Cattles set for legal fight with former auditors

The Batley-based company, which lent to people with poor credit ratings, was nearly forced into administration by a long-running scandal which saw its bad debts massively under-stated.

Cattles and its subsidiary Welcome Financial Services, which are being wound down by creditors, recently held preliminary legal hearings at the High Court in London over access to documents.

Mr Justice Eder granted Cattles access to some of PwC’s audit documents, as it weighs up a claim against the accountancy giant.

Cattles claims “there was a gross misstatement at the heart of the accounts”, according to Mr Justice Eder’s judgement over costs arising from the preliminary hearing.

The company claims that between 2005 and 2007, loans in long-term arrears, which should have been treated as impaired, were instead classed as “rewrites” and “deferments”, according to Mr Justice Eder.

Cattles alleges these soured loans which were “ostensibly” placed into groups for debt collection, but were in reality just “buckets for bad debt”, added the judge.

“Once the misstatement became clear, the group could not continue trading and became worthless,” said Mr Justice Eder.

Cattles has previously said it is considering “all possible avenues for potential claims against third parties”.

PwC is also being probed by the accountancy watchdog, the Accountancy and Actuarial Discipline Board. The Financial Services Authority is also understood to be investigating the demise of Cattles.

Together with HBOS and Bradford & Bingley, Cattles has been one of Yorkshire’s biggest business failures in recent years.

PwC said in a statement: “We are not aware of a claim against us. In respect of the discovery order, it is a preliminary process for information sharing between both sides. As previously stated, we will continue to vigorously defend our work.”

Cattles was awarded some legal costs relating to the dispute over access to documents. However, no timescale is thought to have yet been put on legal action against PwC, nor has the value of any future claim been established.

Cattles took PwC to court to get access to audit papers for 2005-2008 which dealt with provisions for bad debts. Cattles also wanted documents containing all communication between PwC and its audit committee. The lender also wanted to see all communication between PwC and Cattles’ employees regarding impairment, deferment or rewrites.

Cattles, founded in Hull in 1927, first revealed holes in its accounts in early 2009, when it discovered a “breakdown” in the way it dealt with bad debts. The company abandoned plans to obtain a banking licence and admitted it had hugely understated provisions it should have made for bad loans.

Cattles sacked six directors, suspended its shares, and chief executive David Postings stood down. It was forced to backdate losses of £764.6m for 2008 and £685.4m in 2009. Investors were told its accountancy problems have been traced back as far as 2002 and possibly earlier.

The company, which had debts of about £2.45bn, finally agreed a restructuring deal between banks, bondholders and shareholders earlier this year, with banks’ claims taking priority. It left the stock market in March and is being wound down under a scheme of arrangement, supervised by restructuring group Zolfo Cooper. Cattles has shrunk its workforce from 5,000 in early 2009 to about 1,500.

Cattles declined to comment.

Cattles was represented by Ashurst LLP and PwC was represented by Taylor Wessing LLP at the document disclosure hearings.

The rise and fall

Cattles traces its roots back to Hull, when Joseph Cattle founded the business as a retailer in 1927. It extended into weekly home collected credit and in 1963 Cattles listed on the London Stock Exchange.

During the 1960s and 1970s the group expanded by acquisition, buying many similar home credit businesses. In the early 1980s its home credit business was rebranded Shopacheck. In 1994 Cattles bought Welcome Financial Services.

In April 2008, Cattles successfully launched a £200m rights issue to fund a banking licence application. But in 2009 it uncovered accounting flaws, forcing it to backdate huge losses and leave the stock market in 2011.