OSAKA (Kyodo) Nozomu Sahashi, former president of bankrupt Nova Corp., was arrested Tuesday on suspicion of misusing some ¥320 million of the company's funds held in reserve for employee welfare programs.

In the hot seat: Former Nova Corp. President Nozomu Sahashi faces reporters last year. KYODO PHOTO

The Osaka Prefectural Police served the warrant for the alleged embezzlement after questioning the 56-year-old Sahashi on a voluntary basis starting in the morning.

Sahashi, who headed what was once Japan's largest English-language school chain, is suspected of diverting the ¥320 million in reserve funds, set up specifically for employee benefits, last July 20 to Nova through an affiliate firm that he effectively owned.

Sahashi allegedly used the money to refund tuition to students who had canceled their contracts.

"The money was used to refund tuition, but I did not misappropriate any for my own interests," Sahashi said in a statement released by his lawyer.

While Sahashi was questioned by police, his lawyer held a news conference in Osaka and criticized the attempt to build an embezzlement case against his client.

Repeating the same line of argument as Sahashi's statement, the lawyer argued that the fund was used to refund tuition fees to students who had canceled their contracts.

"I don't see any logic in claiming that company employees became the victims" of the refund system, he said, suggesting that Sahashi's actions were based on his responsibility as Nova's president and not dictated by personal interest.

The lawyer also said Sahashi has been ready since late May to cooperate with police if summoned for an interview.

The news of police action against Sahashi largely drew a cool response from former employees and teachers, who indicated that it was expected.

The president "never offered an apology to employees" over the firm's collapse, a former Nova employee said. "My impression of Sahashi is that he did whatever he wanted, saying 'that's for the company's sake.' "

He added that the arrest is only the first step in a full investigation into the company's collapse.

Fionna Macrae, an English teacher now working for another language school chain, expressed hope that Sahashi's arrest would uncover Nova's mistreatment of employees and teachers.

Nova faced a liquidity crunch after the government ordered it to suspend some of its operations last June for allegedly lying to prospective clients about tuition charges and also faced lawsuits by clients seeking tuition refunds.

In October, a labour union that includes non-Japanese Nova instructors requested that labor authorities build a criminal case against Sahashi and others at Nova.

Nova's board sacked Sahashi and the company filed for corporate rehabilitation.

Some Nova schools have been taken over by G.communication Co., based in Nagoya.

Established in 1981, Nova at one point had 300,000 students and employed about 4,000 foreign instructors.