Bairstow v. Queens Moat Houses plc

John Bairstow, Martin Marcus, Alan Porter, and David Hersey (former directors) (plaintiffs) were directors of Queens Moat Houses plc (QM) (defendant). QM fired the former directors, who then sued for wrongful dismissal. QM counterclaimed that the former directors caused QM to pay improper preference and ordinary dividends in 1991 and 1992 based on QM’s 1990 and 1991 accounts. After a trial, the court concluded that the former directors had breached their contracts with QM, committed gross misconduct, and willfully neglected their duties. In particular, the trial court found that (1) QM had insufficient distributable profits in 1990 and 1991 to support ordinary dividends in 1991 and 1992 and (2) QM’s 1991 financial statements did not provide a true and fair view of its financial condition. The trial court further concluded that pursuant to § 727 of the Companies Act 1985, the former directors were entitled to relief from liability for the 1991 ordinary dividend and the preference dividends because they acted honestly and reasonably with respect to them. The trial court denied § 727 relief for the 1992 ordinary dividends, ruling that the former directors did not act honestly and reasonably with respect to them. Accordingly, the trial court (1) dismissed the wrongful-dismissal claims, (2) ruled that the former directors were liable to QM for the 1992 ordinary dividends, and (3) ruled that the former directors were not obliged to repay QM for the 1991 ordinary dividends or any preference dividends. Bairstow, Marcus, and Porter appealed, arguing that (1) any distributable-profits deficiencies as depicted in QM’s financial statements were technicalities, especially because QM’s wholly owned subsidiary had sufficient profits to support the dividends; (2) directors could not be compelled to reimburse a solvent company for improperly paid dividends; (3) QM suffered no damage because it would have lawfully paid the same 1992 dividends if its subsidiaries paid their distributable profits to QM in 1991; and (4) Bairstow, Marcus, and Porter should be relieved from personal liability for the 1992 dividends under § 727. QM cross-appealed, arguing that the former directors were not entitled to any § 727 relief because they engaged in improper accounting when QM paid all the relevant dividends.