The Liberal Democrats are facing a new threat of financial meltdown after the Government’s Asset Recovery Agency was called on to investigate the £2.4 million donated by the jailed millionaire Michael Brown.

The Conservatives demanded that the agency investigate the money under the Proceeds of Crime Act, opening up the prospect that the Liberal Democrats could be required to refund it. The Electoral Commission is already investigating the money to see if it broke party funding rules, and could also ask the party to repay it. The party says that it has spent the money and does not have it to pay it back.

Mr Brown, who was recently jailed for perjury, bankrolled the Lib Dem election campaign through his company 5th Avenue Partners, which the High Court declared last month was fraudulent from its inception. After being sued by his investors, Mr Brown was jailed for perjury for claiming that he had traded with their money, whereas in fact he had just shuffled the funds through various accounts around Europe. The Times revealed yesterday that Lord Rennard, the Lib Dem chief executive, had been questioned by police in an attempt to trace the money.

Sources at the agency suggest that it is unlikely to begin an immediate investigation. It would try to recover the money itself only if the police fail to secure a prosecution. Even if the agency does act to confiscate the money, it would try to reclaim the gift from Mr Brown himself.

Times Recommends

• Charles blazes trail as sun king
• Thalidomiders win payout 50 years on
• Libel gag on talk of 'medical hurricane'