CAT's are actually quite fragile and several things could have happened to it.
One is being hit/knocked would cause the materials inside to fracture and crumble away therefore rendering the CAT inefficient and ultimately cause it to become useless.
Another is thermal shock. (ie cold water splashed onto the CAT, when driving through a ford/deep puddle etc) this would also cause the materials inside to shatter/fracture.
Once a CAT starts to fail the engine management will notice a deteriation in emisions and adjust the fuel/air mix to suit. Overtime this can lead to inefficient running and a decrease in mpg.
From what I recall, CAT systems for the 1.8's are difficult to come by. It is possible to get an aftermarket one fitted but I do not know of costs involved.
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