The University of South Africa (Unisa) may lose its state subsidy and face court action because it has defied government requests not to appoint a vice-chancellor until after a merger with other distance-learning institutions.
Unisa will get its R40 million (£3 million) in funding this month, but education minister Kader Asmal has said that he might withhold future payments if any of the three institutions involved in the merger defies him over senior appointments.
Professor Asmal first clashed with university council chairman McCaps Motimele a month ago when human rights commissioner Barney Pityana was offered a five-year contract to lead Unisa. Professor Asmal had wanted Unisa to award a short-term contract because the merged institution would, by law, have to appoint a new head.
Mr Motimele accused the minister, who is of Indian extraction, of arrogance, of racism and of "siding with those who resist transformation".
In response, Professor Asmal criticised the high stipends paid to council members and questioned their judgement and competence.
The issue has split the council and staff. Some 700 academics and administrators signed a statement backing Professor Asmal. They are sympathetic to the view that the council is more of a threat to autonomy than are the minister's orders. They have complained of council interference in the university's daily running.
The merger of Unisa, Technikon South Africa and Vista University's distance arm to create a single open-learning institution was announced in the national plan for higher education earlier this year.
More changes are expected when a report on opportunities for rationalising higher education is published at the end of this year. The report will launch a new phase of transformation for a sector still settling down after radical post-apartheid change.
The South African Universities Vice-Chancellors Association is concerned about growing instability at Unisa. Chair Andreas van Wyk said events were "having a marked effect on the core business of the institution" and casting a negative light on higher education as a whole.
Professor Asmal said he had decided to make the November payment to Unisa in the interests of institutional stability and that he was taking legal advice on how to act against the council.
If Professor Asmal is able to rush through the merger, he may be able to sidestep the issue because a new single institution would require a new council.
The government has the power to appoint temporary administrators to head institutions in crisis, but it is unlikely to do so because Unisa's problem involves its council rather than the competence of its senior management.
It might be possible for Professor Asmal to sack Mr Motimele. Mr Motimele has strong support from students and external council members but has clashed with senior staff on several occasions.