Bairstow & Ors v Queens Moat Houses Plc

A distribution must be justified by the company’s own properly prepared relevant accounts. The strict statutory regime in Part VIII of the Companies Act 1985 cannot be avoided by informal shareholder assent or by treating profits in wholly owned subsidiaries as if they had been distributed to the parent.

Directors who deliberately cause unlawful dividends to be paid from funds under their stewardship must make good the payments. A solvent company may recover notwithstanding that a later lawful dividend might benefit some of the same shareholders. Relief under section 727 requires honesty and reasonableness. Directors who dishonestly prepared false accounts cannot satisfy those conditions when paying dividends on the strength of those accounts.

Three former directors of Queens Moat Houses plc appealed from orders of Nelson J following lengthy wrongful-dismissal proceedings and the company’s counterclaim. The judge had found serious breaches of duty and that the 1991 accounts did not give a true and fair view.

On the counterclaim, the judge held that nine dividends paid between 1991 and 1993 were unlawful. He ordered repayment of two ordinary dividends paid on the basis of the 1991 accounts, but granted statutory relief for several preference dividends and an earlier interim ordinary dividend. The former directors challenged liability for unlawful dividends and the refusal of relief. Queens Moat cross-appealed against the relief granted.

The central issues were the effect of the statutory accounts regime, whether a solvent company could recover unlawful dividends from its directors, the measure of recovery, and the availability of relief under section 727.

1. The appeal was dismissed and the cross-appeal allowed in part. Robert Walker LJ gave the judgment, with which Sedley LJ and the Vice-Chancellor agreed. Judgment was entered for Queens Moat for £78,565,710.56.

2. The statutory scheme required a distribution to be justified by Queens Moat’s own relevant accounts. The scheme in Parts VII and VIII of the Companies Act 1985 was strict and mandatory. Informal shareholder assent under Re Duomatic Ltd [1969] 2 Ch 365 could not cure an unlawful distribution. Profits held by wholly owned subsidiaries could not be treated as though they had been paid to the parent; at most, their availability could bear on discretionary relief.

3. The principle in Re Exchange Banking Co, Flitcroft's Case (1882) 21 Ch D 519 was not confined to insolvent companies. A company is separate from its shareholders. Directors who improperly distribute its assets are liable to restore them even if the company remains solvent. The prospect that some shareholders might later receive a lawful dividend did not answer the company’s claim.

4. The former directors’ trustee-like stewardship of the company’s funds distinguished their position from the solicitors’ transactional breach considered in Target Holdings v Redferns [1996] AC 421. The unlawful dividends had not been reimbursed. The directors could not defeat recovery by asserting that dividends could and would have been paid lawfully by another route.

5. Relief under section 727 required proof of honesty and reasonableness. The judge’s view that this was essentially subjective was wrong, particularly as to reasonableness. Having found that the former directors dishonestly prepared the false 1991 accounts, he could not consistently find that they acted honestly and reasonably in paying any dividends on those accounts. Relief was therefore unavailable for the dividends paid after the misleading 1991 interim results, save insofar as the corrected calculation showed that particular payments were not unlawful.

• Court of Appeal (Civil Division): in [2001] EWCA Civ 712, dismissed the former directors’ appeal and allowed Queens Moat’s cross-appeal in part.
• High Court of Justice, Queen’s Bench Division (Nelson J): dismissed the former directors’ wrongful-dismissal claims, made findings supporting Queens Moat’s counterclaim, and ordered repayment of two unlawful ordinary dividends while granting section 727 relief for several other dividends.