A training company is seeking a judicial review after further education funding chiefs ruled its diving courses were not eligible for cash.
Plymouth Ocean Projects runs courses under franchise agreements with Mid-Kent and South Devon colleges. It says it has lost more than Pounds 500,000 because the Further Education Funding Council has told the colleges it will not pay for leisure courses.
The company has lodged a formal complaint with the Education Secretary, who can intervene if he thinks the council has acted unreasonably. It is also considering suing the colleges for breach of contract, in the hope that they will sue the council. The colleges support the firm and have protested to the FEFC.
Speaking during a Commons adjournment debate on the issue this week, education minister Dr Kim Howells said he was surprised at the length of the dispute and said he wanted it cleared up as soon as possible. He would try to ensure jobs were preserved.
He said: "I am shocked at what appear to be several instances of a lack of communication and of coherent interaction between the FEFC and the colleges in question. This is one of several cases that show that there should be much more careful monitoring of what contracts are allowed."
He said that the DFEE had taken legal advice and had written to the FEFC about the issue.
The dispute centres on what constitutes a leisure course under the Further and Higher Education Act. The council can fund courses which "give progression" to academic or vocational courses, but argues that this does not apply to the open water and advanced open water diving courses.
Dave Welsh, who runs Plymouth Ocean Projects, said: "They just do not understand what these courses are. These courses can lead directly to NVQs. They said before that that it was up to the college principal to rule on eligibility.
"They said for 10 months it was the principals' decision, then they changed their mind. Since January I have shed 300 jobs and may need to lose another 130. If I got paid what I was owed, I could take 90 per cent of those people back.
"The FEFC see these courses as just for people who want to go off and dive in the Algarve. But it is a huge industry and if you want to work under water you must have a qualification. The council overspent its budget and is trying to cut corners by kicking me."
Peter Watson, finance director of Mid-Kent College, said: "We are in dispute and we have obtained a legal opinion which says these courses are eligible for funding."
Diving courses have provoked fierce controversy within colleges. Two years ago a DFEE official wrote a letter saying that the FEFC would fund such courses. But the council sought its own legal advice and was told the courses were ineligible. It informed colleges, and all - apart from Mid-Kent and South Devon - halted the work.
A spokeswoman for the council said: "These are introductory leisure-based courses, for fun and pleasure. It would be illegal for us to fund them out of public money. We have interpreted the Act correctly, and given the colleges a warning."