Three colleges in the Northeast have been left with a bill of more than Pounds 1.4 million after losing a High Court battle with Cleveland County Council.
The colleges are not the first to dispute debts allegedly incurred before they became independent of local authorities in 1993, but no clear court precedent had been set.
The judgment went in favour of the county council which had demanded that the colleges repay the debts.
Hartlepool vice principal David Waddington said the three colleges - Hartlepool College of Further Education, Teesside Tertiary College and Cleveland Tertiary College - had joined forces to argue a complex case over the proper allocation of backing for courses funded under the European Social Fund. He said the verdict could have important repercussions for colleges receiving ESF funds.
Hartlepool College claims that additional costs of delivering the courses were not met by the county council and that if the money had been properly allocated then the college would now be in surplus rather than in debt to Cleveland County to the tune of Pounds 530,000.
The board of governors will meet next week to discuss whether to appeal against the ruling but Mr Waddington stressed that provision had been made within the college budget for payment of the deficit if necessary.
Under the ruling Teesside must pay back Pounds 625,000 and Cleveland college owes Pounds 235,000. The colleges must also meet the council's court costs.