Winchester City Council looks set to revise the way it deals with charities following the collapse of a mental health group which went bust owing the authority more than £350,000.

After years of cashflow problems and mounting debt, the Winchester Alliance for Mental Health went into liquidation and finally folded in December.

Figures presented to the council's Central Services Performance Improvement Committee on Tuesday showed that, between November, 2002, and January, 2004, the charity's debt to the council had increased from £76,820 to £385,000.

A report to councillors this week warned that the money might never be recovered in full, with taxpayers footing the bill in the end.

The matter is now under investigation by external auditors.

The alliance, which ran the Bird in Hand activity centre in Parchment Street, was one of a number of charities for which the council provided a payroll service.

When cashflow difficulties meant the alliance could not meet its wages bill, the authority continued to provide the service, believing that its work for the vulnerable was invaluable and because it was reluctant to see it fold.

A report from the council's director of finance, Sheila Boden, which, she said, had been drawn from documents shown to councillors in the past, stated that, from 1997 to 2000, WAMH had kept up payments.

The debt started in 2001 with the alliance saying it had difficulty obtaining money from the European Social Fund grants, which were also paid in arrears.

At the time, the council noted the problem with the ESF and agreed to continue the service while keeping it under review.

By July, 2003, the debt had grown to more than £140,000, but the alliance promised it would be operating with a surplus within six months time and so the council agreed to continue.

But, by the beginning of 2004, the money still had not materialised and the charity owed the equivalent of eight monthly wage bills. The relationship was terminated and the liquidator called in.

Tory group leader, Barry Lipscomb, welcomed the report and the fact that the details were being made public.

He said that he and colleagues had taken advice from officers throughout their dealings with WAMH.

"We made proper decisions based on the facts as we knew them," he added.

Reports by the liquidator, Harold Wilks, and the external auditor are expected in the next few weeks.

The committee agreed to recommend that a revised policy on charities should go before cabinet.

It proposes that all payments for payroll are made up front and, for existing clients, provision of payroll services should be stopped if debts mount up for two months.