The move comes after Bill Dickinson, a governor of Blackpool Sixth Form College, complained to the Department for Education and Employment.
The investigation will be conducted by the Lancashire learning and skills council, responsible for funding the college.
Steve Palmer, executive director of the council, said Mr Dickinson had been asked to clarify some of the details of his complaint. He added: "Once we have received these, we will conduct a prompt and thorough investigation. We are the funding agency and we take these matters very seriously."
The inquiry will quiz the chairman of governors, John McGlynn, over the way the board has behaved towards Mr Dickinson. The inquiry will not investigate whether Mr Fulford's dismissal was fair.
Mr Dickinson claims the corporation board failed to investigate properly the case of principal Chris Fulford and that he has been excluded from meetings and circulation of board minutes because he was not trusted to observe confidentiality and is seen as a friend of Mr Fulford.
He claims he has been singled out for insisting the college should have reconsidered its position after a former student wrote to the governors denying there had been a sexual affair between her and Mr Fulford. She was not interviewe as part of the disciplinary procedure against Mr Fulford.
Mr Fulford, 68, of Preston, Lancashire, was suspended in March 2000 and dismissed the following August for having an "inappropriate relationship" with a former student and making false expenses claims. He has denied all the allegations.
The LSC's involvement emerged this week as Liverpool's employment tribunal office confirmed that Mr Fulford's claim for unfair dismissal and breach of contract, due to be heard on August 28, has been withdrawn. The college has made a financial settlement, believed to be worth pound;25,000, although Mr Fulford has refused to comment on the payment.
"Mr Fulford has withdrawn his appeal to the tribunal and I have nothing further to say about that," said John McGlynn, the chairman of governors. "As far as the LSC is concerned, I spoke to them about two weeks ago and they asked me for some particulars, which I provided, and I have no reason to believe that they were anything other than satisfied with what I told them. I will be quite happy to co-operate if they wish to speak to me again."
Mr Dickinson, an employment law specialist, complained to the DFEE in November. Mr McGlynn has always maintained that the college took legal advice throughout processing of the allegations against Mr Fulford and that Mr Dickinson has never been unlawfully excluded from the corporation's business.