Queens Moat Houses plc, Re [2004] EWHC 1730 (Ch)

The Secretary of State sought disqualification of Mr Bairstow, former chairman of Queens Moat Houses plc, for approving grossly misleading financial statements overstating profits by tens of millions of pounds. Despite no dishonesty being alleged, the court found gross negligence in failing to supervise delegated accounting functions and disqualified him for six years.

Facts

Queens Moat Houses plc (QMH) was a large listed hotel company founded by John Bairstow in 1969. Mr Bairstow served as Chairman and executive director from 1969 until 1993. In April 1992, QMH published accounts showing profits of £90.4m for 1991. In August 1992, interim results showed profits of £38.1m. However, in October 1993, QMH announced that its 1991 results needed restating to show a loss of £56.3m, and 1992 results showed a loss of £1,040.5m.

The Secretary of State appointed inspectors to investigate QMH’s affairs. Based on their findings, the Secretary of State alleged Mr Bairstow breached his duties as director by approving accounts that did not give a true and fair view, by misrepresenting QMH’s financial position in Chairman’s Statements, by misleading bankers during credit facility negotiations, and by causing unlawful dividend payments.

Issues

Primary Issues

1. Whether Mr Bairstow was in breach of his duties as director in approving misleading financial statements.

2. Whether Mr Bairstow could rely on delegation to the Finance Director and the auditors’ clean certificate as a defence.

3. Whether any established breaches rendered Mr Bairstow unfit to act as a company director.

Judgment

Sir Donald Rattee found substantially all grounds of unfitness established against Mr Bairstow. The court found serious defects in the 1991 accounts and 1992 interim results, including improper treatment of turnover, incentive fee income, interest capitalisation, and property transactions that materially overstated profits.

“Directors have, both collectively and individually, a continuing duty to acquire and maintain a sufficient knowledge and understanding of the company’s business to enable them properly to discharge their duties as directors.”

The court rejected Mr Bairstow’s defence that he was entitled to rely entirely on the Finance Director and auditors:

“the exercise of the power of delegation does not absolve a director from the duty to supervise the discharge of the delegated functions.”

Applying the dual objective and subjective test from Re D’Jan of London, the court held that as Chairman and most senior executive director, Mr Bairstow had particular responsibilities. Many accounting defects required no accountancy expertise to identify, merely “a prudent businessman’s sense of reality.”

Key Findings

The court found Mr Bairstow should have been aware of misleading turnover figures, improper treatment of MIS incentive fees, wrongful interest capitalisation, and false property profit figures. The combined effect of improper accounting treatment of Norfolk Capital assets and the Vaux share sale alone overstated profits by nearly £30m, over 30% of reported profits.

Implications

This case reinforces that directors cannot escape liability by delegating accounting responsibilities, particularly where matters should have been apparent to a reasonably diligent person with the director’s knowledge and experience. Senior executive directors bear heightened responsibility proportionate to their status and remuneration. The Chairman bears particular responsibility for statements made in his name to shareholders and the market.

The case emphasises that gross negligence in oversight of delegated functions, even without dishonesty, can constitute unfitness warranting disqualification. It demonstrates that reliance on auditors’ clean certificates does not absolve directors of their statutory duty to prepare true and fair accounts.

Verdict: Mr Bairstow was found unfit to be concerned in the management of a company due to gross negligence in performing his duties as director. A disqualification order of six years was made against him.

Source: Queens Moat Houses plc, Re [2004] EWHC 1730 (Ch)