Investigation: Cash for peerages - Lord Cashpoint, the Curry King and Tony's £14m 'dodgy loan'

Sleazy drama that goes to the heart of Blair's authority

The Asian businessman was flattered - and more than a little intrigued - when the invitation to dine with Michael Levy dropped through the letterbox.

Arriving at the impresario's north London mansion, he found he was in the company of six other wealthy figures - all, like himself, sympathetic to New Labour. Then, just as the dinner was served on Levy's marble-legged glass table, a surprise extra guest swept into the room, saying: "Hi, I'm Tony."

"Everybody is so immensely flattered they forget they are being crudely manipulated," recalls another Labour donor subjected to the Levy "sting".

A mood of bitter disillusionment is felt by other former guests of "Lord Cashpoint", as Levy is nicknamed, as the row over Labour's secret loans threatens to engulf the party.

Sir Gulam Noon is the latest secret lender to discover this weekend the price of the party's secrecy as he joins others blocked by the House of Lords Appointments Commission.

Sir Gulam, a 70-year-old Indian food magnate, joins Barry Townsley, Sir David Garrard and Chai Patel on a list of would-be Labour peers caught up in the funding scandal. The story of how Sir Gulam was drawn into the cash-for-peerages row began a year ago, as Mr Blair prepared to fight to win a third Labour term.

The Tories may have been depressed in the polls, but their finances - thanks to big donors such as Michael Ashcroft - were surprisingly healthy. Even the Liberal Democrats had amassed unprecedented funds, due to the support of the millionaire businessman Michael Brown.

Labour, on the other hand, had "never really recovered from the 2001 election", insiders claim, when an expensive blitz of ads was ordered in the final week of the campaign. What was more, the party found that its cramped Old Queen Street headquarters, in a historic building near the House of Commons, were "entirely inappropriate" as a campaign base. A more modern campaign base, a few doors up from the Tories in Victoria Street, had to be found and paid for.

At the time, Labour had crippling debts of up to £23m. It owed up to £15.8m to creditors, including overdrafts, and another £4.3m was owed in longer-term bank loans. Its property portfolio, its most valuable asset was worth just over £9m, hardly enough to cover the debt. In effect, the party was in negative equity.

With the financial pinch on, Matt Carter, the party's 31-year-old general secretary, Tony Blair and Ian McCartney, Labour's chairman held a meeting with the PM's chief fundraiser, Lord Levy, about new ways to raise cash fast. They talked about breaking Labour's last fundraising taboo: seeking commercial loans from backers who had previously provided donations.

The idea of a loans facility was agreed between the three men, although the names of those who might be approached to provide the money was not discussed.

It will surprise some to learn that Lord Levy had for some time resisted the option. "If someone gives you a loan, you have got to find someone who is a donor and not a lender if it is called in. You have got to persuade them into a gift. You have more of a headache with loans," said one senior Labour source.

But with the pressure on, Mr Blair gave the green light to his fundraiser Lord Levy to collect the loans. Using his business contacts, including prominent figures in the Jewish community, he raised almost £14m - including a £1.5m loan from Chai Patel, who ran the Priory Group of clinics.

The loans were short term, set at 2 per cent above the base rate. Most would not be called in for a year, and The Independent on Sunday understands that none have yet been repaid. Lord Sainsbury, Labour's most generous benefactor and Tony Blair's science minister, is believed to be among those who provided a generous loan to the party, on top of donations worth £16m. Another prominent Labour donor, Sir Gulam Noon, made a £250,000 loan to help the party. Sir Gulam, a well-known fixture on the New Labour circuit, arrived from Bombay in 1971 with £50 in his pocket before earning his fortune through ready-meals (and is credited with popularising chicken tikka masala).

A prominent philanthropist, he sits on the board of six charities, including an inter-faith group. A Muslim, he was a vocal supporter of his community in the wake of the 7 July bombings.

Yet even this genial Anglophile and apparently blameless man is now enmeshed in the cash-for-peerages row after he agreed to a request for a loan.

In Bahrain yesterday and unavailable for comment, Sir Gulam's office made clear that he would abide by the commission's ruling. Privately, however, he is likely to be deeply wounded by the affair.

"The first loan was in 2005. They were short-term loans at 2 per cent above the bank rate," said a Labour source. "At the end of the day, the party needed money."

Collecting loans did have advantages. Not only did they not have to be declared publicly, under Electoral Commission rules, but technically Labour supporters from abroad, banned from giving cash under the strict donation rules, could give loans.

But as the money poured into the Labour Party accounts, only few in the Labour Party were in the know. Even Matt Carter did not see the fine print about who was providing the cash.

"As the general secretary he was formally responsible for the finances," said one friend. "But he hadn't discussed loans with any of these people. He probably knew where the loans came from, but he wouldn't have dealt with the people. He was a party apparatchik. This was very much a Downing Street operation."

Like all loans, there came a time for a repayment and, although it is denied, the impression of reward was difficult to resist as the Lords Appointments Commission belatedly found out about the secret loans while assessing Mr Blair's nominations.

The Independent on Sunday's revelation that the donors had given loans as well as gifts detonated most explosively at the breakfast table shared by Harriet Harman and Jack Dromey at their home in the smart south London suburb of Dulwich.

They are one of New Labour's leading power couples, she a minister in the Department for Constitutional Affairs with responsibility both for party funding and Lords reform; he a union boss and Labour Party treasurer. The loans scandal had every chance of developing into another great spousal controversy.

Mr Dromey, who knew nothing about the loans, was determined that he and his wife were not to be dragged through the same sort of media maelstrom that had sunk the Mills-Jowells marriage. The next morning, the couple took immediate steps to fireproof themselves, Ms Harman casting off her ministerial responsibilities for party funding, Mr Dromey demanding a full inquiry.

In Downing Street, the alarm bells started to ring. It is a small irony of last week's revelations that Mr Blair faced them largely alone. His wife Cherie had a lucrative speaking engagement in Florida on Tuesday.

Preoccupied with his looming battle over the Education Bill, Mr Blair left it to John Prescott to manage the loans fallout. In fact, the Deputy PM shared many of Mr Dromey's concerns. If Labour's rules had been followed, then the fact that the party was raising secret loans should have been shared with a handful of senior officials - and indeed ministers. Neither Mr Prescott nor Ian McCartney were fully aware of what had happened.

It was agreed that the matter should be investigated and a report presented to Labour's ruling body, the National Executive Committee (NEC), on Tuesday.

To Mr Prescott's considerable fury, Mr Dromey then broke an agreement that the matter should be kept quiet until then. The union boss issued a dramatic statement and toured the TV studios to reveal his fury at being kept in the dark, even as Labour whips were assessing the damage of the education rebellion on Wednesday morning.

The mood among Labour MPs on Thursday was ugly. In the Commons tea room, Stephen Byers, a Blair ultra-loyalist, was vocal in his condemnation of Gordon Brown, blamed for "putting Jack up to it".

Others speculated that Mr Dromey's decision to go public was the de facto launch of his wife's bid to be Mr Brown's deputy. In Downing Street, there was a sense of bewilderment at what appeared a full-frontal assault. "It was as if Jack was going out of his way to hurt us," one former aide complained.

Mr Blair, meanwhile, looked worn and defensive as he sought to calm the baying media corps at his monthly press conference. What had been intended as an event to move attention away from the education rebellion became, instead, an extended cross-examination on the loans scandal. He was forced to admit that he had indeed known that the men proposed for peerages had secretly loaned his party money.

This weekend, Mr Blair is desperately trying to stitch together a peace deal that will see Mr Dromey brought back into the fold. He will personally apologise to the NEC and pledge a new system of financial accountability.

Tuesday's meeting, likely to be in the Commons' Portcullis House, promises to be a stormy affair. Mr Blair may well be able to patch together an uneasy peace, but the damage is deep and lasting. A significant number in his party now think that his pre-election visit to "Lord Cashpoint" has left him morally bankrupt.

EYE OF THE STORM

Sir Gulam Noon

Sir Gulam Noon arrived in Britain from Mumbai in 1971 with £50. Now worth an estimated £50m, the businessman who has been revealed to have lent £250,000 to Labour, has been dragged into the row over cash for honours. His nomination by Tony Blair has been blocked by the House of Lords Appointments Commission. His first company made sweets, but he made his millions with ready-made curries. He speaks Hindi, English, Urdu and Gujarati and is prominent among the UK's Muslim community. He was knighted in 2002.

Michael Levy

The charismatic former pop impresario behind the careers of Alvin Stardust and Chris Rea left school at 16 and trained as an accountant but made his fortune owning Magnet records. As Tony Blair's chief fundraiser, Lord Levy is a central figure in the "cash for honours" scandal. He plays tennis with the Prime Minister at his lavish home in Totteridge, where hospitality helped to persuade donors to part with some of the £14m in loans that helped Labour fight its election campaign. He uses considerable charm and influence, particularly in the London Jewish community, to schmooze businessmen.

THE PLAYERS

Labour Party treasurer Jack Dromey detonated a political explosion on Wednesday when he revealed that he was kept in the dark over £14m in loans raised before the general election. The next day Tony Blair was forced to admit to the secret fundraising operation. He faces a showdown with the party's ruling body this Tuesday and many Labour MPs are wondering if this is the scandal that will finally drive him from office.

Jack Dromey

Union leader elected Labour Party treasurer in 2004. He stunned Downing Street just before the votes on the Education Bill when he went on "Channel 4 News" to denounce the Prime Minister for failing to tell him about the million-pound loans that paid for last year's election campaign. Close to Gordon Brown, but he and his wife Harriet Harman were also close to Tony and Cherie.

Harriet Harman

The constitutional affairs minister who was forced to give up part of her job on Wednesday night. When husband Jack Dromey attacked the Prime Minister, he drew attention to a possible conflict of interest between his job as Labour treasurer and her responsibility for electoral law. Blair gave her a second chance as a minister in 2001. Wants to be deputy Labour leader under Brown.

Ian McCartney

As party chairman in the Cabinet, he met Dromey on Monday, two days before the treasurer went public. McCartney knew about the loans, further provoking Dromey's fury as being left out by a secret parallel party structure based in Downing Street. That made McCartney part of the plot to bypass the democratic structure of the party which Dromey attacked on Wednesday.

Matt Carter

General Secretary of the Labour Party when the secret loans were made. As the official with legal responsibility for the party's finances, he knew where the money came from. But his co-signatory on the party accounts, Dromey, did not. Carter left the Labour Party in December to join Mark Penn, the American pollster who is now advising Silvio Berlusconi, the Italian premier.

Sir Jeremy Beecham

Leading light of Labour local government, currently the elected chair of the Labour Party and therefore its national executive committee. Furious with Dromey for going public, but equally annoyed at not being told about the loans himself. He will chair the crunch meeting of the national executive on Tuesday that may see the party's internal democracy reassert itself.