Colleges were left with debts approaching pound;1 million following the collapse of AoC Workforce Development, a company they had created to provide skills training for employers.

The details, revealed in the annual accounts of the Association of Colleges, roused anger among principals and governors during a private session at its national conference in Birmingham this week, as an independent inquiry was launched into what went wrong.

The company, created by Deeside College in Flintshire, Wales, was sold to the AoC three years ago and won contracts with firms including Sony UK, Iceland and Spar supermarkets and the network of Co-operative chemists.

Despite attracting high-profile businesses, AoC WD failed to find enough clients to survive. This weakness was exposed when Iceland, in particular, had financial problems and cancelled contracts.

Some ground was regained by switching to a telesales approach, but then cash-strapped colleges abandoned the enterprise. The operation was closed in July, with the loss of eight jobs, leaving the AoC to shoulder pound;922,000 of accumulated losses, liabilities and outstanding payments.

There was dismay this week that the scale of the losses has only just come to light. John Brennan, the chief executive of the AoC, said it will have to dig into its reserves to cover the debts and pay creditors. He said it would take a “couple of years” to restore the AoC’s reserves.

Walton Dodge, a firm specialising in business failure, has been appointed to conduct the inquiry.

Mr Brennan, who took up his post after the company was bought, said: “We are giving our member colleges a full account of what we know and will give them a clear view of what happened and what lessons are to be learned once we have the outcomes of the independent examination.”

AoC WD had provided a single point of contact between colleges and employers who wanted to upgrade staff skills, often through government-funded opportunities. Industry assessors were drafted in to give nationally accredited qualifications in the workplace.

Companies House records show operating profits last year were just Pounds 28,142. Figures for 2004 show a loss of pound;215,228. The AoC wrote off the losses from reserves built up since reorganisation in 2004.