Sue Davenport, who used to run Leeds City Credit Union (LCCU), was detained by Fraud Squad detectives yesterday morning and taken for questioning before being bailed.

Mrs Davenport was forced to resign in 2008 after a Yorkshire Post investigation into a catalogue of mismanagement at LCCU. The credit union then commissioned forensic accountants to carry out an internal inquiry, the findings of which were passed to West Yorkshire Police last summer.

The police inquiry has focused on provisions of loans, accounting practices and use of the company credit card.

Mrs Davenport was due to be arrested earlier this year but was unavailable for questioning because she has spent the last couple of months in California.

Her extended trip to the USA infuriated LCCU because Mrs Davenport was declared bankrupt last June. Her debts included tens of thousands of pounds owed to her former employer in outstanding loans which are unlikely to ever be repaid.

LCCU president Michael McGowan, a former Leeds Euro-MP, said the credit union referred the findings of its own forensic investigation to the police when certain matters came to light in relation to a former employee.

"The credit union is now under new management with both a strengthened board and professional management team. The investigation is now in the hands of West Yorkshire Police and I thank them for their support," he said.

The credit union, which has over 20,000 members and manages funds of around £30m, needed a £4m bail-out from the public purse last year after its accounts showed that more than £2m of bad or so-called "toxic" debts had remained hidden for four years.

Leeds City Council made an emergency £2m loan to LCCU to keep it afloat, the rest coming from the Department for Work and Pensions.

Mrs Davenport could not be contacted for comment yesterday.