The government was forced last night to deal with its first sleaze row since the general election when secret Whitehall documents showed a Tory donor successfully lobbied for the cancellation of an £80m loan to a leading engineering company.
Downing Street denied ministers had acted improperly when a loan to Sheffield Forgemasters was cancelled weeks after Andrew Cook, who has subsidised some of David Cameron's flights, warned the government it could be illegal.
The government swung into action last night a few hours before two Sheffield Labour MPs named Cook, chairman of engineering firm William Cook Holdings – which is not in competition with Sheffield Forgemasters – in a Commons debate.
Angela Smith, MP for Penistone and Stocksbridge, told the Commons an email from Cook to Mark Prisk, the business minister, claimed that the loan – agreed by the last government – was "possibly illegal" under EU law.
Clive Betts, MP for Sheffield South East, read out the email which was dated 25 May. Betts quoted Cook as writing: "I am the largest donor to the Conservative party in Yorkshire and have been since David Cameron was elected leader. I am delighted you are back in power, albeit in coalition."
To laughter from the Labour benches, Betts continued quoting Cook to add: "I have specialist knowledge of the situation which I would like to share with you confidentially. The loan is probably unnecessary and possibly illegal under EU rules."
Within three weeks of the email the Lib Dem treasury chief secretary Danny Alexander announced the cancellation of the loan. Vince Cable, the Lib Dem business secretary, endorsed the decision.
As soon as he received the email on 25 May Prisk forwarded it to his private secretary who replied to Cook. The industrialist replied, enclosing legal advice that the loan was "in breach of EU state aid regulations".
Angela Smith asked: "Is it not the case that it is the £500,000 Mr Cook donated to the Conservative party, along with the £54,000 worth of plane flights to David Cameron, that is the real reason for this?"
Prisk insisted Cook's intervention had no impact on the decision but it was right of him to alert officials after receiving a warning that the loan could be illegal. "Now when I receive something of that nature, as a minister, I say: 'I don't give a monkey's whether he is a donor to the Conservative party, or the Labour party or any other party.'"
Prisk pointed out that he made sure that the letters were made available to the Sheffield MPs so they could be seen in the debate. "If I had something to hide I would not have done that. It is a peculiar logic to suggest that a Conservative party donor is the reason why a Liberal Democrat cabinet member in this department and a Liberal Democrat as chief secretary should support the proposal."
Nick Clegg, who is MP for Sheffield Hallam, earlier faced pressure over his claim last month that the loan had been denied because the company's owners did not want to dilute their shareholding. Clegg later admitted this was not the case.
Jack Straw, the shadow justice secretary, asked Clegg to rethink the cancellation of the loan. Clegg criticised Labour for pretending there was money to support the company.