Supreme Court confirms objective element to directors’ duty to act in good faith under Companies Act s.172

In a significant decision on the standard of conduct required of company directors, the Supreme Court has held that a director who covertly drove a company towards his preferred objective - concealing his conduct from his fellow directors - acted in breach of his fiduciary duty to promote the success of the company under s.172 of the Companies Act 2006: Saxon Woods Investments Limited v Francesco Costa [2026] UKSC 21.

Section 172 requires directors to act in the way they consider, in good faith, would be most likely to promote the success of the company. The Supreme Court's decision shows that, while the courts will respect the business judgment of directors as to the best way to promote the company's success, there is an objective element in determining whether a director has breached the duty. A director is not free to adopt any course of conduct they wish (including lies, cheating, deception, dishonesty or disloyalty) to ensure that the company takes the course they consider to be in its best interests. 

The Supreme Court also held that where a director owes a fiduciary duty of loyalty, it is not necessary to establish a breach of that duty by reference to the test of dishonesty laid down in Ivey v Genting Casinos (UK) Ltd [2017] UKSC 67 (which requires the court to decide whether, taking into account the defendant's actual state of mind or belief, their conduct was objectively dishonest by the standards of decent, reasonable people). Dishonesty may provide evidence of a breach of the fiduciary duty, but the duty itself provides the relevant analytical framework.

Background 

As explained in our post on the Court of Appeal decision here, the dispute centred around a company called Spring Media Investments Limited (the “Company”). A minority shareholder, Saxon Woods Investments Limited (“Saxon Woods”), brought an unfair prejudice petition under s.994 of the Companies Act against Mr Costa, a director and substantial indirect shareholder in the Company. 

The Company and its shareholders had entered into a shareholders’ agreement under which they agreed to “work together in good faith towards an Exit", ie a sale of the Company, no later than 31 December 2019, failing which they would engage an investment bank to cause an exit. 

Mr Costa was entrusted by the board with exclusive conduct of the exit process. According to the judge at first instance, it was Mr Costa’s genuine belief that delaying the sale, contrary to the process set out in the shareholders’ agreement, would generate a more favourable return for the Company and its shareholders. To this end, he adopted a series of covert tactics, including ensuring that other directors and shareholders had no knowledge of or involvement in the exit process, and misleading the board into believing that the Company was fulfilling its obligations under the shareholders’ agreement. 

No sale was ultimately achieved by the end of 2019. The business then suffered a severe downturn as a result of the Covid pandemic. The extent to which the prospects of a successful exit had been affected by the Covid pandemic was deferred to a second trial.

Lower court decisions

At first instance, the High Court held that Saxon Woods' case on unfair prejudice had been made out, but that Mr Costa's conduct had not amounted to dishonesty or a breach of fiduciary duty under s.172 – only a breach of the shareholders’ agreement. Accordingly, the court ordered a buyout on a basis equivalent to the remedy available for a breach of contract, by considering what would have happened but for Mr Costa’s breach. 

The Court of Appeal overturned the High Court’s decision, finding that the facts disclosed a breach of fiduciary duty by Mr Costa under s.172. This was, first, because his deception of the board had been dishonest and therefore not in good faith. Second, the Court of Appeal concluded that it was not open to Mr Costa to formulate or act upon his own different judgment about a strategy for the success of the Company, since that had already been defined in the shareholders’ agreement. Given that there had been a breach of fiduciary duty, not only a breach of the shareholders’ agreement, the appropriate remedy was an unconditional buy-out of the shares at their pro rata undiscounted value on the intended exit date of 31 December 2019.

Grounds of challenge

Mr Costa appealed to the Supreme Court on two grounds: (i) s.172 only requires a director to act in the way he personally considers is in the best interests of the company, which is to be assessed subjectively rather than objectively; and (ii) procuring a company to act in breach of a shareholders’ agreement is not inherently a breach of s.172 – the key question is whether the director genuinely believed he was acting in the company's interests.

Decision 

The Supreme Court dismissed the appeal, upholding the Court of Appeal's decision that Mr Costa had acted in breach of his duty under s.172. The judgment was delivered by Lord Briggs, with whom Lord Sales, Lord Hamblen, Lord Burrows and Lady Rose all agreed.

The key issue was the construction of s.172(1) which provides that: “A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company...”

Mr Costa argued that the requirement for good faith governs only the director’s thinking rather than their conduct, relying on the fact that grammatically the words “in good faith” appear to be part of the phrase “he considers in good faith”. The consequence of this interpretation, as the court noted, would be that if a director genuinely believes a particular course of action to be in the company's best interests, they are free to take whatever steps they consider necessary to secure that outcome, notwithstanding that those steps may, objectively speaking, involve deception, dishonesty or disloyalty.

Conversely, Saxon Woods argued that the requirement of good faith extends to the director’s conduct in pursuit of what they believe to be the best course for the company. While the court will not second guess a director’s genuine view about the best way forward for the company, the requirement for good faith does involve an objective assessment if the director’s conduct is challenged in court.  

The court agreed with Saxon Woods’ interpretation for three reasons. 

• First, it is consistent with the law prior to the codification of the general duties in the Companies Act, to which regard must be had in interpreting the codified duties (per s.170(4) of the Companies Act). Lord Briggs noted that, at common law, the equivalent to the s.172 duty had been described as a duty of loyalty which would be breached by disloyal conduct (such as a director, like Mr Costa, covertly seeking to implement their own view in the face of the contrary view resolved by the board). Further, Lord Briggs noted that, before codification, the courts were prepared to apply an objective test in determining whether the duty of loyalty had been breached. 
• Second, Saxon Woods’ interpretation was consistent with the context and purpose behind the relevant part of the Companies Act, which was to codify a set of general duties in a way which operates in harmony with the governance of a company in accordance with its constitution. That objective, the court noted, is not achieved by a construction of s.172 which permits (and perhaps even requires) an individual director to pursue his own dissenting view as to the best way to secure the company's success by covert and disloyal means, in defiance of the board's collective judgment. 
• Third, it was highly unlikely that the drafters of the Companies Act intended that the duty under s.172 would require directors merely to think, rather than act, in good faith. As the court noted, far from promoting corporate success in the modern world, this would be “a recipe for chaos and paralysis in corporate governance” and “destructive of the collegiality of the board of directors as a whole which all stakeholders in limited companies are entitled to expect”.  

It followed from this analysis that the Court of Appeal was correct to reverse the trial judge's decision on the question of whether a breach of s.172 was made out on the facts. 

Lord Briggs noted that his analysis ultimately proceeded on a broader basis than the Court of Appeal – concentrating on the requirement for good faith rather than dishonesty on its own: the Court of Appeal by contrast had concluded that s.172 had been breached because Mr Costa acted dishonestly when applying the objective test laid down in Ivey. Lord Briggs observed that, where the defendant owes a fiduciary duty of loyalty, although dishonesty may serve as evidence of a breach of that fiduciary duty, dishonesty only forms part of the wider enquiry and it is unnecessary to use the test in Ivey in that context. 

In light of its decision, the Supreme Court did not consider it necessary to form a concluded view in respect of the Court of Appeal’s finding that Mr Costa was independently in breach of his duty under s.172 because the shareholders’ agreement determined the route for success of the Company.