## Facts

- Queens Moat Houses plc, a listed holding company, approved and paid ordinary and preference dividends in 1991–1992 based on statutory accounts for 1990–1991.
- The 1991 accounts materially overstated profits and asset values and did not show sufficient distributable profits to support certain ordinary dividends.
- After a 1993 financial crisis and the directors’ dismissals, the former directors sued for wrongful dismissal; the company defended and counterclaimed to recover dividends alleged to be unlawful distributions contrary to Companies Act 1985 capital maintenance rules.
- The High Court dismissed the wrongful dismissal claims, held the 1992 ordinary dividends unlawful for lack of distributable profits, and ordered three former directors to repay about £26.7 million jointly and severally.
- The High Court granted discretionary relief under Companies Act 1985 § 727 for the 1991 ordinary dividend and preference dividends, but refused § 727 relief for the 1992 ordinary dividends.
- The former directors appealed on limited grounds focused on the basis and extent of liability for unlawful dividends, the relevance of group profits, quantification, and § 727 relief.

## Issues

1. Whether directors’ liability to restore unlawful dividends depends on the company’s insolvency or applies even where the company is solvent.
2. Whether group-level profits can justify dividends declared by a holding company, or whether only the distributing company’s own distributable profits in its relevant accounts count.
3. Whether directors are liable only for the “excess” above what could hypothetically have been paid, or for the full amount of the unlawful dividend.
4. Whether the trial judge erred in refusing Companies Act 1985 § 727 relief for the 1992 ordinary dividends.

## Decision

- The Court of Appeal dismissed the directors’ appeals and left the repayment order in place.
- Directors who authorize an unlawful distribution may be required to restore it to the company regardless of solvency; insolvency is not a precondition to liability.
- The legality of a dividend by a holding company is determined by that company’s own distributable profits shown in properly prepared relevant accounts, not by consolidated/group profitability or hypothetical intra-group transfers.
- The company may recover the full amount of an unlawful dividend from responsible directors, not merely any “excess” above a theoretical lawful level.
- The refusal of § 727 relief for the 1992 ordinary dividends was within the trial judge’s discretion and disclosed no appellate error.

## Legal Principles

- A dividend paid without sufficient distributable profits is an unlawful return of capital under the statutory distribution regime, giving rise to director liability to restore funds to the company.
- Compliance with the distribution rules is tested by reference to the distributing company’s own relevant accounts; subsidiary profits do not become parent profits unless lawfully transferred and reflected in the parent’s accounts.
- Arguments that repayment creates a shareholder “windfall” do not defeat the company’s claim; the company’s separate legal personality makes the current shareholder mix legally irrelevant to director liability.
- Where directors procure an unlawful dividend, restitution is ordinarily for the whole unlawful payment; potential contribution claims against recipients are distinct and do not reduce the company’s entitlement in the director action.
- Relief under Companies Act 1985 § 727 is discretionary and depends on whether the director acted honestly and reasonably and ought fairly to be excused; appellate courts will not interfere absent misdirection or an unreasonable exercise of discretion.

## Conclusion

The Court of Appeal upheld full restoration liability against directors for unlawful 1992 dividends, rejecting solvency, group-profits, and “excess only” defenses, and confirming that § 727 relief is a narrow, fact-driven discretion properly denied where directors were responsible for accounts that failed to justify the distributions.


Bairstow v. Queens Moat Houses plc, [2001] EWCA Civ 712 (Eng. C.A. 2001)