A firm that provides alternative education for Bristol children has run into difficulties, leaving workers out of pocket and youngsters without schooling.

Active8 Education Ltd, which is thought to work with more than 40 vulnerable and disaffected youngsters, has suspended all its activities and looks set to fold.

Staff say they are owed more than two months' pay for continuing to work after James Fortune, the boss of Active8, told them the business had a cashflow problem.

Several of the 10 or so workers who remain are getting into financial problems themselves because they have had no wages, but cannot claim benefits. Some have been threatened with eviction.

Meanwhile, Active8 – the organisation that was educating Troy Atkinson, who died when he was hit by a car near Cabot Circus – is ensuring that eligible students are able to sit their GCSE exams, but is no longer working with any of the other children.

Mr Fortune said staff would be made redundant.

Bristol City Council says individual schools must take back responsibility for pupils they placed with Active8, but this looks unlikely in many cases.

Unions say the case highlights the problems that can arise when local authorities privatise services.

Active8 was set up by Mr Fortune and three other directors in 2007 to work with children who have special needs, are excluded from school or are in danger of exclusion.

It was commissioned by the city council a year ago to work with 10 students. A number of schools, including Merchants' Academy, Oasis Academy and Henbury School, have placed youngsters with the firm. Schools pay about £6,000 a year per pupil to Active8. Mr Fortune said the business had grown quickly in the early part of 2008. Turnover last year had been more than £200,000 and this year was set to be more than £300,000.

The service operated at different times out of centres in Easton, Shirehampton, Filwood Broadway and Southmead but hit problems over the cost of renting accommodation.

Difficulties worsened in February, Mr Fortune said, when the council pulled children out because of concerns over safe recruitment and child protection. These are understood to centre on historic criminal convictions of three staff, who had been employed after being cleared as fit to work with children under enhanced Criminal Records Bureau checks, but were sacked some months later.

In March, Mr Fortune told the remaining staff he could only give them half their wages, citing a severe cashflow problem.

Jayne John-Baptiste, 49, of St Werburgh's, said she and other workers continued to work for some weeks in spite of this because they were dedicated to helping the students.

But they have as yet received no outstanding wages for March, April or May, redundancy notices or P45s from Active8. She said: "We cannot look for other jobs or claim benefits. We have not got the money to pay our bills."

Parents and students said they had not been given information from Active8 about the problems, but were given a string of excuses such as swine flu, a virus and a minibus breakdown, for why lessons were not taking place.

Susan Thompson, 45, of Marbeck Road, Southmead, whose son Jordan Hill was with Active8, said: "He could not cope with mainstream school. At first he was doing well with Active8 but it became very unpredictable and now he is upset that he had just been left."

Chelsea Ogbourne, 15, of Romney Avenue, Lockleaze, said she had been missing out on lessons with Active8 for nearly three months.

City council spokesman Katharine de Lisle said: "Bristol City Council commissioned work from Active8 a year ago for 10 children with special educational needs and for three excluded children.

"Additionally, schools could buy-in the service for children who are not excluded but need extra support. Schools retain responsibility for those pupils.

"Following concerns about the suitability and safe practice of staff at the organisation, Bristol City Council withdrew children from the service and clarified with schools their responsibilities regarding the duty of care for children they may have placed there. Contractors who work with children must have safe recruitment guidelines and a safe culture of working in place.

"The council has been assured that all children who are registered to take GCSEs with Active8 will be able to do so and some exams have already taken place. All other children remain on school rolls and the schools will be responsible for their continuing education."

Mr Fortune told the Bristol Post he was determined to get the necessary paperwork to staff as soon as possible but he made no pledge to pay them the cash they were owed.

He said. "I want to place the company into voluntary administration, but to do that I have to find £2,000 to pay an administrator. Otherwise I will have wait for a creditor to make a petition to a court for the company to wind up. It is likely I will have to declare myself bankrupt."

Rowena Hayward, of the GMB union, said she believed the council should repay staff who had missed out on wages.

She said: "It is taxpayers' money that has been bankrolling this company. The very least the council can do is pay these people what they are owed.

"The authority is hell-bent on outsourcing. But if it wants to improve education in the city, the council should be providing services to work with challenging young people."