Gaping hole discovered in accounts of Reject Shop: Legal action likely against some directors over 'misrepresentation' during bid

THE discovery of a pounds 2.75m hole in the accounts of Reject Shop is likely to lead to legal action against some of the former directors of the troubled retail chain.

Upton & Southern, which bought Reject Shop for pounds 2.3m in February, said yesterday it had prepared a report on 'missing stock' for its lawyers, Nabarro Nathanson, and would follow whatever course of action they recommended.

Jeffrey Gould, Upton's chief executive, said the company had been a victim of 'misrepresentations' at the time of its bid. 'The problem is the overstatement of certain stock assets,' he said. Not all the directors had made the representations in question, he added.

The news sent Upton's shares into a tailspin and they closed down 12p at 14p. The company is preparing a rescue rights issue, which it hopes will be in place by the end of the month, but said it continued to operate within its existing facilities and retained the support of its banks.

The bulk of the shares in Reject Shop, about 83 per cent, were held by its two founder directors at the time of the offer, Anna Vinton and Anthony Hawser.

Both recommended that shareholders accept the offer, which represented a discount of about 60 per cent to its market capitalisation at the time.

Following the bid, which became unconditional in March, Ms Vinton was initially invited to join the Upton board for a fixed term of three years at a salary of pounds 15,000. She resigned 'at her own request' and without compensation in May.

Mr Hawser was employed by Upton as a consultant for six months following the bid for a fee of pounds 25,000. Mr Gould said the contract had been completed.

Ms Vinton and Mr Hawser were unavailable for comment.

Upton, which at the time of the offer was smaller than Reject Shop (it had only five stores compared with Reject Shop's 31 and its market capitalisation was only just over pounds 5m), said that the stock problem meant that Reject Shop's losses for the year ended 31 July would be significantly greater than expected.

Mr Gould said Reject Shop had always been envisaged as a 'turnaround situation' and was beginning to see an upturn in sales as the steps taken by the new management began to have effect.

'Sales have improved dramatically over the last two or three months. It is very encouraging - they are up by 50 per cent,' he said.

The company has held talks with its institutional investors about its planned rights issue, and said they were supportive.

The hope is that it will be fully underwritten and the company expects to make a profit this year if the rights is successful.

It will be Upton's second rights issue this year. A pounds 4.5m rights issue at 30p per share was made at the time of the original offer for Reject Shop.