Neil Preston, the Pounds 90,000-a-year director of Stoke-on-Trent College, and his deputy, Helen Chandler, were dismissed on Christmas Eve after a lengthy inquiry into allegations of "dictatorial bullying". They were also said to be in breach of their contracts because they were working in a pub while on sick leave.
Plans to recruit a rescue squad to support acting principal Bob Powell are understood to have been discussed by senior management after an independent report revealed that Stoke had hit only 80 per cent of its recruitment targets last year.
The Further Education Funding Council cut Stoke's income by Pounds 2.8 million and demanded that it repay a further Pounds 3.5m plus interest - a total of Pounds 8m out of an income of Pounds 29m - in the light of the report. Warnings of job cuts provoked a swift reaction from the lecturers' union NATFHE, and roof-top protests from members of staff.
Recruitment of outside trouble-shooters from successful colleges was predicted by Sir William Stubbs on his retirement as the chief executive of the Further Education Funding Council last summer.
It would provide struggling colleges with an escape route from the worst-case scenario of closure or alternative damaging mergers and takeovers, he suggested.
The initiative has proved successful in at least two colleges whose fortunes were turned round after plunging into debt. Labour party leader Tony Blair seized on the idea in the autumn as an initiative to rescue failing schools.
The cash crisis is the latest in a series of woes for the college under Mr Preston's leadership. Trouble came to a head after a NATFHE survey in July revealed rock-bottom morale and staff allegations that a climate of fear was created by a "dictatorial and bullying" regime.
Initial inquiries by governors suggested that things were worse than the union predicted. The corporation set up a special committee of inquiry and signalled that senior management could be for the chop.
The chair of governors, George Mardle, was ousted by members who accused him of failing to act forcefully enough over the bullying allegations. At almost the same time Mr Preston and Mrs Chandler went on sick leave. Troubles deepened when the special committee was also asked to investigate allegations that the two were helping run a Clwyd pub, the Dymock Arms, while on sick leave with stress-related illnesses.
Both were dismissed "without notice", a college spokeswoman said this week. There was no question of any pay-off or handshake for either. The decision comes as auditors investigate the massive debts and threats of up to 200 redundancies.
The college must submit a recovery plan, including management reorganisation, to the FEFC within two weeks. The proposal for outside support is understood to be part of the plan.
Kevin Farrell, chair of governors, said: "I would not want to comment on proposals to the FEFC." But the college did want all post-16 providers in the area to look at what was a "broadly viable" proposal.
Parallels have been drawn with the Derby Wilmorton Tertiary College crisis of two years ago. That resulted in the highly critical Shattock report, claiming mismanagement, and the first sackings of college governors by a secretary of state.
Like Stoke, Derby Wilmorton was remarkably successful for curriculum innovation. What went wrong was to do with the governance and management, rather than the staff.
Troubled colleges which have come back from the brink with outside trouble-shooters include Rotherham College of Arts and Technology, and Thomas Danby in Leeds.
Similar moves by Stoke-on-Trent would win the sympathies of FEFC chief executive Professor David Melville since it would save him the embarrassment of worse consequences.
Mr Preston is no stranger to such accusations. He was accused of "bully boy tactics" by NATFHE in 1992, when he was principal of Amersham and Wycombe College. He left Amersham for Stoke in 1993. Mrs Chandler, also his deputy at Amersham, moved to Stoke shortly after. A year later, they admitted they were having a relationship.
The decision of Stoke governors to sack them both was welcomed by NATFHE. "The staff will be quite relieved that the two have been dismissed," said a spokesman.
Mr Preston and Mrs Chandler were not available for comment.