Dividends paid out of capital attract director and auditor liability when profits are unreal and accounts are not properly verified.

Liquidator's claim was not barred by limitation because the cause of action arose on winding-up and the statutory remedy was not governed by the ordinary limitation articles relied on by the directors. Directors were held liable for dividends paid out of capital where the company had no realised profits, since honest belief was not enough without reasonable diligence and independent judgment. The auditor was also liable because his duty extended beyond arithmetic checking to verifying that the accounts truly stated the company's financial position; reckless certification of false balance-sheets and dividend statements breached that duty. A separate claim for loss of grain failed because the liquidator did not prove the quantity, value, or a recoverable connection to any director's act or omission.

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Issues: (i) whether the liquidator's claim under the Companies Act was barred by limitation; (ii) whether the directors were liable for misapplying the company's funds by paying dividends out of capital; (iii) whether the auditor was liable for certifying false balance-sheets and dividend statements; and (iv) whether the separate claim for alleged loss of grain was proved.

Issue (i): Whether the liquidator's claim under the Companies Act was barred by limitation.

Analysis: The liquidator came into existence only upon the winding-up, and the cause of action to enforce the statutory remedy arose when the liquidation commenced. The claim was not treated as one governed by the ordinary limitation articles relied on by the directors. The Court rejected the contention that the short limitation articles for tort or contract applied, and held that the statutory bar did not defeat the liquidator's application.

Conclusion: The claim was not barred by limitation and the objection failed.

Issue (ii): Whether the directors were liable for misapplying the company's funds by paying dividends out of capital.

Analysis: The evidence showed that the company had ceased to make profit and that dividends were nevertheless declared and paid as if they were profits. The directors did not exercise independent judgment, did not inquire into the nature of the debts and securities shown in the books, and accepted the manager's statements without reasonable verification. In the circumstances, the Court held that honest belief alone was insufficient; the directors had to show that they acted both honestly and reasonably, and they failed to do so. The amounts distributed as dividends were held to be capital misapplied in breach of duty.

Conclusion: The directors were liable for the dividends paid out of capital.

Issue (iii): Whether the auditor was liable for certifying false balance-sheets and dividend statements.

Analysis: The auditor's duty was not confined to checking arithmetic accuracy. He was required to satisfy himself that the books and balance-sheet truly reflected the financial position of the company. He signed statements showing reserves, securities, and realised profits without making the inquiries that the circumstances plainly called for. The Court found no conscious dishonesty, but held that his conduct was reckless and indifferent and that he failed in the duty expected of an auditor.

Conclusion: The auditor was liable for the dividends certified for the relevant years.

Issue (iv): Whether the separate claim for alleged loss of grain was proved.

Analysis: The liquidator did not establish the actual quantity, value, or identifiable loss of grain attributable to any specific act or omission of the directors. The evidence was insufficient to connect the alleged loss with a recoverable breach by any particular director.

Conclusion: The grain-loss claim failed.

Final Conclusion: The liquidator succeeded on the main claim for misapplied dividends, failed on the grain-loss claim, and obtained recovery against the liable directors and the auditor for the relevant years.

Ratio Decidendi: Where company funds are distributed as dividends without realised profits, directors must prove not only honesty but also reasonable diligence and independent judgment; an auditor must verify that the accounts state the true financial position before certifying them.

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