St Neots Learning Partnership, which runs the Longsands and Ernulf academies, has been ordered to investigate financial concerns over 10-year grant advances to private companies which were allegedly made in breach of funding regulations.

The partnership has been given until the end of August to draw up a report after it was served with a financial notice to improve by the Education and Skills Funding Agency (ESFA).

The agency also alleged there was ineffective financial management and governance at the partnership and potential conflicts of interest in recruiting staff.

Karl Wainwright, chairman of the trustees at the partnership, said: “We have already started the investigation which we hope will be ready by the end of the week.”

Mr Wainwright did not want to comment in depth at this stage of the investigation but said the loan issue revolved around interpretation of the rules.

“As far as we are concerned they were not loans but were contractual arrangements to bring extra services to the school,” he said. “We believe what we did at the time was correct.”

The partnership is scheduled to be taken over by the Astrea Academy Trust in September, a move which followed a pre-termination warning notice being issued to the learning partnership last February.

In a letter to Mr Wainwright, Mike Pettifer, director academies and maintained schools group, said: “I recognise the trust's co-operation and extensive discussions that have taken place between the trust and Astrea regarding the re-brokerage of Ernulf and Longsands schools. However, I am concerned about the leadership and management of the trust and am not convinced that it can effectively address the issues raised with you.

“Therefore, this letter and its annex serve as a written notice to improve financial management, control and governance at the trust. It reflects our continued concerns regarding the governance and oversight of financial management by the board.”

The notice said the trust was required to investigate the advances granted to the two private companies, with independent input, which should take into account whether the advances were in line with the purposes the money was intended for when received by the partnership, that the accounting officer met the requirements of the Academies Financial Handbook when the grants were made, the trust met ESFA requirements for “novel, contentious and repercussive” transactions and to continue working with Astrea to ensure a smooth transition to the new trust by September and with ESFA over the winding up of the present partnership.

A Department for Education spokesman said: “Where a school is failing we will not hesitate to take action for the benefit of pupils.

“We have transferred two schools to Astrea Academy Trust from the St Neots Learning Partnership and have issued a financial notice to improve to give the Education and Skills Funding Agency more oversight of decisions taken by the trust before it is formally closed.”