Birmingham City Council has failed to pay up to 30,000 bills and faces the bailiffs after a new computer system which was supposed to improve efficiency broke down.
Scores of suppliers have been out of pocket since the Voyager IT system was installed at the end of October and it is understood that legal action is being considered in a number of cases, with at least one firm warning that it will seek a court order for bailiffs to seize goods to the value of the money it is owed.
According to disgruntled council staff, as many as 30,000 bills may remain unpaid after the invoice-scanning system failed to work properly.
Former Labour councillor and cabinet member John Tyrrell found himself caught up in the financial chaos.
He is owed £700 for consultancy work carried out for the council in October and November last year.
Mr Tyrrell complained and received a letter from council chief executive Stephen Hughes, who admitted: "We have fallen slightly short in some areas because of the complexities involved".
Mr Tyrrell said: "They could at least have kept the old system running while testing the new equipment and then this wouldn't have happened."
Local authority bosses are accused of attempting to cover up the true extent of the IT failure.
Council employees writing on Adrian Goldberg's The Stirrer website claim that:
* Staff at children's homes are being forced to use their own money to buy food for residents.
* Bailiffs visited the Sparkbrook Neighbourhood Office demanding payment for the rent of the building.
* Supplies of newspapers to several city libraries have been suspended until the council is able to settle its debts.
Last night the council said Service Birmingham, the arm's-length company run by outsourcing firm Capita, which introduced the Voyager system on the grounds that it would make cash transactions more efficient, was working hard to iron out "glitches".
Service Birmingham is spearheading the council's Business Transformation project, which aims to make savings of £600 million by 2016.
The problem is deeply embarrassing for the council's Conservative-Liberal Democrat leadership, which has spoken of its support for local traders and its commitment to "fiscal responsibility".
The failure of the new system will provide ammunition for the trade unions, who are suspicious of Capita's record.
Last week The Birmingham Post revealed that Capita had received £20 million in fees and expenses from the city council in two years. The company says it can save the council £280 million by improving IT systems and changing working practices.
But a spokeswoman for the union Unison warned: "We have wider concerns about the role Capita is playing in other local authorities where they have brought in new computer systems that just don't work and make things more difficult and complicated."
Deputy council leader Paul Tilsley, who has overall responsibility for Business Transformation and is on the Service Birmingham board, said: "I have to put my hands up and say there is a problem. I am aware that not everything has gone to plan.
"We are working hard to iron out the glitches from the new system."
Coun Tilsley (Lib Dem Sheldon) said special arrangements could be made to pay the worst-hit suppliers.
He added: "If anyone has a serious problem they need to get in touch very quickly and we will do our best to sort it out, if necessary by manual payments."
He said it was inevitable, given the size of Birmingham City Council, that there would be teething problems. But he remained convinced that Voyager, when bedded down, would provide a far more efficient service for the council, which pays almost £1 billion a year to buy goods and services.
Coun Tilsley added: "With the old system the cost of paying one cheque, because of the manual involvement, was about £30. It is the same for any large organisation, but the move to a fully electronic system will simplify matters."