act and the International Criminal Court Act, and we look forward to testing that argument in court."

The arguments are expected to rumble on through the court system, eventually reaching the supreme court.

Another of the Libyans' lawyers, Cori Crider of the legal charity Reprieve, predicts: "The higher up the court system it goes, the worse it will get for the government."

No doubt the government would like to see much of the proceedings held behind closed doors, under controversial proposals for new courtroom secrecy laws as a consequence of the Binyam Mohamed case.

Scotland Yard, meanwhile, will be taking advice on the matter from lawyers at the Crown Prosecution Service.

How Secret Renditions Shed Light On MI6's Licence To Kill & Torture