English Supreme Court Rules on Scope of Directors’ Good Faith Duty

Legal Alert

July 27, 2026

Summary

For the first time, the Supreme Court has had to consider the meaning of section 172 of the Companies Act 2006 (the “Act”), which provides: “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 for the benefit of its members as a whole …”.

The key issue was whether the above duty is purely subjective or also includes an objective element. Put another way, can a director conduct themself in an objectively dishonest fashion if they genuinely believe this will promote the success of the company? The Supreme Court held that they cannot; the duty applies to conduct as well as intention.

Background

Saxon Woods was a minority shareholder in a company, of which Mr. Costa was the chairman of the board of directors. A Shareholders’ Agreement (the “SHA”) required the company and its shareholders to work in good faith to achieve a sale of its shares or assets by 31 December 2019. The company entrusted the conduct of the sale process exclusively to Mr. Costa. No sale occurred. The business, and in turn the value of Saxon Woods’ shareholding, was then severely affected by Covid-19. Saxon Woods brought an unfair prejudice petition under sections 994-996 of the Act, alleging that Mr. Costa’s conduct breached section 172.

The trial judge held that the company had suffered unfair prejudice. He found that Mr. Costa had deliberately delayed the sale (including by failing to instruct the company’s advisers to achieve an exit by the end of 2019), while misleading the board and denying them knowledge and involvement in the sale process. However, there was no breach of section 172, because Mr. Costa had done so in the genuine belief that a sale after the end of 2019 would produce a much higher return for the company and its investors. He therefore made an order for Mr. Costa to buy Saxon Woods’ shares, but conditional upon it being found at a later quantum hearing that, had the SHA exit provisions been followed, the company would have sold for more than US$75 million net of debt before the end of 2019.

On appeal by Saxon Woods, the Court of Appeal found that Mr. Costa had breached section 172, concluding that: (i) applying the objective test of dishonesty from Ivey v Genting Casinos, Mr. Costa had acted dishonestly; and (ii) it was not open to him independently to formulate or act upon a different strategy for the success of the company than the one in the SHA. Mr. Costa appealed both conclusions to the Supreme Court, as well as the Court of Appeal’s decision to substitute the High Court’s conditional buyout order with an unconditional order for him to buy Saxon Woods’ shares at their undiscounted 31 December 2019 value.

The Supreme Court’s Decision

Mr. Costa’s main argument was that the section 172 duty was purely subjective, so that a director’s genuine belief that they are promoting the company’s best interests is a complete defence, regardless of their actions. The Supreme Court rejected this argument, holding that, notwithstanding any grammatical infelicity, section 172 applies to both conduct and intention, because:

The pre-2006 common law, which the Act codified, had consistently applied objective standards in determining whether directors breached their fiduciary duty. While courts generally respect directors’ business judgment, there was no authority for this respect extending to a case of a sole director pursuing their own judgment by a covert strategy, contrary to a judgment and strategy resolved upon by the board.
If a director were entitled to do this, it would undermine the purpose of Chapter 2 of Part 10 of the Act (of which section 172 forms part), namely to “[codify] a set of general duties in a way which will operate in harmony with the governance of a company in accordance with its constitution”. Such conduct would, for example, likely infringe section 171(a) (which requires directors to act in accordance with the company’s constitution) and section 171(b) (which requires directors only to exercise powers for the purposes for which they are conferred).
It is highly unlikely that the drafters of section 172 had intended to require directors only to think, and not to act, in good faith. 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, on the trial judge’s findings, that Mr. Costa had breached section 172, and it was unnecessary for the Court of Appeal to have applied the Ivey v Genting test, even though this produced the same result.

In the premises, the Supreme Court did not need to decide whether Mr. Costa was in breach of his section 172 duty merely because the SHA had determined a different route for success of the company. It observed that this was not an easy question to answer: “The mere fact that a company has contracted with others (here its shareholders) to pursue a certain route to success cannot … altogether close off any analysis by its directors whether it would be better served by changing course, even if that were to involve a breach of contract …”. However, this language makes clear that, for such a course even potentially to be permissible, it would have to be decided on by the board, rather than a sole director acting covertly.

Finally, the Supreme Court upheld the Court of Appeal’s unconditional buyout order. In circumstances where the trial judge had erred in ruling that Mr. Costa did not act in breach of duty (a matter important to its exercise of discretion on remedy) the Court of Appeal was entitled to exercise that discretion afresh.

Implications

The decision reinforces that section 172 operates within the framework of collective board governance. The Supreme Court repeatedly emphasized that the success of a company is ordinarily promoted through decisions of the board acting collectively, rather than through individual directors pursuing their own preferred strategy.

For directors, the decision provides clear guidance on how to act when they disagree with a strategy agreed on by the board. They must raise their concerns with the board. They are not entitled covertly to pursue a different course, even if this falls within their delegated functions and they firmly believe it to be in the company’s best interests.

As for company boards, the case underlines the importance of creating and communicating: (i) reporting procedures for directors to whom authority is delegated for key matters (e.g. share sales, mergers, fundraisings, negotiations of key contracts); and (ii) processes for directors to challenge board decisions with which they disagree.