Store's customers pay price of Power failure

To claim the cashback, documentation had to be sent in within a 30-day window after the warranty had elapsed. Scottish Power reckoned many would forget or lose the paperwork. In any case, the five years interest should cover repairs, while anyone using the cover would lose cashback rights.

Some cynical shoppers questioned what would happen if the firm holding their money was to disappear. This had already happened to a few schemes. And it was to happen to Texas Homecare - the home improvement chain had a controversial cashback scheme with kitchen furniture.

The standard consumer advice was to look at the quality of the firm behind the promises. But because even big groups could collapse, the essential was an independent trustee who would hold the cash in a ring-fenced fund until all potential liabilities had been met.

Dudley Yorke, from Manchester, bought a £300 dishwasher in late 1998 from a Scottish Power store in Lancashire. He also bought a five-year extended warranty for a further £129.99.

"There was no way I would normally have bothered - the cost was just out of all proportion to the risk. But with the cashback, I thought it was a reasonable deal. I also believed I was dealing with Scottish Power which I saw as a large and very solid company. Its brand name and logo were prominent on the literature," says Professor Yorke, who specialises in educational research.

Although the literature is full of references to it, Scottish Power says it only acted as "an agent".

It compares itself with the likes of Tesco or Sainsbury which sell branded travel, household, motor or pet cover on behalf of third party insurers. But this sidesteps an essential difference. Tesco Financial Services does not sell cover related to baked beans. Electrical retailers sell warranty plans directly linked to goods in their stores.

Professor Yorke recently tried to get his warranty cash back - his dishwasher had behaved perfectly. But he failed as PowerPlan had collapsed into administration.

But what Professor Yorke and the 750,000 others did not know was that there was a group of interlocking offshore companies behind the plan. Until early 1998, Scottish Power store warranties were backed by London General Insurance Company, a specialist firm based in Harrow, Middlesex.

London General is part of the massive Aon insurance group. It is a member of the Association of British Insurers and the Insurance Ombudsman Bureau, and is approved by the Department of Trade and Industry. Its policies are covered by the Policyholders Protection Act.

But all that was to change. In late 1997, Scottish Power (and a number of other electrical retailers) was introduced to Cooper Chan, an Isle of Man law firm specialising in tax planning.

The offshore lawyers came up with PowerPlan Company as the pivot of a new extended warranty plan. This promised Scottish Power an even bigger cut of the warranty cake than its then current insurance-based scheme.

Cooper Chan had identified a major profitability weakness of the insurance-based extended warranty - UK insurers could not reclaim VAT on repairs or replacements. Reclaiming VAT would reduce the cost of a £235 replacement TV set to £200.

But offshore tax planning is rarely simple or transparent. The Scottish Power scheme involved a complicated plan whereby the retailer would send 100% of warranty payments to an Isle of Man company, PowerPlan Company Limited. In the August 2000 edition of the PowerPlan leaflet, PowerPlan is shown as having a Kingston-on-Thames, Surrey, address in bold type. There is a small print reference to an Isle of Man address but no statement saying PowerPlan was not connected with Scottish Power.

PowerPlan Company, now in administration, was owned by Court Services, an Isle of Man company. Court was owned by Harbour Protectors, also registered in the island. Harbour's shares are controlled by Hock Chan, a partner in Cooper Chan.

PowerPlan paid Scottish Power (and later PowerHouse) commission of around 35%. Similar arrangements were set up with many other electrical retailers. Scottish Power will not confirm this figure, citing "commercial confidentiality."

PowerPlan customers were told its products were "backed by trust funds held by an independent trustee. The independent trustee is The Royal Bank of Scotland Trust Company (Jersey) Ltd."

But what they were not told was how little of the money went into the trust fund or where the bulk of the money went. The remaining cash was divided up - just 5% stuck with PowerPlan. This was deposited with the independent trustee.

The balance of 95% was, unbeknown to planholders, sent to a Guernsey company - Domestic Appliance Insurance Ltd (DAIL).

The tax-haven based DAIL was owned by the retailer, firstly Scottish Power, and then, after the sale of the Scottish Power stores to PowerHouse in October 2001, by Powerhouse, which renamed it Powerhouse Insurance Ltd.

Jobs & Money asked Scottish Power why it did not ring-fence DAIL to ensure claims and cashbacks would be met. The Glasgow firm says: "DAIL was considered to be fully funded at the time of the sale. It was sold to a company with a sound reputation and one with a track record of managing such arrangements within the retail appliance industry."

But this is of no comfort to Scottish Power customers. Less than two years later - in August 2003 - Powerhouse, and a number of related companies, went into administrative receivership. It had spent most of the cash in Powerhouse Insurance. A separate company, New Powerhouse, owned by New Zealand-based Pacific Retail, subse quently purchased some Powerhouse stores and assets. The independently owned PowerPlan, which legally backed the warranties and cashbacks, also became insolvent in August 2003. Its assets had slumped from £1.8m in April 2001 to just £86,000 shortly before administrators were appointed.

Jobs & Money also asked Scottish Power what had happened to the funds held by the independent trustee whose presence gave comfort to plan buyers.

Scottish Power, using a different version of the consumer booklet, said: "We cannot find this reference. But we understand that some funds are, indeed, held in trust and the administrator of PowerPlan Company is working to access these funds. Scottish Power does not have control over these funds."

The MacDonald Partnership, a London firm of insolvency specialists, is administering PowerPlan.

It has already negotiated a limited repair scheme. But the big expense is the cashback - claims could be £20m or as much as £60m.

Now it is working behind the scenes to see if it can squeeze some cash from those formerly involved in selling and administering PowerPlan. And there could be some good news.

"The administrators are cautiously optimistic of some good news for cashback claimants," says the MacDonald Partnership's Douglas MacDonald.

If you have a claim

PowerPlan has 750,000 potential creditors - ruling out normal communications from the administrators as mailing them all would cost at least £2m.

But if you have a PowerPlan warranty and the appliance breaks down, you may still be able to get goods repaired even if the cashback outlook remains opaque.

Warranty holders have to use independent repair outlets as the central scheme has been shut down.

They then have to send the bill to the PowerPlan administrators, the MacDonald Partnership (tel 0870 160 2324). This firm will send out information packs "to make it as easy as possible to claim."

The Partnership will arrange to reimburse invoices. However, these will only be paid for at a maximum "scale" fee. It may also be suspended from time to time if there are insufficient funds available.

Other schemes operated by the old PowerHouse group include ServicePlus, Extracare and Easycare. ServicePlus is still valid as are most of those from Easycare, and some from Extracare. The powerhouse.co.uk website (from New Powerhouse) has details.