by Chris McLaughlin

Labour chiefs have until the end of this month to plug a £4 million hole in the party’s finances and avert the possibility of a formal declaration of bankruptcy.

The financial crisis in the wake of the party’s drubbing at the local and London polls comes as Gordon Brown faces another humiliation with a possible defeat by the Tories in the Crewe and Nantwich by-election.

Auditors are due to sign off the party’s accounts soon after the end of May, but there are fears that they will refuse to do so and instead declare the party insolvent.

Arrangements have been made to account for most of the party’s £21 million debt, through negotiations with the Co-op Bank and rescheduling deals done with the donors of the controversial loans which led to the “cash-for-honours” affair.

But officers have identified a gap in the balance sheet of around £4 million which must be closed in order to satisfy the auditors, either by cash in the bank or certifiable promissory notes.

The size of Labour’s financial problems, and the possibility of incurring personal liability, are reported to be the reasons for City financier David Pitt-Watson refusing to take up the post of general secretary.

The announcement was held back until after the May 1 elections, though party chair Dianne Hayter led officers and national executive members to believe that Mr Pitt-Watson’s commencement was merely delayed because of difficulties in extracting himself from his present post.

It cost the party £50,000 in consultancy and advertising fees for the general secretary’s job-that-never-was. New adverts are to be restricted to the internet to save money.

Mr Brown had been determined to find a City figure with the experience and connections to help get the party swiftly out of its financial difficulties. Unable to persuade his first choice, London businessman Paul Myners, to take the role of general secretary – a post which has overall legal responsibility for finances – he then “went ballistic” when confronted with Mr Pitt-Watson’s decision several weeks ago.

Informal discussions have been taking place on the possibility of turning the Labour Party into a private limited company to protect officers and national executive members from individual liability if the party is declared insolvent.

As well as the short-term difficulties, there are long-term worries about financing the party in the run-up to the next election, when it can expect big donations for the campaign.

One Labour head office worker who has seen the books said: “Whether we sort out the immediate problem or not, we are still going to have to rely on millions of donations. The money is just not coming in.”