In a letter to Sir Tony Redmond, chairman of the independent board overseeing the authority, Kemi Badenoch MP said the Secretary of State for the Department for Levelling Up, Housing and Communities, Michael Gove, was ‘minded to intervene’ in the Labour-run council’s case.
Ms Badenoch continued: "He is satisfied on the basis of the evidence provided that Nottingham City Council is failing to comply with its Best Value duty.
"He is therefore minded to exercise his Best Value powers under the Local Government Act 1999 and appoint commissioners."
The council has been under scrutiny since it revealed last year that funds from its Housing Revenue Account (HRA) had been allocated unlawfully.
At the time that came to light, the authority was already being monitored by a Government-appointed board after the collapse of Robin Hood Energy in January 2020.
Coun David Mellen (Lab), council leader, said: “The Government’s decision to appoint commissioners follows our discovery last December that HRA funds had been allocated unlawfully.
"This was a significant setback but it’s important to understand that we brought the matter to light ourselves as part of our work to tighten up our financial and governance arrangements and have already taken swift and direct action to address the issue, including seeking the necessary ministerial direction to pay the money back into the HRA.
“In light of the improvements we have been making, it’s clearly disappointing that the HRA issue has led to the Government taking the action it has.
"We understand that it will be a major concern for city residents, council staff, our partners and local businesses but we are committed to working with commissioners on any further improvements we need to make.
“Our staff do a great job providing vital services to city residents and we will support them to continue to do that in the months and years ahead.”
The council has agreed a balanced medium term financial plan covering the next four years, a key requirement of the previous non-statutory review, and within that a balanced budget for this year without the need for any other financial support or intervention.
It is also continuing to bring down overall debt levels significantly and taking a strategic approach to disposing of property assets to bring an income to the council.
A review of council-owned companies is continuing and all the recommendations of two independent reports into the HRA issue commissioned by the council are being implemented, including bringing housing management back in-house, to ensure problems are resolved, the money is returned to the HRA and the same mistakes can never happen again.
Mel Barrett, council chief executive, said: “We have been making good progress on our recovery and improvement plan over the last 18 months, working closely with the independent board appointed by the Government to oversee its implementation.
“We have had a positive relationship with the board and its chair Sir Tony Redmond.
"Sir Tony’s appointment as the lead commissioner therefore provides reassurance and continuity.
"This, and the fact that commissioners have been appointed for two years rather than the normal three, is recognition of the progress we have already made.”
The council has until July 7 to respond to Mr Gove over the issue.