Specialist bank Greensill Capital has fallen into administration.
The principal financial lender to businessman Sanjeev Gupta's companies, which include Liberty Steel has put 5,000 jobs at risk at the firm and others.
Greensill said Gupta’s GFG Alliance business empire was “currently experiencing financial difficulties” and had “started to default” on payments.
Union officials were already due to have crisis talks with Mr Gupta on Tuesday.
Liberty owns 12 steel plants in the UK including in Rotherham, Motherwell, Stocksbridge, Newport and Hartlepool.
Gupta’s allegedly owes Greensill about £3.6bn.
Gupta, an Indian-born British billionaire who was nicknamed the “saviour of steel”, has defied pessimists in the industry for years by buying up seemingly unpopular industrial assets. These included several UK steel and aluminium plants that many experts said could not compete with cheap imports from China.
Business secretary, Kwasi Kwarteng, held emergency meetings over the weekend with Jon Ferriman, the boss of Liberty Steel UK. They reportedly discussed contingency plans if Greensill, which includes former prime minister David Cameron among its advisors, went bust.
A spokesperson for Grant Thornton said its insolvency practitioners Chris Laverty, Trevor O'Sullivan and Will Stagg had been appointed as joint administrators of Greensill Capital and Greensill Capital Management Company.
"The joint administrators are in continued discussion with an interested party in relation to the purchase of certain Greensill Capital assets. As these discussions remain ongoing, it would be inappropriate to comment further at this time," the spokesperson added.
Liberty says it is the third largest steelmaker in the Britain, with nine sites employing about 3,000 people. In total about 5,000 people work for GFG Alliance in the UK.
According to court documents seen by the Financial Times, GFG said last month that it would collapse into insolvency if Greensill stopped providing it with working capital.
Greensill, which allows businesses to borrow money to pay their suppliers, was thrown into crisis after its own financial backers, including Switzerland’s GAM Holding and Credit Suisse, withdrew support amid concerns about the firm’s management and the growing pile of loans issued to GFG Alliance.
Local Labour MP for Rotherham Sarah Champion, said that Liberty is a significant employer in and around South Yorkshire.
Reading reports that the Greensill collapse could bring down Gupta’s empire, Champion said was “terrifying”.
“Losing Liberty would decimate our economy, because it’s not just the steel jobs but the many more in the shops and cafes that depend on them,”
Employment and output have fallen significantly for the steel industry over the last four decades. At its peak, the state-owned British Steel Corporation in the early 1970s, had 10 times as many workers.
The whole UK steel industry has gone through a challenging period of ownership since it was privatised in the 80s.
However, the sector is still considered important by government ministers, regional politicians and business leaders.