The EFA has issued a pre-termination warning notice to the Durand Academy Trust saying that unless it takes steps to address conflicts of interest within its board and senior management teams its funding contract will be terminated.
The DAT is an exempt charity primarily regulated by the EFA, and uses land and facilities leased from the Durand Educational Trust. The commission opened a statutory inquiry into the trust in February 2015 over conflict of interest concerns.
At the time the inquiry opened, the land was also partly used by a not-for-profit leisure and accommodation business called London Horizons, which returned income to the academy.
Schools minister Lord Nash said in a statement: "I have today issued Durand Academy Trust with a pre-termination warning notice.
"This is not a decision I have taken lightly given the trust's commitment to providing an excellent education to its pupils, many of whom come from disadvantaged backgrounds and difficult circumstances."
But he said the trust had repeatedly failed to address serious concerns about the school's governance, the effective use of public money and its failure to comply with the standard rules all academy trusts must follow, so "we have taken this decision to safeguard the future education of Durand's pupils".
The EFA has previously criticised the DAT for failing to manage conflicts of interest relating to Sir Greg Martin, then head teacher at Durand Academy, in respect of his former role as a director of the trust and his ongoing role in managing the leisure and accommodation facilities through a contract between DET, London Horizons and Martin’s own company, GMG.
GMG was paid a percentage of the London Horizons turnover, topping up Martin’s £200,000 basic salary as executive headteacher.
Martin retired as headteacher in August, but remained at the trust as chair.
The EFA has today issued a notice of provisional intention to terminate its funding agreement unless Martin resigns as chair by 1 August and never holds any future position on the DAT staff or board.
The notice also calls for the trust to ensure that, by the same date, no director of DAT is also a director of DET, London Horizons Limited or GMG Management Resource.
The Durand Academy’s current interim head, Martin McLaughlin, is listed as an officer of DAT, DET and London Horizons on the Companies House register.
The notice says McLaughlin must either resign from any position with DET, London Horizons or any company of which Martin is a director or has a more than a 5 per cent share, or resign as headteacher and hold no further position at DET.
The DAT must also secure the repayment of £1.8m in funding it paid to the DET in the 2013/14 academic year, according to the notice.
And by 29 August the DAT must appoint two new directors or trustees with appropriate educational, governance or finance expertise who have no previous connection with DAT or Durand School, as well as publishing a list of trustees’ interests and ensuring all trustees understand their duties.
Nash said: "Durand Academy Trust now has the opportunity to respond to the issues raised in the notice and provide any representations.
"We will consider any response in deciding whether to continue the process of terminating the trust's funding agreement."
A Charity Commission spokeswoman confirmed the statutory inquiry into DET was ongoing, but declined to comment further.
No one from the DAT responded to Third Sector’s request for comment.