The SNP's campaign in the Glasgow North East by-election was in disarray yesterday when its candidate quit after failing to disclose serious financial problems.

James Dornan stood down just five days after being selected. It emerged he had been on the verge of bankruptcy between October 2004 and December 2007, when his assets were controlled by an insolvency practitioner.

At the same time, he stood for both Westminster and the Scottish Parliament, and was elected a Glasgow City Councillor for Langside.

He also spent seven months as a director of the charity running Glasgow's sports centres and museums, in an apparent breach of its rules.

Culture & Sport Glasgow last night said Mr Dornan had not informed them he was an "undischarged bankrupt" in the eyes of Scots charity law.

Mr Dornan's departure is the second embarrassment for the Nationalists in the seat.

Last month councillor Grant Thoms unexpectedly pulled out over unguarded comments on his blog.

The latest development raises questions about Mr Dornan's ability to stay as leader of the SNP opposition on Glasgow City Council.

One Nationalist MSP told The Herald it was "unbelievable" he could have cleared the party's vetting system if he had been completely open about his finances. An SNP spokesman declined to discuss Mr Dornan's vetting.

Labour, who privately wanted Mr Dornan to remain the candidate as they saw him as weak, said the Nationalist campaign was in "complete, utter and total meltdown".

David Kerr, 35, the TV presenter who was narrowly defeated for the candidacy, and who represents a far greater threat to Labour, is now the clear favourite to win a fresh selection round.

The Sunday Herald, The Herald's sister paper, yesterday revealed Mr Dornan had signed a "protected trust deed" in 2004 after becoming unable to pay his debts.

A less painful alternative to bankruptcy, the deed froze his debts and allowed him to repay his creditors what he could afford over three years.

As he was not sequestrated by a court, Mr Dornan was entitled to stand for election.

However, under Scottish charity law he was deemed an "undischarged bankrupt" and disqualified from being a charity trustee.

Culture & Sport Glasgow's Articles of Association state anyone prohibited by law from being a trustee cannot be one its directors either.

Despite this, Mr Dornan was a "partner director" from May 2007 until his discharge from insolvency in December 2007. In a statement, Mr Dornan, 56, said he was taking legal advice on whether there had been a breach of charities legislation.

"I am not ashamed of having experienced financial difficulties. Many people know only too well how that feels.

"I am absolutely clear that throughout the period of the Protected Trust Deed, I acted in good faith. However, I am not prepared to allow this issue to overshadow the by-election or to be exploited by Labour as a distraction from the real issues."

A SNP spokesman said Mr Dornan had made an "honourable decision".

Paul Martin, the Labour MSP for Springburn, said: "On Sunday afternoon the SNP were delivering leaflets saying James Dornan was their candidate. Now they have no credibility left."

The by-election has been caused by the resignation of Commons speaker Michael Martin. Labour candidate Willie Bain, 36, a law lecturer, is defending a notional majority of around 7000.