Local Government Minister Paul Toole has said he will give Auburn City Council, the political home of controversial developer-politician Salim Mehajer, two weeks to show why it should not be suspended.

The council's planning decisions will also be examined in an independent review by Sydney silk Richard Beasley, SC.

It is understood that a Fairfax investigation into a $20,000 payment from the council to Liberal lobbyist Joe Tannous sparked state government investigations into the council, which has set the suspension threat in train.

The move has been welcomed by Cr Mehajer, Auburn's deputy mayor, who said in an email that the public inquiry would "give the opportunity for council to simply justify the 'negative press' that it has been experiencing over the past few months".

"It is a great idea to have the inquiry undertaken, as any 'wrong doings' by a particular councillor or member of the council staff should be sacked immediately as the council and greater community should not suffer due to a consequence of other members' poorly guided actions," Cr Mehajer said.

Mr Toole said that if the council could not make a convincing case to remain in operation, an administrator would be appointed.

"I have serious concerns about Auburn City Council's perceived decision-making in relation to planning and development matters and the appearance that those decisions may have delivered an inappropriate benefit to some councillors," Mr Toole said.

The leader of the NSW Opposition and state MP for Auburn, Luke Foley, welcomed the decision, calling the council a "laughing stock" and a "rotten borough".

Mr Foley accused the Baird government of dragging its feet on sacking the council - a fact he said was linked to the Liberal Party's ties to councillor and former mayor Ronney Oueik, who is an ally of Cr Mehajer, a developer and was the Liberal candidate for the seat of Auburn.

"These characters are [Premier Mike] Baird's allies. Mr Baird should answer some questions about his political relationship with Mr Oueik.

"Mr Baird chose twice in the last 72 hours of the [March 2015 state election] campaign to stand next to Mr Oueik. The Liberal Party should have a look at its councillors and decide whether they are fit and proper representatives."

Mr Foley has previously been accused by Auburn councillor Irene Simms of being "silent for too long" on problems in the council.

Cr Oueik could not be contacted for comment. Mr Baird has declined to comment.

The ALP has itself faced a difficult battle with its own former party member, Cr Hicham Zraika, who was sensationally booted out of the party in December after he was revealed to have been working against the party in key votes. Mr Zraika is appealing that decision.

"I'll note that the party tribunal has decided to expel that gentleman," Mr Foley said.

Dr Bligh Grant from the UTS Institute for Public Policy and Governance said the last local council to be suspended by the state government was Central Darling Shire council in 2013, following a debt crisis.

In 2008, Wollongong and Port Macquarie Hastings councils were suspended and then sacked for corruption and financial mismanagement.

Mr Toole's announcement follows several reports into a complicated network of business interests between Cr Mehajer and several other members of the council involved in property dealings.

The council's mayor, Le Lam, has won strata management contracts for buildings constructed by Cr Mehajer and Cr Oueik.

Cr Lam's brother-in-law, Minh Hua, and Cr Mehajer have also been business partners in a venture that has since declared bankruptcy.

Cr Lam continued to vote on development applications that benefited Cr Oueik and Cr Mehajer without declaring any conflict of interest. She told Fairfax Media she only became aware of the connection between Cr Mehajer and her brother-in-law after reading media reports.

Fairfax Media has also revealed that the council voted to sell Cr Mehajer a prime piece of public land, in the form of a council car park, for $8.5 million despite commissioning a valuation that found it was worth $5 million more.

"I'm pleased about the inquiry," said Cr Simms, who has been one of Cr Mehajer's political antagonists. "But the timing is unfortunate - hearings about [state government plans for amalgamations] are taking place early next month and it's going to be difficult for staff to prepare.

"I'm disappointed, too, that the 'goodies' have to go out with the 'baddies', but that's the way it has to be."

Cr Simms formed a minority bloc of votes, derisively dubbed "the poor four" by Cr Mehajer and his allies, who refer to their own majority grouping as the "super six".

A similar inquiry will be held into North Sydney Council, to be led by Thomas Howard, SC. That council is not facing the same threat of immediate suspension as Auburn, but could still be dismissed or face a lesser punishment, depending on Mr Howard's findings.

Mr Toole cited poor relationships between councillors, "conflict" and "dysfunction" as the need to hold the inquiry.

Scandals, conflict and petty intrigues dogged North Sydney Council for much of 2014. The council was even forced to hire an "organisational psychologist".

Mayor Jilly Gibson initiated, then dropped, a restraining order against a fellow councillor. Council spent more than $120,000 on that and other law suits initiated by its own mayor.

Fairfax revealed that Cr Gibson took receipt of a potentially illegal donation from a pub baron that she said was actually payment for tickets for a raffle of one of her paintings.

A total of 26 "code of conduct" complaints were made against North Sydney councillors in 2013/14, the most of any council in the state.

It is not the first time the state government has moved against North Sydney Council.

In 2014, Mr Toole gave it two weeks to show cause for why it should not be suspended.

But after council threatened legal action, Mr Toole said he was "encouraged to see that North Sydney Council is determined to improve".

Cr Gibson is a political independent and recently formed her own political party - not without some controversy and further allegations of conflict of interest - but she is understood to have close links to many prominent members of the NSW Liberal Party.

Mr Toole said the dual inquiries would run independently of the state government's plans to merge Sydney councils.

Under those plans, Auburn would be merged with Holroyd Council and take in parts of Parramatta. North Sydney would be merged with Willoughby.