The National Citizen Service, the “big society” youth organisation set up by David Cameron, has been accused of a national scandal over claims it effectively forced a charity partner into insolvency, resulting in hundreds of staff losing their jobs.

The Challenge, which had provided nearly half of the entire NCS programme under a £70m-a-year contract, announced on Wednesday that it had gone into administration after months of dispute with NCS Trust, which administer the service, over the terms of a new contract to run youth services from April 2020.

NCS was launched by Cameron in 2010 as “a kind of non-military national service” to encourage youngsters from different backgrounds to integrate and develop life skills. The trust oversees £181m of public funds aimed at pushing 100,000 16-year-olds a year through its four-week citizenship programme.

About 500 staff have lost their jobs at The Challenge since August when NCS Trust unilaterally cancelled its contract and withheld payments. Administration means most will now no longer receive redundancy payments, although up to 200 may be able to transfer to jobs at new NCS providers.

“Those charged with oversight of NCS provision have failed many hundreds of dedicated colleagues and jeopardised many thousands of opportunities for young people. It is nothing short of a national scandal,” said Bill Ronald, the chair of The Challenge.

An internal email sent to Challenge staff by its chief executive, Oliver Lee, said it had been unable to withstand what amounted to a “systematic assault” by NCS Trust, which he said had “bled us dry” financially and left the charity with no option but to go into administration.

Lee, a former Royal Marine commander with experience in Bosnia, Northern Ireland and Afghanistan, added: “I have worked in some difficult places and circumstances over my career, but none is equal to the manner in which The Challenge has been treated by NCS Trust this year.”

It is understood that the dispute centred on NCS Trust’s contractual insistence that The Challenge adopt its new centralised IT operating system, which the latter regarded as inefficient and expensive. The Challenge is understood to have raised the dispute with ministers in July and was told it was not a government problem.

In a statement, NCS Trust denied it was responsible for The Challenge entering administration. “The fact remains The Challenge decided it would not sign contracts to deliver NCS from 2020 and that was the main catalyst for the resulting problems it has faced. To suggest there is a failure of oversight in NCS provision is utter nonsense.”

The Challenge denied that it had withdrawn from the contracts but said it had sought assurances about their safety and viability. “The contracts – which we had fairly won and been awarded – were unilaterally withdrawn on 31 July 2019, 16 days after we registered our concerns with DCMS.”

The shadow minister for civil society, Vicky Foxcroft, said it was unbelievable that the Department for Digital, Culture, Media and Sport had watched The Challenge go into administration without even meeting to discuss its concerns. “DCMS gives NCS £181m a year. We need to know it has a handle on this,” she said.

Since 2011, more than 600,000 young people have participated in the NCS programme, which offers a residential course teaching team-building, discipline and resilience as well as involvement in social action projects such as planting communal gardens or arranging family fun days.

NCS Trust has struggled to prove that the £1bn of public funds spent on the scheme – at a time when hundreds of millions has been cut from local authority-run youth services as part of austerity programmes introduced under Cameron – have proved value for money or produced the hoped-for social benefits.

Cameron remains connected to NCS Trust as chair of its board of patrons. Other patrons include a number of peers, businesspeople and media figures including the Today programme editor, Sarah Sands, ITV’s political editor, Robert Peston, and the former Times editor James Harding.