Birmingham City Council's deputy leader and the chief executive of the Learning and Skills Council could face legal action following the withdrawal of a £200,000 grant from a community organisation.
The Birmingham Association of Neighbourhood Forums is considering applying for a judicial review of a decision to axe its funding from November 30 - effectively putting Banf out of business.
The hearing would challenge the constitutional validity of the Birmingham Strategic Partnership, chaired by deputy city council leader Paul Tilsley, which took the decision to withdraw Banf's money.
As an unincorporated body, the BSP's members take legal responsibility for decisions in their own names and are personally liable according to Banf manager Mick Rice.
This means that Coun Tilsley and David Cragg, vice-chairman of the BSP, could be ordered to meet Banf's costs if the judicial review proved successful, Mr Rice said.
Banf's tactics are designed to force the city council cabinet member for local services, Ayoub Khan, to overrule the BSP and take a decision on future funding for neighbourhood forums. Any decision taken by Coun Khan could then be subjected to the council's scrutiny process and debated in public.
Mr Rice said: "We believe that a decision to cease funding must ultimately be approved by the relevant cabinet member. A decision has to be posted and subject to scrutiny, and that's not happened."
The dispute emerged against the backdrop of a major shake-up of community involvement. As well as withdrawing Banf's funding, the BSP has told the Birmingham Community Empowerment Network (B:cen) that its core funding will cease. Both bodies are responsible for engaging citizens at grass roots level.
The BSP proposes instead to set up a community engagement service, assigning a community worker to each of the city's 10 constituencies.
The BSP was forced to act after the Government withdrew funding for B:cen, according to Coun Tilsley.
But Mr Rice denied that was the case, arguing that ring-fencing attached to the grant had merely been removed, leaving the BSP free to decide how to use the money. Mr Rice pointed out that Birmingham's Neighbourhood Renewal Fund allocation had risen from £25 million to £37 million.
He added: "The council has told us we are closing on November 30, and we have already made two staff redundant."
Coun Tilsley (Lib Dem Sheldon) said he was satisfied the BSP had acted within the law and that he believed the new community engagement system would be fairer by making sure each constituency had the same level of help and promised that budgets for neighbourhood forums would be safeguarded.