Bairstow v Queens Moat Houses plc [2001] EWCA Civ 712

Former directors of Queens Moat Houses plc appealed against orders making them liable for unlawful dividends paid based on accounts that did not give a true and fair view. The Court of Appeal dismissed their appeal and allowed the company's cross-appeal, holding directors accountable for dividends paid on dishonestly prepared accounts regardless of company solvency.

Facts

Queens Moat Houses plc was a hotel company that experienced a major financial crisis in 1993. Four former directors, including Mr Bairstow (chairman), Mr Marcus (deputy chairman), and Mr Porter (assistant finance director), were dismissed and brought proceedings for wrongful dismissal. Queens Moat defended and counterclaimed for payment of dividends allegedly paid unlawfully between 1991 and 1993.

Nelson J at first instance found that the 1991 accounts did not present a true and fair view, overstating pre-tax profits at £90 million when the true figure was approximately £32 million. The former directors were found to have dishonestly prepared false accounts through various improper transactions including front-loading incentive fees, inconsistent treatment of sale and leasebacks, and undisclosed property sales.

Issues

Principal Legal Questions

1. Whether directors’ liability to restore unlawfully-paid dividends arises only where the company is insolvent

2. Whether the availability of distributable profits within the group (though not the holding company) affected liability

3. The proper measure of compensation for breach of fiduciary duty

4. Whether relief should be granted under section 727 of the Companies Act 1985

Judgment

The Flitcroft Principle

Robert Walker LJ rejected the argument that directors are only accountable for unlawful dividends when the company is insolvent. He stated:

“If directors cause a company to pay a dividend which is ultra vires and unlawful because it infringes these rules, the fact that the company is still solvent should not be a defence to a claim against the directors to make good the unlawful distribution.”

Group Reserves Argument

The court rejected the submission that directors could rely on distributable reserves within subsidiaries rather than the holding company’s own accounts. The strict mandatory character of section 270 of the Companies Act meant directors could not go behind the figures disclosed in properly prepared accounts.

Relief under Section 727

The court held that honesty and reasonableness are absolute preconditions for relief. Robert Walker LJ stated:

“It was not open to the judge, having found that the former directors were guilty of dishonestly preparing false accounts for 1991, to find that they had acted honestly and reasonably in paying any dividends on the strength of those accounts.”

The judge’s grant of relief for preference dividends was overturned as involving an impossible conceptual inconsistency.

Implications

This decision confirms that the statutory regime for distributions under Part VIII of the Companies Act 1985 provides comprehensive protection for both creditors and shareholders. Directors cannot escape liability for unlawful dividends simply because the company remains solvent. The requirement that distributions be justified by properly prepared accounts cannot be circumvented by informal reliance on group resources or the Duomatic principle. The case reinforces that dishonest directors cannot obtain relief under section 727, regardless of whether the type of dividend might otherwise have been payable by honest directors on true accounts.

Verdict: The appellants’ appeal was dismissed. Queens Moat’s cross-appeal was allowed. Judgment was entered in favour of Queens Moat in the sum of £78,565,710.56. Leave to appeal to the House of Lords was refused but a stay was granted pending any application for permission to appeal.

Source: Bairstow v Queens Moat Houses plc [2001] EWCA Civ 712