The former chair of two free schools broke the law over payments of more than £500,000 to his own company, a government investigation has found.

A probe by the Education and Skills Funding Agency has cast “significant doubts on the legitimacy” of money paid by Collective Spirit Free School and Manchester Creative Studio to the Collective Spirit Community Trust, a company with links to a number of its trustees.

However, investigators encountered “substantial difficulties” establishing “any reasonable audit trail of financial transactions or evidence to assure the regularity of funds spent by the trusts”.

In its report, the agency concluded that the schools’ former chair of directors Alun Morgan breached the Companies Act 2006 when he failed to meet requirements to exercise independent judgment and reasonable care, skill and diligence, failed to avoid a conflict of interest, and failed to declare interest in a “proposed transaction or arrangement”.

Morgan was a 50 per cent shareholder in CSCT, which also had “unclear” links to the schools’ former chief executive Raja Miah, according to the report. Miah had sent emails to the free schools chasing payments on the company’s behalf, the probe stated.

The ESFA first received allegations of financial irregularity at the two schools in February 2017, and has since identified “a number of significant failings in both the governance and financial control arrangements” at the schools, including the failure of trustees to declare their connections with CSCT and failure to properly manage or disclose related-party transactions.

The two schools were run as separate organisations but governed by an overarching board of directors. They had the same chair and same chief executive, although they had separate local governing bodies.

Collective Spirit, in Oldham, closed in the summer of 2017 after being placed in special measures. Manchester Creative Studio, which was also in special measures, closed last summer despite an emergency government funding injection of over £400,000. Both free schools were founded by Miah, who won an MBE for his social integration work in 2004.

The investigation report, published today, said the ESFA could not confirm if services had been provided “at cost”, in accordance with the rules around related-party transactions, because of the “lack of any robust financial control system, adequate financial oversight and relevant documentation to support contractual management and financial transactions” at the trusts.

It also could not confirm whether costs were “inappropriately inflated” or if invoices were submitted for services that were never delivered.

Nevertheless, the investigation found “limited or no evidence” for delivery of certain CSCT invoiced items, and asked why invoices had been paid before the delivery of services.

Concerns about two different sets of invoices to Collective Spirit, one set for £47,000 a month and another £56,000 a month, were also questioned, as were invoices seemingly issued after the contract between the schools and the company ceased in April 2017.

Although the agency confirmed that the two trusts spent at least £500,000 with CSCT in 2016-17, the report said it was “unable to confirm with any assurance the totality of the spend with CSCT”.

The investigation also found that the amount Collective Spirit Free School paid to CSCT increased by £14,373 (34 per cent) between August 2016 and April 2017, although these increases were not included in the agreed payment schedule.

Links between the schools and the CSCT were also not disclosed in the trusts financial statements, declared in annual declarations and not declared or managed in board meetings. The link between Miah and the company was labelled “unclear”.

Accounts for 2015-16 show Manchester Creative Studio declared payments of £155,894 to CSCT, while Collective Spirit declared £139,676. The ESFA said this was “understated” as the connection between the parties continued after one board member left in December 2015, and said Collective Spirit alone should have declared closer to £500,000.

“This has been extremely challenging owing to the lack of any robust processes or procedures, lack of relevant information and poor record keeping by the previous trust,” the report said.

“New staff and trustees at Manchester Creative Studio have also highlighted several items of IT equipment which may have been retained by former trustees and/or employees.”

Records on companies house show Miah resigned as director of both trusts in September 2014. However, he continued to attend board meetings between September and December 2016, remained a trust member and CEO during 2015-16 according to the trusts accounts, was part of the strategic monitoring group and was still involved in meetings with the regional schools commissioner until January 2017.

The Department for Education refused to say whether any action has been taken against Morgan.