The Clayton Utz report, obtained by Fairfax Media, recommends the government establish a special commission of inquiry into the decision.

Mr Macdonald, who resigned from Parliament last year over an expenses scandal, announced approval of the exploration licence to Doyles Creek Mining, chaired by John Maitland, who had an 11 per cent stake, by media release on Christmas Eve 2008.

The licence was not put to tender, ignoring departmental advice and sparking accusations that it was a favour for Mr Maitland, a former national secretary of the Construction, Forestry, Mining and Energy Union.

The government argued there was a community benefit as the department specified that Doyles Creek must be a ''training mine'' to improve worker safety. In February last year NuCoal Resources bought Doyles Creek Mining and listed on the stock exchange with a market value of $100 million, eventually inflating the value of Mr Maitland's stake to about $10 million.

The report says Doyles Creek, in the upper Hunter, is classified as a ''major stand-alone area'', meaning it contains sufficient coal to support a new mine. Under departmental guidelines, licences for such areas must be subject to a competitive tender or expressions-of-interest process.

It rebuts claims by Mr Macdonald that he invited Mr Maitland to apply for a licence at the advice of the department. ''The evidence suggests the invitation of 21 August 2008 by the minister was written without the department's knowledge or encouragement,'' it says.

The report highlights an email on December 23 from Mr Macdonald's then chief-of-staff, Jamie Gibson, to the department requesting information about ''how good it will be''.

''Upstairs have seen it and are having a bit of a panic,'' it says. The report presumes ''upstairs'' refers to the premier's office.

The Clayton Utz report finds a report commissioned by the former Labor government that cleared Mr Macdonald was flawed. It also finds key documents are missing from the department's files and concludes a special commission of inquiry should be established.

''We consider that, in light of the facts … (as presently known) there is a circumstantial case of wrongdoing and breach of public trust,'' it says.

A government source said that while such an inquiry had not been ruled out the government was likely to refer the matter to the Independent Commission Against Corruption.