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	England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Secretary Of State For Trade And Industry v Bairstow & Ors [2004] EWHC 1730 (Ch) (19 July 2004) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2004/1730.html Cite as: [2004] EWHC 1730 (Ch)

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IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		19th July 2004

Sir Donald Rattee :

 

1. I have before me an application made by the Secretary of State for Trade and Industry under section 8 of the Company Directors Disqualification Act 1986 for an order disqualifying the Defendant John Bairstow from acting as director of a company. The Secretary of State alleges that such an order is appropriate by reason of breaches of his duties as a director of a company called Queens Moat Houses plc.("QMH"). Very regrettably the alleged misconduct of Mr. Bairstow on which the Secretary of State relies all took place more than eleven years ago.
2. QMH, which was, by the dates of the events giving rise to these proceedings, a large listed public company, was founded in 1969 by Mr. Bairstow as Moat House Hotels Ltd. Its shares became listed on the London Stock Exchange in 1972. Mr. Bairstow was Chairman and an executive director of the Company from its foundation in 1969 until 1993. He was also joint Managing Director from 1980 until 4 December 1992.
3. There were originally three other Defendants to the Secretary of State's application under the 1986 Act. They were David Hersey, who was the former Finance Director of QMH, Martin Marcus, who was a former joint Managing Director of the Company, and Allan Porter, who was a former deputy Finance Director of the Company. Of these other Defendants Mr Hersey did not contest the proceedings and was disqualified for eight years by an order made by the Court on 24 July 2000, Mr Marcus gave a disqualification undertaking under section 1A of the 1986 Act as amended for ten years, and Mr Porter did not contest the proceedings and was disqualified for seven years by order made by the Court on 24 July 2000.
4. Mr. Bairstow has contested the proceedings throughout. At the trial before me he appeared in person without the benefit of legal representation. On 16 November 2001 he asked the Treasury Solicitor, on behalf of the Secretary of State, for suggestions as to how the present proceedings might be disposed of summarily, if he were willing to accept disqualification. The Treasury Solicitor suggested that Mr. Bairstow could give an undertaking under section 1A of the 1986 Act as amended, and sent to him a draft of an undertaking which would be acceptable to the Secretary of State. By it Mr. Bairstow would have undertaken not to act as a director of a company for nine years. The undertaking would have been expressed to have been on the basis set out in a schedule to it, which set out the details of misconduct relied on by the Secretary of State in the proceedings.
5. Mr. Bairstow was not willing to give such an undertaking, if it meant he had to admit the alleged misconduct. The Secretary of State was not prepared to accept the undertaking without such an admission. Such insistence by the Secretary of State on an admission of the alleged conduct said to call for disqualification as a term of an undertaking under section 1A of the 1986 Act as amended was sanctioned by the Court of Appeal in Re Blackspur Group plc.(No.3) [2002] 2 BCLC 263.
6. The Secretary of State's application is based on evidence given by one Adrian Burn, a chartered accountant, who, on 12 November 1993, was appointed with Patrick Phillips Q.C. by the Secretary of State under section 432(2) of the Companies Act 1985 to investigate the affairs of QMH.
7. Mr. Bairstow is now a man of 73 years of age. He has very considerable experience as a business man and, in particular, of property investment. In the past he founded not only QMH, which became a very successful hotel operating company, but also an estate agency business which became known as Bairstow Eves, and which also proved extremely successful. However he has no qualification in accountancy.

The Allegations of Unfitness

8. Before setting out the detail of the allegations made by the Secretary of State against Mr. Bairstow, it is convenient to summarise the events leading up to the appointment of the inspectors under section 432(2) of the Companies Act 1985 and the making of the Secretary of State's allegations against Mr. Bairstow. I am indebted for this summary to the very helpful skeleton argument produced by Mr. Todd Q.C., leading counsel for the Secretary of State, at the beginning of the trial. I am satisfied by the evidence adduced by the Secretary of State that it is an accurate summary.

(1) On 30 April 1992 QMH published consolidated accounts of the group of which it was the holding company for the year ended 31 December 1991, which showed profits before tax of £90.4m.

(2) On 12 August 1992 QMH published its interim results for the period 1 January 1992 to 12 July 1992, showing profits before tax of £38.1m.

(3) In the months leading up to March 1993 investment analysts forecast that QMH's profit for the year ending 31 December 1992 would be approximately £85m.

(4) On 26 March 1993 QMH published its intention to announce its preliminary results for the year ended 31 December 1992 on 7 March 1993.

(5) However, on 31 March 1993 QMH announced that the Stock Exchange listing of its shares was to be temporarily suspended at the Company's request pending clarification of its financial position, and that the dividend on its preference shares, which was due for payment on 31 March 1993, would be deferred.

(6) On 29 October 1993 QMH announced financial information which included:

(a) That its results for the year to 31 December 1991 were to be restated to show a loss of £56.3m., as opposed to the profit of £90.4m. previously stated; and

(b) That the Company's results for the year ended 31 December 1992 showed a loss on its ordinary activities before tax of £1,040.5m., which resulted in part from reduced valuations of its tangible fixed assets showing a total reduction in value below historical cost of £803.9m.

9. As a result of investigations made by Mr. Burn and his fellow inspector appointed by the Secretary of State, Mr. Burn has given very full and detailed evidence to the effect that the results published by QMH prior to the suspension of the listing of its shares were false and misleading, both in terms of the amount of profits made by QMH and the nature of those profits, and that QMH's bankers and the stock market in general were consequently misled as to QMH's financial position.
10. Based on that conclusion the Secretary of State makes the following detailed allegations against Mr. Bairstow:

(1) That in breach of section 226(1) and (2) of the Companies Act 1985 (which require the directors of a company to prepare accounts giving a true and fair view of the company's affairs) he failed to prepare, for QMH's financial year ended 31 December 1991, a balance sheet which gave a true and fair view of the Company's affairs as at the end of that financial year;

(2) That in breach of section 227 of the Companies Act 1985 (which requires the directors of a parent company to prepare consolidated accounts showing a true and fair view of the affairs of the group of which the company is parent, so far as concerns members of the parent company) he:

(i) failed to prepare a consolidated balance sheet for the year ended 31 December 1991 which gave a true and fair view of the affairs of QMH and its subsidiaries at the end of that period;

(ii) failed to prepare a consolidated profit and loss account which gave a true and fair view of the profit and loss of QMH and its subsidiaries for the year ended 31 December 1991;

(3) That in breach of section 234(1) of the Companies Act 1985 he failed to prepare, for the year ended 31 December 1991, a directors' report containing a fair review of the development of the business of QMH and its subsidiaries during that year;

(4) That, in making, on 8 April 1992, the Chairman's Statement and preliminary announcement of the results of QMH to 31 December 1991, he misrepresented to QMH's shareholders and bankers, the stock market and others having dealings with the Company the true financial performance of QMH and its subsidiaries;

(5) That, in relying on QMH's 1991 accounts, or allowing them to be relied on as the basis for renegotiating a revolving credit facility enjoyed by QMH, he misled QMH's bankers as to the financial position of QMH;

(6) That, in making the announcement on 12 August 1992 of QMH's interim results for the period 1 January 1992 to 12 July 1992, and in particular the Chairman's Statement included therein, he misrepresented QMH's financial position to QMH's shareholders and bankers and to the stock market and other persons having dealings with QMH;

(7) That in relying on the 1992 interim results and projections and forecasts produced by QMH between December 1992 and March 1993 as the basis for renegotiating, in late 1992 or early 1993, a multi option facility enjoyed by QMH, he misled QMH's bankers as to the financial position of QMH;

(8) That in breach of section 263(1) of the Companies Act 1985 he recommended that QMH pay, and caused the payment by QMH of, dividends totalling £25.9m. other than out of profits lawfully available for the payment of dividends.

11. It is the Secretary of State's case that the conduct so alleged against Mr. Bairstow makes him unfit to act as a director of a company. However, it is important to bear in mind that the Secretary of State does not allege that Mr. Bairstow had any intention to deceive anyone or that he has been guilty of any other dishonesty. The Secretary of State's case is that the conduct alleged against Mr. Bairstow shows such gross negligence on his part with regard to the performance of his duties as a director as makes him unfit to act as such in future.
12. Before considering each of the allegations to see whether it has been made good by the Secretary of State, I should say a little more about QMH's business and the way in which it was run.
13. As I have already said, the Company was founded by Mr. Bairstow in 1969 to operate an hotel business. At the outset it managed only one hotel. By the end of 1991 a group of which QMH was the holding company owned or operated 189 hotels in 10 European countries, of which more than half were in the United Kingdom. Its shares became listed on the London Stock Exchange in 1972. One of its subsidiaries was a property company and one a leisure business company, but by far the major part of the Group's business was at all material times the running of hotels.
14. The Board of QMH at all material times comprised executive and non-executive directors. Of the executive directors four were regarded as what was termed an "Executive Board", of which any two regarded themselves as competent to make decisions on behalf of the Company by virtue of a common form provision in the Company's Articles of Association which provided for a quorum of two directors at a meeting of the Board. I accept Mr. Bairstow's evidence that he understood that this provision enabled any two directors to make decisions on behalf of the Board, even though no meeting of the full Board had been called. This was clearly a misconception on his part. The four directors who regarded themselves (without any legal authority for so doing) as the Executive Board were Mr. Bairstow, the Chairman of the Company, Mr. Marcus, the Managing Director until January 1993 and thereafter joint Managing Director, Mr. Bell, Operations Director until January 1993 and thereafter joint Managing Director, and Mr. Hersey, Finance Director.
15. QMH expanded by acquiring hotels and groups of hotels. The managers of hotels thus acquired at the date of acquisition were generally left to continue to run their hotels themselves with little interference from QMH's head office.
16. From 1975 QMH developed an unusual management incentive scheme ("MIS"). It is necessary to say something about this scheme, because it is the Secretary of State's case that it came to be used by the directors of QMH as a means of distorting QMH's profit figures. The essentials of the MIS were as follows. The manager of an hotel owned by the Group would enter into an agreement with QMH to pay to QMH over the ensuing 12 months, by monthly instalments, an "incentive fee", which was designed to represent the budgeted profit of the hotel concerned over that 12 month period. In consideration for his agreeing to pay the incentive fee the manager became entitled to retain for his own benefit all the hotel's income during the period of the agreement, although he was bound himself to pay all income costs of running the hotel.
17. Thus the manager became entitled to retain for himself any profit of the hotel over and above the incentive fee, though he remained liable for the full incentive fee even if the hotel's profits proved to be below budget. According to Mr. Burn's evidence, in practice the Company would assist the manager in such a situation by making some concession over the full incentive fee legally payable. Mr. Bairstow denied that such concessions were made by QMH throughout the history of the MIS, but accepts that they were in the latter years of his chairmanship of QMH, when there was a period of recession in the hotel industry. Thus I find that at least for the years in question in these proceedings Mr. Burn's evidence on this point is accurate.
18. Use by QMH of the MIS increased steadily from its inception in 1975, but in 1991 and 1992 its avowed purpose of providing incentives to hotel managers was not met because of recession in the hotel business, which meant that substantial arrears of MIS payments due to QMH built up and QMH found itself unable to recover such arrears. According to the Secretary of State the only purpose of the scheme by that stage was to enable QMH artificially to boost its reported profits by taking all the payment of incentive fees due over a 12 month period as profits in QMH's accounts accrued at the beginning of the 12 months, even though in fact some payments were never actually received by QMH. Mr. Bairstow denies this and asserts that the MIS continued to serve a useful commercial purpose even under the new management that took over QMH in 1993. I accept Mr. Bairstow's evidence to this effect, but I do not think it in fact material to the issues I have to decide.
19. I have earlier set out the breaches of duty on Mr. Bairstow's part alleged by the Secretary of State to constitute unfitness to act as a director of a company. Although the complaints made by the Secretary of State are properly set out in terms of breaches of Mr. Bairstow's duties as a director in relation to the preparation and reliance on each individual accounting document of QMH in the preparation of which Mr. Bairstow was, or should have been involved – balance sheet, consolidated balance sheet, consolidated profit and loss account, Directors' Report and Chairman's Statement, all for the year ended 31 December 1991, and announcement of QMH's interim results for the period 1 January 1992 to 12 July 1992 – the burden of all these complaints is that Mr. Bairstow, not dishonestly, but in grossly negligent breach of his duties as a director of QMH, was a party to the making of, and reliance on, statements of QMH's financial position which were significantly misleading in grossly overstating the profits of QMH. I will come to the detail of the respects in which it is said by the Secretary of State that the relevant documents overstated profits. Before doing so I should say something about the general defence that Mr. Bairstow puts forward to all the allegations against him. That is that he himself had no knowledge of the alleged falsity of the accounting documents.
20. I have already recorded that the Secretary of State disavows any allegation that Mr. Bairstow acted in any way dishonestly or with intention to deceive anyone. It follows that the Secretary of State does not allege that Mr. Bairstow in fact knew that QMH's profits were being overstated. The Secretary of State's case is that he should have known, and would have known, had he performed his duties as director and Chairman of QMH properly.
21. It is Mr. Bairstow's case, put by him very fully and forcefully, that he relied, and was entitled to rely, on his fellow directors, and, in particular, Mr. Hersey, the Finance Director, to prepare proper financial statements. He himself had no accounting expertise and could not be expected to check the figures produced by the Company's finance department. Moreover, in particular, he was, he says, entitled to rely on the fact that the Company's auditors saw no reason to qualify the Company's accounts for the year ended 31 December 1991. I accept Mr. Burn's evidence that the auditors clearly should not have been satisfied with the accounts and would appear to have been in breach of their duty in not questioning the profit figures in those accounts.
22. In support of his argument that Mr. Bairstow was not entitled to rely entirely on his fellow directors or even the Company's auditors, without satisfying himself that the Company's financial statements were not misleading, Mr. Todd Q.C., on behalf of the Secretary of State, relied on a number of authorities on the extent of a director's duties in that regard.
23. In Re D'Jan of London Limited [1994] BCLC 561 Hoffmann L.J., sitting as an additional judge of this Division, said this, at p.563d-f:

"In my view, the duty of care owed by a director at common law is accurately stated in s 214(4) of the Insolvency Act 1986. It is the conduct of -

'a reasonably diligent person having both – (a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company, and (b) the general knowledge, skill and experience that that director has.'

24. Mr. Todd submitted, rightly in my judgment, that, in applying these twin objective and subjective tests, I should have regard to the following factors:

1. In relation to the objective test, Mr. Bairstow was at the material times the Chairman and most senior of the executive directors of QMH;

2. In relation to the subjective test, Mr. Bairstow had had many years' experience as a director of QMH, and therefore should have been well aware of the Company's business and of the nature of the Company's income and profits; and

3. In particular, as Chairman of QMH, Mr. Bairstow was the face of the Company vis a vis those dealing with, or investing in, the Company. The Chairman's Statement is an important vehicle for conveying to such persons the Company's financial performance and status, and therefore the Chairman has a particular responsibility to satisfy himself that what is said in the Chairman's Statement is accurate.

25. In Re Barings plc. [1998] BCC 583 Sir Richard Scott V-C (as he then was) had to consider an application by the Secretary of State for a disqualification order under the 1986 Act on the basis of events leading up to the collapse of Barings Bank. At p.586 of the Report the learned Vice-Chancellor said this:

"I have referred already to Mr. Maclean as a senior director within the Barings Group. That particular description of his role in the group is, in my view, important for the purpose of considering the degree of culpability that attaches to him in regard to the matters that brought about the collapse and insolvency of the Group. Mr Collings has rightly drawn attention to the need in any large organisation for senior members of management to delegate functions to others, to subordinates. Mr. Collings made the point that if an efficient system is in place, or if the individual in question has good reason for believing there to be an efficient system in place, the delegation within the system of functions to be discharged in accordance with the system by others cannot be the subject of serious criticism if, in the event, the persons to whom the responsibilities are delegated fail properly to discharge their duties.

That may be so up to a point in theory, but the higher the office within an organisation that is held by an individual, the greater the responsibilities that fall upon him. It is right that that should be so, because status within an organisation carries with it commensurate rewards. These rewards are matched by the weight of the responsibilities that the office carries with it, and those responsibilities require diligent attention from time to time to the question whether the system that has been put in place and over which the individual is presiding is operating efficiently, and whether individuals to whom duties, in accordance with the system, have been delegated are discharging those duties efficiently. It plainly becomes individuals holding high office to be responsive to warning signs that indicate some failure in the system, or in the discharge by individuals within the system of their respective responsibilities. It would, I think be quite rare to find a case where there have been serious continuing failures on the part of individuals of which the senior executive officers could disclaim responsibility on the ground that they did not know, and were not told of the failures. There may be some cases of that sort, and if it is right that the senior executives did not know, were not told and could not have been expected to know about the failures, they may be absolved of criticism. But the responsibilities that go with the high office held by Mr. Maclean, notwithstanding that there were others who held higher office, carry with them the obligation of diligent supervision"

26. The extent of a director's right to trust his fellow directors was considered by Hart J. in another directors disqualification case, Re Landhurst Leasing plc. [1999] 1 BCLC 286 at 346a-h:

" More recently the Court of Appeal in Re Westmid Packing Services Ltd, Secretary of State for Trade and Industry v Griffiths [1998] 2 BCLC 646 at 653, [1998] 2 All ER 124 at 130 accepted as correct the following propositions:

' ... the collegiate or collective responsibility of the board of directors of a company is of fundamental importance to corporate governance under English company law. That collegiate or collective responsibility must however be based on individual responsibility. Each individual director owes duties to the company to inform himself about its affairs and to join with his co-directors in supervising and controlling them. A proper degree of delegation and division of responsibility is of course permissible, and often necessary, but total abrogation of responsibility is not. A board of directors must not permit one individual to dominate them and use them, as Mr Griffiths plainly did in this case. Mr Davis commented that the appellants' contention (in their affidavits) that Mr Griffiths was the person who must carry the whole blame was itself a depressing failure, even then, to acknowledge the nature of a director's responsibility. There is a good deal of force in that point. '

Closely allied to the difficulty of distinguishing the responsibilities and conduct of the individual directors from that of the board as a whole is the question of the extent to which an individual director may trust his or her colleagues. The judgment of Romer J in Re City Equitable Fire Insurance Co Ltd [1925] Ch 407 is usually taken as authority for the general proposition that a director may rely on his co-directors to the extent that (a) the matter in question lies with their sphere of responsibility given the way in which the particular business is organised and (b) that there exist no grounds for suspicion that that reliance may be misplaced. But even where there are no reasons to think the reliance is misplaced, a director may still be in breach of duty if he leaves to others matters for which the board as a whole must take responsibility. Re City Equitable Fire Insurance vividly illustrates that rider to the general proposition, since Romer J there held all (save one) of the respondent directors to have been negligent in approving accounts for three successive years without having caused detailed lists of the company's investments first to be drawn up for their examination. In that case reliance had been placed on the chairman, Mr Bevan, of whom it was said ' ... he was one of the greatest authorities on finance in the City of London. In reputation and in credit he stood second to none. His advice on questions of investment was eagerly sought and readily followed' (at 445). Later events proved him in fact to have been a 'daring and unprincipled scoundrel' (at 474)."

27. In Re Barings plc. and others (No.5) [1999] 1 BCLC 433 Jonathan Parker J. (as he then was) had to consider further disqualification proceedings arising from the Barings Bank collapse. He considered the nature of a director's duty at p.486h – 488a, where he said this:

"B. The duties of directors

B1. '[E]ach individual director owes duties to the company to inform himself about its affairs and to join with his co-directors in supervising and controlling them' (see Re Westmid Packing Services Ltd [1998] 2 BCLC 646 at 653, [1998] 2 All ER 124 at 130 per Lord Woolf MR, giving the judgment of the Court of Appeal). Later in the judgment Lord Woolf MR said ([1998] 2 BCLC 646 at 654, [1998] 2 All ER 124 at 131):

'It is of the greatest importance that any individual who undertakes the statutory and fiduciary obligations of being a company director should realise that these are inescapable personal responsibilities.'

B2. This does not mean, of course, that directors cannot delegate. Subject to the articles of association of the company, a board of directors may delegate specific tasks and functions. Indeed, some degree of delegation is almost always essential if the company's business is to be carried on efficiently: to that extent there is a clear public interest in delegation by those charged with the responsibility for the management of a business. As the Earl of Halsbury LC put it in Dovey v Corey [1901] AC 477 at 486:

'The business of life could not go on if people could not trust those who are put in a position of trust for the express purpose of attending to details of management.'

In the same case, Lord Davey said ([1901] AC 477 at 492, [1895–9] All ER Rep 724 at 726):

'I think the respondent was bound to give his attention to and exercise his judgment as a man of business on the matters which were brought before the board at the meetings which he attended, and it is not proved that he did not do so. But I think he was entitled to rely upon the judgment, information, and advice of the chairman and general manager, as to whose integrity, skill, and competence he had no reason for suspicion.'

B3. But just as the duty of an individual director as formulated by the Court of Appeal in Re Westmid Packing Services Ltd does not mean that he may not delegate, neither does it mean that, having delegated a particular function, he is no longer under any duty in relation to the discharge of that function, notwithstanding that the person to whom the function has been delegated may appear both trustworthy and capable of discharging the function.

As Sir Richard Scott V-C said when making a disqualification order against Mr Hawes:

'Overall responsibility is not delegable. All that is delegable is the discharge of particular functions. The degree of personal blameworthiness that may attach to the individual with the overall responsibility, on account of a failure by those to whom he has delegated particular tasks, must depend on the facts of each particular case. Sometimes there may be a question whether the delegation has been made to the appropriate person; sometimes there may be a question of whether the individual with overall responsibility should have checked how his subordinates were discharging their delegated functions. Sometimes the system itself, in which the failures have taken place, is an inadequate system for which the person with overall responsibility must take some blame.'

B4. It is not in dispute in the instant case that where delegation has taken place the board (and the individual directors) will remain responsible for the delegated function or functions and will retain a residual duty of supervision and control. As Sir Richard Scott V-C made clear in the passage quoted above, the precise extent of that residual duty will depend on the facts of each particular case, as will the question whether it has been breached."

28. Further, at p.489a-d, in a passage of his judgment subsequently expressly approved by the Court of Appeal (see Re Barings plc. and others (no.5) [2000] 1 BCLC 523) Jonathan Parker J. said this:

"In summary, the following general propositions can, in my judgment, be derived from the authorities to which I was referred in relation to the duties of directors:

(i) 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.

(ii) Whilst directors are entitled (subject to the articles of association of the company) to delegate particular functions to those below them in the management chain, and to trust their competence and integrity to a reasonable extent, the exercise of the power of delegation does not absolve a director from the duty to supervise the discharge of the delegated functions.

(iii) No rule of universal application can be formulated as to the duty referred to in (ii) above. The extent of the duty, and the question whether it has been discharged, must depend on the facts of each particular case, including the director's role in the management of the company."

29. Mr. Bairstow relied for his argument that he was entitled to trust his fellow directors and the Company's auditors and not check their conclusions on two passages in earlier authorities. The first was a passage in the speech of Lord Halsbury, L.C. in Davey v. Cory [1901] AC 477 at 485:

"I cannot think that it can be expected of a director that he should be watching either the inferior officers of the bank or verifying the calculations of the auditors himself. The business of life could not go on if people could not trust those who are put into a position of trust for the express purpose of attending to details of management"

30. The second dictum relied on by Mr. Bairstow is one to similar effect in the judgment of Romer J. in Re City Equitable Fire Insurance [1925] Ch 407 at 428.
31. These two authorities were referred to Jonathan Parker J. in Re Barings plc. and others (No.5) [1999] 1 BCLC 433. The learned judge cited part of the dictum from Davey v. Cory relied on by Mr. Bairstow. On the basis of these and other authorities referred to in his judgment Jonathan Parker J. formulated the general propositions which I have cited from his judgment and which were approved by the Court of Appeal, including the proposition that the exercise of the power of delegation does not absolve a director from the duty to supervise the discharge of the delegated functions.
32. I accept Mr. Todd's submission based on these authorities that Mr. Bairstow is not entitled to deny responsibility for the falsity of the accounting statements issued by QMH simply on the ground that he relied on other directors to whom the preparation of such statements had been delegated, or on the fact that the Company's auditors did not (as they should have done) raise doubts about the propriety of those statements. In particular I accept Mr. Todd's submission that Mr. Bairstow's attempt to hide behind the clean certificate given by the auditors is misconceived. It is the statutory duty of the directors to prepare financial statements giving a true and fair view of the company's affairs for consideration by the auditors. That duty cannot be affected by the view the auditors take of accounts so prepared.
33. On the other hand, as was said by Jonathan Parker J. in the third of the general propositions set out in the passage of his judgment which I have last cited, the extent of the duty of a director to supervise the discharge of delegated functions depends on the facts of any given case, including, in particular, the director's role in the management of the company concerned.
34. In the present case the director concerned was, of course, an executive director and chairman of the company. The preparation of financial statements had, in the usual way, been delegated to the Finance Director, Mr Hersey. Mr. Hersey was a qualified accountant, though, as Mr. Bairstow accepted in his evidence, he, Mr. Bairstow, knew that Mr. Hersey had had virtually no experience of the running of a finance department of a company before he became Finance Director of QMH. Mr. Bairstow, for his part, had no accountancy qualification or expertise, though he had wide business experience.
35. In the circumstances of this case – and, like Jonathan Parker J., I stress that it is not possible to lay down any universally applicable principle – I do not consider that Mr. Bairstow can reasonably be held to have been under a duty to query the draft financial statements produced to the Board by the Finance Department, save to the extent that they included matters which should, on a perusal of them, have been apparent to a man of Mr. Bairstow's business experience and knowledge of this particular company's affairs as being of at least doubtful accuracy or propriety. I do not consider he was under a duty to check the performance of functions delegated to Mr. Hersey which were properly within the expertise of an accountant and which Mr. Bairstow had no reason to doubt were being properly performed.
36. With these principles in mind I have to consider whether, in the context of the criticisms made by the Secretary of State of the financial statements issued by the Company, the Secretary of State is right in submitting that Mr. Bairstow so far failed to fulfil his duty as to show himself unfit to be a director of a company in future.
37. I turn then to the detailed criticisms made by the Secretary of State of the financial statements concerned.

Accounts for the year ended 31 December 1991

38. The 1991 accounts showed a profit before tax of £90.4m. When restated in October 1993 the 1991 results showed a loss of £56.3m. According to the Secretary of State's witness, Mr. Burn, almost all the profits reported by the original 1991 accounts were created by unacceptable accounting processes. Mr. Burn groups the alleged defects in the accounting processes used under 6 headings:

1. Turnover

2. Incentive Fee Income

3. Maintenance Wages

4. Deferred Revenue Expenditure

5. Interest Capitalisation

6. Rationalisation Costs

(1) Turnover

39. (a) The 1991 accounts showed a figure for turnover of £543.3m.This included figures for turnover not only of hotels directly managed by QMH, but also of hotels comprised in the MIS. This, as Mr. Burn says and at one point the Company's auditors pointed out, was clearly wrong. The incentive fees due to QMH under the MIS were an appropriate part of QMH's turnover, but the turnover of the MIS hotels themselves was not, since, by virtue of the MIS, QMH had no interest in the income of those hotels.

(b) The figure in the 1991 accounts for QMH's turnover also included the proceeds of sale of properties, whereas a note to the accounts stated that "Turnover is the total income receivable excluding VAT for goods supplied and services rendered." I agree with Mr. Burn that to include in the turnover figure the proceeds of sale of property was inconsistent with that note and clearly made the accounts misleading.

40. In my judgment Mr. Bairstow should, from his knowledge of QMH's affairs and the information available to the Board, have been aware that the figure for turnover in the 1991 accounts was misleading in both the respects I have described. He gave no convincing reason for not being so aware. In my judgment he was in breach of his duty as a director in approving accounts for publication in this form. The seriousness of his failing in this regard is demonstrated by the fact that, of the total turnover reported by QMH in the 1991 accounts, almost 40% represented the proceeds of property disposals and turnover of hotels subject to the MIS. I accept Mr. Burn's evidence to this effect, and his conclusion that as a result the 1991 accounts gave a significantly false impression of the ordinary trading activities of QMH.
41. Thus, the Secretary of State's complaints under the heading of Turnover have, in my judgment, been made good.

(2) Incentive Fee Income

42. It is the Secretary of State's case, based on Mr. Burn's evidence, that the way in which the 1991 accounts dealt with incentive fees payable to QMH under the MIS was wrong in three different respects:
43. (a) The accounts included the whole of the incentive fee payments due over the 12 month period of the relevant MIS agreement between QMH and an hotel manager as income in the profit and loss account accrued on the day of commencement of the agreement. According to Mr. Burn the amounts receivable by QMH under such agreement should have been apportioned in the profit and loss account over the 12 month period over which they were receivable. This error, says the Secretary of State, made the accounts give a seriously inflated impression of QMH's profits in the year in which the date of commencement of the agreement fell – especially in the case of agreements commencing in the latter part of QMH's accounting year. This effect was exaggerated by the fact that during the relevant period most of the MIS agreements were entered into close to the end of QMH's accounting year.
44. Mr. Bairstow sought to justify the inclusion of the whole of the incentive fees payable under an MIS agreement as at the date of commencement of the agreement by reference to Note 1(d) to the 1991 accounts, which included the following:

"Fees receivable from group operations not directly managed are included as income at the commencement of the period of licence."

45. I accept that this statement does in terms cover the treatment of fees receivable under MIS agreements as income accrued at the date of commencement of the agreement rather than being apportioned over the period over which they were receivable. However, I do not accept that this is a sufficient answer to the Secretary of State's criticism. In my judgment the inclusion as income of 1991 of all incentive fees payable under an agreement entered into late in 1991, most of which would not be received (if at all) until 1992 and some of which (as experience proved) might not be received at all, did give a significantly misleading impression of QMH's income in 1991. It was impossible for a reader of the accounts, even one who properly read Note 1(d), to form any view as to how much of the sums in question could realistically be regarded as income of 1991. I consider that this made the profit and loss account improperly misleading, and I consider that Mr. Bairstow, with his knowledge of the working of the MIS agreements should have appreciated this fact and was in breach of his duty as a director in not objecting to this treatment of MIS incentive fee payments in the 1991 accounts, of which I am satisfied he was aware.
46. (b) The accounts included no bad debt provision to take account of the fact that some of the incentive fee instalments which were all included as income as at the date of commencement of the relevant agreement, might never be received, notwithstanding that it was known by QMH by 1991 that many hotel managers were in default in paying such instalments and significant arrears had already built up.
47. I accept Mr. Burn's evidence on this, and his conclusion that the absence of any such bad debt provision added improperly to the false impression of profitability already given by the inclusion of all incentive fee instalments as income at the commencement of the incentive fee agreement.
48. Again, in my judgment, the need for such provision really should have been apparent to Mr. Bairstow. I find he was well aware that arrears of incentive fees were building up during 1991.
49. (c) The accounts failed to include any debit in the profit and loss account for incentive fees unpaid under an MIS agreement, when the hotel concerned was taken back by QMH into direct management and the incentive fee agreement terminated.
50. I agree with Mr. Burn that it is clear that such a set-off should have been made to redress the fact that all such instalments of incentive fees had been treated as income at the inception of the agreement. It seems to me equally clear that Mr. Bairstow should have been aware that this factor added to the misleading impression given by the treatment in the 1991 accounts of incentive fees in the manner I have described.
51. Thus the Secretary of State's complaints under the heading of Incentive Fee Income have, in my judgment, been made good. In my judgment, to be aware of the falsity in this respect of the picture painted by the 1991 accounts of the product of the MIS required no expertise in accountancy, which I accept Mr. Bairstow could not be expected to have, but only a prudent businessman's sense of reality.

1. Maintenance Wages

52. This complaint by the Secretary of State is that a late adjustment was made to the 1991 accounts to charge some wages of maintenance staff employed by QMH to capital rather than income. According to Mr. Burn's evidence, which I accept, the result was to overstate profits by some £1.6m.
53. I accept that this accounting treatment was wrong, but I am not satisfied that Mr. Bairstow can be held in breach of duty by reason of his failure to appreciate that this error was made in the accounts. Such failure cannot in my judgment constitute a complaint justifying disqualification.

(4) Deferred Revenue Expenditure Policy

54. This complaint is based on a practice adopted by QMH that by far the major part of QMH's head office costs (the whole of the salaries of executive directors, other senior executives and associated staff and 75% of QMH's other head office costs) was treated as deferred revenue expenditure and written off over a 5 year period in QMH's accounts. In the 1991 accounts this practice was changed and the balance of all previously deferred U.K. head office expenditure totalling £7.2m. was capitalised as an additional cost of earlier acquisitions instead of being charged against profits. No reference to this change of practice was made in the 1991 accounts. Similarly no charge against profits was made in respect of deferred expenditure of overseas subsidiaries amounting to £4.8m.
55. I accept Mr. Burn's evidence that the effect of this clearly improper treatment of current expenditure was to overstate QMH's profits before tax by some £12m. This treatment of deferred expenditure in the 1991 accounts was clearly inconsistent with Note 1(d) to the accounts, which stated that:

"Expenditure incurred in the creation and marketing of new projects [my underlining] is deferred and charged to profit and loss account over a five year period, commencing when income is first derived."

56. This factor made the 1991 accounts significantly misleading. However, the Secretary of State's evidence does not seem to me to establish that Mr. Bairstow should have been aware that deferred revenue expenditure was being treated in QMH's accounts in the way in which Mr. Burn has now shown it was, given that the draft accounts passed to the Board by the Company's Finance Department made no reference to this fact. In considering this and other criticisms made by Mr. Burn one has to bear in mind that the defects concerned in the accounts now alleged became apparent to Mr. Burn only as a result of a difficult process of reconstruction from evidence obtained by Mr. Burn and his fellow inspector of the process by which the 1991 accounts were prepared. Such defects are not apparent from the accounts themselves.
57. Thus I do not find the complaints of the Secretary of State under the heading Deferred Revenue Expenditure made good.

(5) Interest Capitalisation Policy

58. The Secretary of State's complaint here is that the apparent profits of QMH shown in the 1991 accounts were inflated by some £10.37m. by reason of capitalising interest payable by QMH which should have been treated as a revenue account item and a charge against profits.

The accounts stated in Note 1(g) that:

"Loan finance costs incurred during the period of rationalisation of new hotels, being a period of not more than three months, and those incurred in the acquisition, construction or redevelopment of a property prior to its opening for business are capitalised."

59. Note 5 to the accounts stated that £14.4m. of interest had been capitalised. In fact it has become apparent that the actual amount capitalised was £15.5m. This figure included £6.42m. in respect of interest payable during the first three months after acquisitions of hotels and £3.947m. "in respect of investments."
60. As Mr. Burn points out in his evidence (and this was not challenged by Mr. Bairstow) most of the hotels acquired by QMH in 1991 were open and operating at the time of acquisition, and continued to operate in the same way after acquisition. The acquisition by QMH of such hotels had no impact on their operating performance. I accept Mr. Burn's evidence that, in the case of such acquisitions, there was no possible justification for interest charges incurred in making the acquisitions being capitalised. They should have been charged against the profits of the hotels.
61. In my judgment Mr. Bairstow should, from his knowledge of the Company's affairs, have been aware that part of the interest being capitalised (even on the basis of the figure apparent from Note 5 to the accounts themselves) was interest incurred in the acquisition of hotels operating before and after acquisition, and that there was no proper basis on which such interest could be capitalised rather than charged against profits. Such awareness required no accountancy expertise. Mr. Bairstow was in breach of his duty in approving the treatment by the accounts of such interest.
62. As I have said, the £15.5m. interest capitalised in the 1991 accounts also included £3.947m. interest capitalised as interest on investments which Mr. Burn says, and I agree, should not have been capitalised but treated as a charge on profits. The interest concerned was payable by QMH in respect of funds borrowed to make a loan to Holiday Inn Management SA as part of an arrangement whereby QMH was entitled to manage certain Holiday Inn hotels and to take any profits therefrom. I agree with Mr. Burn that in these circumstances the interest concerned should have been charged against profits.
63. In my judgment, in considering the 1991 draft accounts, Mr. Bairstow should have required to know how the figure shown in the accounts as interest capitalised was made up. Had he done so, he would, or should, have appreciated that there was no justification for capitalising this amount of so-called interest on investments or the amount capitalised in respect of three months post acquisition interest.
64. The result of this wrongful capitalisation of interest under these two heads was to overstate QMH's profits by some £10.37m. Mr. Bairstow should have been aware of this. Therefore I find the Secretary of State's complaints under the heading of Interest Capitalisation Policy made good.

(6.) Rationalisation Costs

65. The 1991 accounts of QMH did not contain any reference to a policy of capitalising "rationalisation costs" in respect of hotels acquired by QMH during 1991. However I accept Mr. Burn's evidence that in fact, in reaching the figures set out in the accounts, the sum of £5.784m. was charged to capital in respect of so-called rationalisation costs relating to hotels acquired by QMH during 1991. I accept Mr. Burn's conclusion that this was an inappropriate method of dealing with these costs, which should have been charged to profits. For the costs concerned comprised mainly overhead costs of running the hotels in question, which were clearly revenue and not capital costs.
66. However, I am not satisfied that this error in the accounts should have been apparent to Mr. Bairstow from information available to him without carrying out his own reconstruction of the accounts, which he was not under a duty to do. Accordingly I do not find the Secretary of State's complaint under this heading made out.

Other Alleged Items of Bogus Profits in the 1991 Accounts

67. In addition to the above alleged defects identified by Mr. Burn in the 1991 accounting processes used in the formulation of the 1991 accounts, the Secretary of State alleges, based on Mr. Burn's evidence, that the 1991 accounts included in the stated profits for QMH figures for profits on five specific transactions or groups of transactions that in fact produced no profit. These transactions are grouped under the following five headings:

1. Sales and leasebacks and similar transactions

2. Norfolk Capital property profits

3. Globana (France) "profit guarantee"

4. Vaux share sale

5. Release of deferred tax provisions.

I must deal with each of these in turn.

(1) Sales and Leasebacks and Similar Transactions

The principal burden of Mr. Burn's complaint under this head is that in 1991 QMH entered into several sale and lease back transactions (or the equivalent) in respect of some of its hotels and office premises and treated part of the proceeds as profits of QMH. It is common ground between Mr. Burn and Mr. Bairstow that this was appropriate only if the leases were properly to be treated as operating leases as opposed to finance leases. Mr. Burn's evidence is to the effect that their terms were such that they were finance leases as defined by SSAP 21, so that the sales could not properly be treated as producing any profit. Mr. Bairstow, in his evidence, insisted that he was satisfied from his wide experience of such transactions in the course of his property dealing career that the leases concerned were such as were properly categorised as operating leases. After the close of the Secretary of State's case, and after having heard Mr. Bairstow's evidence on this topic, Mr. Todd Q.C., for the Secretary of State, applied for leave to recall Mr. Burn to give further evidence on the nature of the leases. I refused such application. For it seems to me unnecessary to determine who is right on the true nature of the leases. I accept Mr. Burn may be right in his view, but it is clear to me that Mr. Bairstow was entirely honest in his belief thet the terms of the leases were such as to make them operating leases. QMH's Finance Director and later auditors apparently took the same view. In these circumstances I am not satisfied that, even if their view was wrong as a matter of accounting principle, Mr. Bairstow can be said to have been in breach of his duty as a director without accountancy expertise in taking the view he did.

However, Mr. Burn makes a further quite different criticism under this head, and that is that even though (in his view wrongly) purported profits on the sale and leaseback of 6 out of 8 U.K. hotels sold and leased back by QMH were credited in QMH's profit and loss account, losses incurred on the sales of the other two hotels amounting to £7.6m. were not debited against QMH's profits. The result was that (even on the basis that the leases concerned could properly be treated as operating leases) QMH's profits were overstated by £7.6m.

Mr. Bairstow accepted that these losses should have been debited against profits in the profit and loss account, but maintained that he was not aware that they had not been. I accept that he was telling me the truth in this regard, but in my judgment he should have been aware of the point and was in breach of duty in not being. He accepted in his cross-examination that all property transactions carried out by QMH were discussed with him (Transcript Day 2 p. 103) and he also accepted in relation to the interim figures for the first half of 1992 that he would have known how the figure for profits in the draft results was made up, because "the make-up of the profits would have been tabled at a board meeting." (Transcript Day 4 pp. 5-6) I am satisfied that the same was true in relation to the profits figure shown in the 1991 accounts.

Thus Mr. Bairstow knew that some of the sales and leasebacks had produced a profit and some a loss, and he should have been aware that, whereas the profits were credited the losses were not debited in the profit and loss account. I find that he was in breach of his duty as a director in this respect.

I also agree with Mr. Burn that the fact that the profits on sales and leasebacks were not shown separately in the 1991 accounts from the Company's profit from its hotel management business did make the accounts misleading to any outsider reading them, in that such a reader would reasonably assume that the profit on the Company's principal recurring business of hotel management was higher than in truth it was. This is also, in my judgment, something of which Mr. Bairstow should have been aware from his business experience and knowledge of QMH's affairs.

(2) Norfolk Capital Property Profits

One of the companies acquired as a subsidiary of QMH was Norfolk Capital Group plc. One of the properties owned by Norfolk Capital was known as the Sloane Club in London. For the purposes of the acquisition of Norfolk Capital by QMH the Sloane Club was valued as at 31 December 1989 by Jones, Lang Wooton, valuers, at £17m. In 1991 it was sold for £14m., thereby producing a loss, so far as QMH was concerned, of £3m. However, QMH's 1991 accounts recognised a profit of £10.2m. on the sale by taking as the cost of acquisition of the Sloane Club Norfolk Capital's own original book cost of £3.863m. I accept Mr. Burn's evidence to the effect that the result was wrongly to inflate QMH's apparent profit by £13.2m. The error was compounded by the fact that the 1991 accounts did not disclose the amount of the purported profit on the sale or, therefore, how it was achieved. Had QMH's consolidated group accounts complied with section 227 of the Companies Act 1985 (as amended), they would not have contained this misleading error.

I consider that Mr. Bairstow must bear responsibility for this seriously misleading error. As appears from what I have said earlier, the details of the sale of the Sloane Club, like all other property sales, must have been known to Mr. Bairstow, as was the make-up of the profits shown in QMH's accounts. In my judgment, Mr. Bairstow was in breach of duty in not having taken steps to avoid the accounts approved by the Board being misleading in this way.

Another asset held by Norfolk Capital when acquired in 1990 by QMH was a French subsidiary which owned a property known as the St. James's Club in Paris. The French subsidiary was sold in December 1991 for a sum some £4.04m. less than the value of the subsidiary included in QMH's books. Instead of being debited in the profit and loss account of QMH, this loss was charged to goodwill as a capital loss.

Mr. Bairstow accepted in his cross-examination that he knew the figures relating to the sale of the French subsidiary and knew it produced a loss of some £4m. Again, in my judgment, he was in breach of duty in not seeing that this loss was properly reflected in QMH's 1991 accounts. The result was a further overstatement of QMH's profits by some £4.04m.

(3) The Globana (France) Ltd. "Profit Guarantee"

In 1990 QMH made loans to a company known as Globana (France) Ltd. ("Globana"), which was to acquire a group of hotels in Europe as part of an arrangement whereby QMH obtained an option to acquire Globana and became entitled to the profits of the hotels pending exercise of the option. The vendors of the hotels for some reason that is obscure paid QMH FF100m. (£10.3m.) described as a "guarantee of profits." In consideration of this QMH paid the vendors an additional FF180m. purchase price. QMH's accounts showed the full FF100m. (£10.3m.) as profit.

I accept Mr. Burn's evidence that the only apparent explanation for this transaction comprising a payment of £10.3m. by the vendors to QMH and a cross payment of £80m. by QMH to the vendors was artificially to boost QMH's profits. I accept, as does the Secretary of State, that Mr. Bairstow did not deliberately participate in this dishonest exercise, but he was in my judgment in breach of duty in not being aware that it was being done. For he accepted in his evidence that the board of QMH would have had before it full details of the Globana transaction. Thus I consider that Mr. Bairstow was again in serious breach of duty in not questioning the transaction and in approving draft accounts that produced such a misleading inflation of QMH's profits.

(4) The Vaux Share Sale

By 31 December 1990 QMH had acquired 13.1m. shares in Vaux Group plc. ("Vaux") at a total cost of £37.2m. On 15 March 1991 it sold all those shares for £31m., thereby incurring a loss of £6.2m. In fact the 1991 accounts showed a profit of £4.5m. on the sale by means of reclassifying the shares as fixed assets in the 1990 accounts and revaluing them in those accounts. I accept Mr. Burn's evidence that there was no justification for reclassifying the shares in that way, and that its only purpose can have been to enable their revaluation and the substitution of a notional profit for a real loss on sale of the shares. The result was to inflate QMH's apparent profit by £10.7m.

Mr. Bairstow accepted that he knew all about the purchase and sale of the Vaux shares. He maintained that the sale produced a profit. He gave no sensible reason for this assertion. It was clearly wrong, and again I find Mr. Bairstow in breach of duty in approving accounts which gave such a misleading picture of the profits of QMH in 1991.

(5) Release of Deferred Tax Provisions

I accept Mr. Burn's evidence that in the 1991 accounts deferred tax provisions totalling £1.765m. were released and credited to operating profit, whereas they should have been credited against QMH's tax charge. I am not, however, satisfied that Mr. Bairstow can be held in breach of duty in not appreciating this point.

Conclusion on the 1991 Accounts

By reason of the breaches of duty on the part of Mr. Bairstow that I have described the profit of QMH was materially overstated in its 1991 accounts. The combined effect of the improper accounting treatment of the sale of Norfolk Capital assets and of the Vaux share sale alone was to overstate QMH's profits by nearly £30m., or over 30% of the full amount of profits shown in the 1991 accounts. The result was to make the accounts seriously misleading to anyone relying on them.

The 1992 Interim Results

On 12 August 1992 QMH announced interim results for the period 1 January 1992 to 12 July 1992 recording profits of £38.1m. The first criticism made of these results is that they were prepared by what is called in the accountancy world an "integral approach", meaning that the figures announced were based not on actual results of the period 1 January to 12 July 1992, but on an estimate of what half the results of the full year would be. This made the results particularly misleading in the context of the practice which I have described earlier of MIS incentive payments being treated as profits accrued at the commencement of an MIS agreement and not apportioned over the life of the relevant agreement or adjusted to take account of payments not in fact received. The interim results depended in part on assumptions relating to MIS incentive agreements which might or might not be made, and payments under such agreements which might or might not be received in the second half of 1992.

I am not, however, satisfied that Mr. Bairstow can be held in breach of duty in permitting the integral approach. From the evidence I heard and read I am not satisfied that it should have been clear to him, not being an accountant, that the integral approach was inappropriate.

More seriously, Mr. Burn's reconstruction of the Interim Results using the integral approach produces a loss of £4m. instead of the reported profit of £38.1m.This is largely accounted for by what is referred to in the evidence as a proposed revision of the MIS. This was a proposal that was never in fact adopted, but was assumed for the purpose of the Interim Results. The proposal involved changing the termination date of each MIS incentive agreement to 31 January 1993 in order to reduce the figure in QMH's accounts for debts due to it in respect of outstanding MIS incentive payments. On the other hand, this change would also have the effect of reducing substantially QMH's profits for 1992. I am satisfied that, in order to counteract this reduction in profit, it was proposed that QMH should enter into the following arrangement artificially to inflate its profits. QMH would make one-off payments to MIS hotel managers to be treated in QMH's accounts as capital expenses. The hotel managers would make one-off payments to QMH in the same amounts as the payments made by QMH to them, such payments to QMH being treated in its accounts as income receipts. This would have the effect of increasing QMH's apparent profit by the amount of the payments, some £25m.

I accept that this proposal was highly improper and designed by Mr. Hersey, the Finance Director, to make the Interim Results thoroughly misleading to anyone relying on them.

Mr. Bairstow denied that he knew of the proposal for self cancelling payments between MIS managers and QMH, and, by accepting that Mr. Bairstow was not guilty of any dishonest attempt to deceive, the Secretary of State by implication accepts that he did not know of such proposal. The question is whether he was in breach of duty in not being aware of it. I consider that he was. He accepted during his cross-examination, as I have stated earlier, that the make-up of the £38.1m. profit figure in the Interim Results was before the Board and known to him, and I am satisfied that he knew of the proposed change of termination date of the MIS incentive agreements and must – or should – have been aware that this would have a serious effect on QMH's profits. I find that, if he had taken the care he should have done in considering the Interim Results, he would have been aware that a major part of the £38.1m. profit shown could not possibly be justified.

Conclusion on the 1991 Accounts and 1992 Interim Results

I am satisfied that Mr. Bairstow was guilty, in respect of each set of financial statements, of approving or endorsing statements of QMH's profits which he would have known were seriously inaccurate, had he properly performed his duties to consider the information available to him before approving the draft financial statements produced to the Board by the Company's finance department. It follows that he was also in serious breach of his duty in being a party to the Chairman's Statements he made in relation to the 1991 accounts and the 1992 Interim Results respectively. From this it follows, in my judgment, that the Secretary of State has made good numbers (1) to (4) and (6) of the alleged grounds of unfitness to act as a director. Similarly it follows that ground (5) – causing or permitting QMH to rely on the false 1991 accounts in renegotiating its revolving credit facility – is also made good, in the sense that, had Mr. Bairstow performed his duty properly, the Company would not have been in a position to use such misleading accounts in such renegotiation.

Alleged ground of unfitness numbered (8) is also made out, because, by allowing the Company's 1991 accounts to show a falsely inflated figure for profit Mr. Bairstow did, in breach of duty, cause or permit the payment by QMH of dividends based on such falsely inflated profit figure, and therefore in breach of section 263(1) of the Companies Act 1985.

This leaves alleged ground of unfitness numbered (7) – that, in relying on the 1992 Interim Results and projections and forecasts produced by QMH between December 1992 and March 1993 as the basis for renegotiating QMH's multi-option facility in late 1992 and early 1993, Mr. Bairstow caused or permitted QMH's bankers to be misled as to the true financial position of QMH. In relation to reliance on the 1992 Interim Results, there is no evidence that Mr. Bairstow himself conducted negotiations with the banks on the multi-option facility. However, it is clear from the findings I have made that, had Mr. Bairstow performed his duty properly and not approved or endorsed misleading financial statements, other directors who did conduct such negotiations would not have been able to rely, as they did, on such misleading statements in such negotiations. To that extent Mr. Bairstow does bear responsibility for the banks being misled.

I must say a little more about the allegation so far as concerns projections and forecasts produced by QMH between December 1992 and March 1993.

The Secretary of State relied in this context on evidence relating to a meeting of 2 December 1992 of which there is a note made by Mr. Radford, a partner in QMH's auditors. The note is dated 4 December 1992 – two days after the meeting. I will read it, but first I should read Mr. Radford's note of a previous meeting also held on 2 December, attended by Mr. Hersey and Mr. Porter, directors of QMH, but not by Mr. Bairstow. I should read most of this note:

"I advised the client that we were unable to find their proposed treatment consistent with the requirement for the accounts to show a true and fair view, as we believed that there was insufficient justification for the payment by [QMH] to be classified as a capital item and the accounting treatment of the suggested payment and receipt should be matched in the profit and loss account.

I indicated that I believed that the company should consider either rephrasing the timing of their incentive agreements so that for example they could run a nine month incentive period this year and in the following two years, to ensure that by the end of 1994 all incentive agreements ended, say the end of January, [sic] would reduce any element of profit taken in advance to a relatively insignificant amount. I also suggested that another possibility would be to alter the group accounting policy with the creation of a prior year adjustment to put the accounting for incentive fees on a more conventional basis.

The company found neither of these possibilities satisfactory. They indicated to me that their motivation was one of profitability and that at present there was likely to be a significant short fall [sic] in profits. The effect of this is clearly extremely serious and it may well be that the company will be in breach of its banking covenants. This in turn could mean that the company's bankers might place the company into some form of administration.

I confirmed our appreciation of the situation, but stated that we expected the company to take a responsible attitude to it, which would include recognition of a real decline in profitability."

It was Mr. Bairstow's evidence, which I accept, that he was not told by Mr. Hersey or Mr. Porter of this meeting.

According to Mr. Radford's note of the second meeting on 2 December 1992, that meeting was attended by Mr. Bairstow. I should read the whole note:

"Subsequent to the meeting noted earlier, I was called into a further meeting of John Bairstow, Martin Marcus, Maurice Hart, David Hersey, Alan Porter.

This meeting was considering various options to generate profits in 1992.

I reiterated my rejection of the proposals to pay sums to and receive sums from incentive managers and treating these as distinct transactions. To class one as capital and one as revenue would not accord with GAAP.

MM [Mr. Marcus] seemed agitated at this and stated that the situation was desperate.

He believed that there was no profit in the group for the year.

This was bad enough, but was made worse by the interim results already announced.

My view was that a responsible thing to do would be to issue a profits warning immediately.

JB [Mr. Bairstow] said that he clearly needed to address the situation and that with only three weeks to go before the year end, there was not much time.

I questioned MM and DH [Mr. Hersey] over what they anticipated group profits would be for the year on the assumption that no additional transactions took place. They indicated that there be [sic] very little core profits, if any it appears that trading has fallen in all countries – but of course we also had to bear in mind that this year there was little in the way of property profits and that there would be a substantial depreciation charge.

It was suggested that Gerry Bell might be about to do some sort of deal in Germany.

At that stage I was thanked for attending the meeting. The Company made clear to me that they did not intend to issue any profits warning, which I took to mean that they would be seeking ways of boosting 1992 profits to the presently anticipated level of £85m."

Despite the apparent recognition by directors of QMH at this meeting that in fact QMH had no real profits, there is no doubt that negotiations with the Company's bankers on the multi-option facility continued on the basis that it did have such profits. Indeed on 17 December 1992 the banks were told that QMH's full 1992 results would show a profit before tax of £85m.

If Mr. Radford's note of the second meeting on 2 December 1992 is indeed accurate, such a subsequent statement to the banks was clearly dishonestly misleading. However Mr. Bairstow was adamant in his evidence that he did not attend such meeting – or any meeting at which it was recognised that QMH had no real profits. Mr. Radford's evidence as well as his note was to the effect that he did. Mr. Hersey said he did in answers given to the Inspectors, of which I have seen a transcript. Such evidence is admissible as evidence in these proceedings (see Re Rex Williams Leisure plc (In Administration) [1994] Ch. 354). However there are many aspects of Mr. Hersey's evidence before the Inspectors that were unsatisfactory, as Mr. Burn accepted, and I do not feel able to place any great weight on it. I did not find Mr. Radford a convincing witness either. On the other hand I did find Mr. Bairstow's evidence that he did not attend any such meeting as purportedly recorded in Mr. Radford's note convincing, notwithstanding that it follows from it that Mr. Radford's note must be seriously inaccurate in this respect. One oddity about the note is that Mr. Radford's own evidence was to the effect that he never showed it to any of the directors of QMH.

I find that Mr. Bairstow did not attend any meeting with Mr. Radford on 2 December 1992 and was not told of what was said at the meeting purportedly recorded by Mr. Radford. My finding that Mr. Bairstow did not attend any such meeting is, in my view, supported by the fact that when the board of QMH met on 3 December 1992, there was (according to the board minutes) no discussion of the meeting or of the absence of core profits in QMH. The absence of such discussion seems highly unlikely if Mr. Bairstow had been a party to such a meeting as Mr. Radford records on the previous day.

The Secretary of State submitted that I should find Mr. Radford's note accurate, notwithstanding that such submission was, it seems to me, irreconcilable with the Secretary of State's express acceptance that Mr. Bairstow was not guilty of any deliberate attempt to mislead anyone about the financial position of QMH. For if Mr. Bairstow did attend a meeting such as that purportedly recorded by Mr. Radford's note, it would necessarily follow that Mr. Bairstow was party to a deliberate presentation of what he knew to be a misleading picture of QMH's financial position to its banks. As I have said, I reject the submission.

Thus I am not satisfied that Mr. Bairstow knowingly allowed QMH's banks to be given false estimates of profits. On the other hand, it follows from what I have said earlier that I am satisfied that, had Mr. Bairstow performed his duty as director and chairman of QMH properly, he would have been aware from the information available to him that the profits figures given to the banks were very seriously unrealistic.

CONCLUSION

Thus for the reasons I have endeavoured to explain I am satisfied that the Secretary of State has substantially established each of the grounds of unfitness to act as a director of a company alleged against Mr. Bairstow. Do they justify a disqualification order against him? In my judgment they clearly do. Third parties dealing with QMH, as well as its shareholders, were seriously misled by thoroughly irresponsible statements as to the Company's financial position in 1991 and 1992 to which Mr. Bairstow was a party. Although I accept that he did not intend to mislead such persons, I am satisfied that such misleading statements would not have been made, had Mr. Bairstow performed his duties as a director of QMH properly and conscientiously. In my judgment his negligent disregard of such duties in the respects I have found proved against him make him unfit to be concerned in the management of a company.

As to the duration of the appropriate disqualification order, I must bear in mind that Mr. Bairstow is 73 years of age and has already been under the threat of these proceedings for over 10 years. Nevertheless, in my judgment the seriousness of his derelictions of duty is such that it can only properly be marked by a significant period of disqualification. In all the circumstances of the case I consider that the Secretary of State's submission that six years would be an appropriate period of disqualification is well-founded and I shall make an order for that period.