Bairstow and Others v Queens Moat Houses Plc

JurisdictionEngland & Wales
CourtCourt of Appeal (Civil Division)
JudgeLORD JUSTICE ROBERT WALKER,LORD JUSTICE SEDLEY
Judgment Date17 May 2001
Neutral Citation[2001] EWCA Civ 712
Date17 May 2001
Docket NumberCase No: A2/2000/0638/0639/0640

[2001] EWCA Civ 712

IN THE SUPREME COURT OF JUDICATURE COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM THE HIGH COURT OF JUSTICE

QUEENS BENCH DIVISION (NELSON J)

Royal Courts of Justice

Strand, London, WC2A 2LL

Before:

The Vice-chancellor

Lord Justice Robert Walker

Lord Justice Sedley

Case No: A2/2000/0638/0639/0640

Bairstow & Ors
Appellants
and
Queens Moat Houses Plc
Respondent

Mr C Purle QC (instructed by Gouldens for the first appellant Mr Bairstow)

the second and third appellants Mr Marcus and Mr Porter in person

Mr D Richards QC and Mr P Downes (instructed by Allen & Overy for the respondent)

LORD JUSTICE ROBERT WALKER

Introduction

1

The background to this appeal is very clearly summarised in the judgment of Rix LJ given on 26 October 2000 when this court (Simon Brown and Rix LJJ) gave permission to appeal, on strictly limited grounds, against orders of Nelson J made on 23 September 1999. The appellants are three former directors of Queens Moat Houses plc ("Queens Moat"): Mr John Bairstow (who was chairman and managing director), Mr Martin Marcus (who was deputy chairman and joint managing director) and Mr Alan Porter (who was assistant finance director). Mr David Hersey, the former finance director, was a party to the first-instance litigation but is not a party to the appeals. The same is true of the trustees of Mr Bairstow's occupational pension scheme.

2

The brief summary that follows is based on the judgment of Rix LJ, to which reference may be made for further detail. In 1993 the four directors named above ("the former directors") were dismissed by Queens Moat and brought separate proceedings against Queens Moat for wrongful dismissal. This followed a major crisis in the financial affairs of Queens Moat and its group of companies, which had carried on a rapidly-expanding hotel business both in the United Kingdom and elsewhere.

3

Queens Moat defended the proceedings brought by the former directors on the grounds that they had between 1991 and 1993 committed serious breaches of contractual, fiduciary and statutory duties as directors of Queens Moat. Queens Moat counterclaimed under various heads, the most important of which (and the only head directly relevant to this appeal) being a claim for payment to the company of preference and ordinary dividends paid out on the strength of the company's statutory accounts for 1990 and 1991 (Queens Moat's accounting date was at all material times the 31 st December).

4

After a trial spread over about a year (during which the former directors appeared in person) Nelson J handed down a judgment in July 1999 ("the main judgment") dismissing the claims for wrongful dismissal and making findings of fact relevant to the counterclaim. In September he heard three days of further argument at which Mr Bairstow and Mr Marcus were represented by leading counsel and in December 1999 Nelson J handed down two further judgments, one relating to the counterclaim for payment of dividends ("the dividends judgment") and the other relating to costs (the former directors other than Mr Hersey were ordered to pay costs on the indemnity basis; Mr Hersey was ordered to pay them on the standard basis).

5

The effect of the order on the dividends counterclaim was that the former directors were jointly and severally liable to pay to Queens Moat, with interest, the sum of £26.728m being the aggregate of ordinary dividends paid out on 28 May 1992 (a final dividend of 1.54p per share for 1991 amounting to £13.834m) and on 23 October 1992 (an interim dividend of 1.395p per share for 1992 amounting to £12.894m). The judge declined to make an order for payment in respect of any ordinary dividends paid out during 1991 (the final dividend for 1990 of 1.40p per share, amounting £12.460m, paid on 29 May 1991 and the interim for 1991 of 1.342p per share, amounting to £12.048m, paid on 21 October 1991) or any preference dividends paid at any time. There are respondent's notices seeking to vary the judge's order in relation to (i) dividends received by the former directors personally between May 1991 and January 1993 and (ii) seven preference and ordinary dividends paid between October 1991 and January 1993.

6

7. At 1 January 1990 Queens Moat had an allotted and fully-paid capital of approximately 727m ordinary shares of 5p each and 24m 7 per cent convertible cumulative redeemable preference shares of £1 each. At 1 January 1991 the comparable figures were 890m and (as a result of the conversion of 7 per cent preference shares) 20m. At 1 January 1992 the comparable figures were 898m and 19m. Moreover during 1991 Queens Moat made a rights issue of approximately 189m 7.5 per cent convertible cumulative redeemable preference shares of £1 each, which first ranked for dividend on 21 October 1991.

8

Although this appeal is directly concerned only with the dividends which Queens Moat claims were paid unlawfully, it will be necessary to make some reference to the judge's findings in his main judgment (running to nearly 500 pages) which he handed down in July 1999. Nelson J found that all four former directors had committed serious breaches of their contracts and had been guilty of gross misconduct and wilful neglect.

9

In relation to the all-important statutory requirements that individual company accounts and consolidated group accounts shall give "a true and fair view" (see ss.226(3) and 227(3) of the Companies Act 1985 as amended "the Act" set out below) the judge found, in Rix LJ's summary, that the former directors

"had each been responsible for the fact that the company's 1991 accounts did not present a true and fair view. Mr Bairstow and Mr Marcus had signed them, and Mr Porter and Mr Hersey had prepared them. Instead of published pre-tax profits of some £90 million for the year, a true and fair view ought to have limited profits to some £32 million only. He also found that in 1992 and the first three months of 1993 the claimants had dishonestly sought to foster false expectations of annual profits for 1992 of around £80/85 million, when in truth underlying profits were running at a very much lower level: so much so that, without exceptional or extraordinary profits, or artificial profits created by dubious or dishonest transactions, the company's profits would have turned out to be plus or minus zero. Ultimately, on 1 April 1993 the company had to ask for its shares to be suspended. The 1992 accounts were not completed until 1994, when the company had long been under new management."

10

This court gave permission to appeal on the limited grounds mentioned in paras 51, 52 and 53 of the judgment of Rix LJ. Those grounds are, in brief summary, the contention that directors' liability to restore unlawfully-paid dividends arises only in the case of an insolvent company (since otherwise shareholders might get a windfall by receiving the same dividend twice); the significance of a sufficiency of distributable profits in the group (although not in Queens Moat, the holding company); and (following on from the last point) the judge's exercise of his discretion to grant relief under s. 727 of the Act. This court specifically refused permission to appeal against the findings of breaches of duty and the former directors' responsibility for the deficiencies of the 1991 accounts.

11

At the appeal hearing Mr Bairstow was represented by Mr Charles Purle QC. Mr Marcus and Mr Porter appeared in person. Queens Moat was represented by Mr David Richards QC and Mr Paul Downes.

The statutory provisions

12

13. In the course of the appeal hearing reference was made, naturally enough, to a large number of provisions of the Act. At this point it is convenient to set out or summarise the provisions which are of central importance to the appeal; some other provisions of less importance are referred to later. Part VII of the Act (ss.221–262A) is concerned with accounts and audit. Part VIII (ss.263–281) is concerned with distribution of profits and assets. The statutory safeguards in Part VIII are closely linked to the statutory requirements in Part VII.

14

Section 226 (duty to prepare individual company accounts) provides as follows:

"(1) The directors of every company shall prepare for each financial year of the company -

(a) a balance sheet as at the last day of the year, and

(b a profit and loss account. Those accounts are referred to in this Part as the company's "individual accounts".

(2) The balance sheet shall give a true and fair view of the state of affairs of the company as at the end of the financial year; and the profit and loss account shall give a true and fair view of the profit and loss of the company for the financial year.

(3) A company's individual accounts shall comply with the provisions of Schedule 4 as to the form and content of the balance sheet and profit and loss account and additional information to be provided by way of notes to the accounts."

Subsections (4) and (5) contain further provisions not directly relevant to these appeals. Section 227 (duty to prepare group accounts) provides as follows:

"(1) If at the end of a financial year a company is a parent company the directors shall, as well as preparing individual accounts for the year, prepare group accounts.

(2) Group accounts shall be consolidated accounts comprising -

(a) a consolidated balance sheet dealing with the state of affairs of the parent company and its subsidiary undertakings, and

(b) a consolidated profit and loss account dealing with the profit or loss of the parent company and its subsidiary undertakings.

(3) The accounts shall give a true and fair view of the state of affairs as at the end of the financial year, and the profit or loss for the financial year, of...

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