Winchester civic chiefs have tightened rules on dealing with charities after the embarrassing fiasco of a mental health organisation that collapsed owing it hundreds of thousands of pounds.

Winchester Alliance for Mental Health (WAMH) went into liquidation with debts to the council of £353,000.

A report to councillors warned that little if any of the debt will be recovered, meaning tax-payers will have to foot the bill.

External auditors will conduct an independent investigation and report back to the council next month.

The council was the biggest creditor, being owed the six-figure sum for providing the charity's payroll services.

WAMH ran the Bird in Hand activity centre and the Byte Internet cafe in Parchment Street, as well as the Skillploy training centre in Fareham to help people with mental health problems.

Some 18 jobs were lost when it folded in December and 300 people were affected.

Last night councillors supported the proposal that, in future, payment for payroll services must be made in advance and will stop if payments default for two months. Cabinet will confirm the new rules next month.

A report to councillors by director of finance Sheila Boden said an independent review in March 2004 had warned that WAMH was not viable.

The charity had been too ambitious in its expansion and had a chronic cash flow problem in that most of its funding came from the European Social Fund but was paid in arrears.

The report revealed that the charity's debt to the council exploded from £76,820 in November 2002 to £201,903 in October 2003 and £385,000 in January 2004.

At the time councillors were concerned that the debt was allowed to spiral and that nothing was done about concerns over the monitoring of the cash flow.

Councillor George Hollingbery was a trustee of the charity but resigned in October 2003 after his warning to WAMH chief executive Duncan Murray was ignored.

Mr Hollingbery said he had sympathy for the other councillors who allowed the charity to continue: "It is difficult to pull the rug on a charity, but we were told by the charity that everything was going to be okay. There would have been an public outcry."

At last night's meeting of the central services performance improvement committee, opposition councillors resisted trying to make political capital.

Councillor Barry Lipscomb, Conservative group leader, said: "We have at all times taken due cognisance of professional advice from our officers.

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

Much of the work of the WAMH has been taken over by Hampshire social services, including the running of the Bird in Hand.