Final report rejected, institution asked to return funding and prosecute my supervisor
You are absolutely not responsible for returning any funding, certainly not at a moral level and almost surely not legally either.  You were engaged in research to the best of your ability; as you were not the person who obtained and was responsible for the funding, you are not responsible to the funder for any failures.

Moreover, I think it is pretty unlikely that the funding body will actually claw back any money from your former supervisor.  Unless there was genuine skullduggery and/or intent to misuse the funds, the worst that is likely to happen is that the supervisor will be required to resubmit a much better explanatory report.