The Supreme Court has, for the first time, confirmed the test for determining whether a director has breached their duty to act in good faith to promote the success of the company under section 172 of the Companies Act 2006.
In the recent case of Saxon Woods Investments Limited and Others v Francesco Costa [2026] the Supreme Court decided that a director’s duty to act in a way that promotes the best interests of the company will be breached if the director acts dishonestly or in bad faith, even if they have an honest belief that they are promoting the success of the company.
The duty to act in a manner that promotes the success of the Company
Section 172 of the Companies Act 2006 imposes a duty on directors to “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”.
Until this recent decision, whether this duty had been breached or not was determined by assessing the intention of the director in question. If the director had an honest belief that they were acting in good faith to promote the interest of the company, then they would not breach this duty.
The Supreme Court has now made it clear that a director’s conduct will be assessed objectively, rather than solely by reference to their intention. If a director has an honest belief they are promoting the success of the company, but they do so in a dishonest way in bad faith, for example by breaching the company’s constitution or by failing to disclose their actions to the rest of the board, then they will be in breach of section 172.
Background
Spring Media and its investors had agreed in a shareholders’ agreement to a sale by the end of 2019. The Defendant, Mr Costa, was its chairman and was in sole charge of the sale process. He decided that waiting until after December 2019 would produce a better return. However, rather than discussing this with the board, he covertly delayed the sale by excluding other directors and misleading the board about the progress of the sale. Unfortunately, the Covid-19 pandemic ruined any chance of a profitable exit.
The Claimant, Saxon Woods, was a minority shareholder in Spring Media and brought an unfair prejudice petition.
The trial judge found no breach of Mr Costa’s duty to promote the success of the company, as he honestly believed that he was acting in the company’s best interest. That decision was appealed by the Shareholders, and the Court of Appeal found there had been a breach of section 172. Mr Costa appealed to the Supreme Court who dismissed his appeal to the higher court, agreeing with the Court of Appeal’s conclusions.
The Supreme Court judgment concluded that the duty to promote the success of the company requires a director to not only think in good faith, but also to act in good faith and in the best interests of the company and ultimately, its shareholders (in a solvent situation).
What does this mean in practice?
A genuine belief that they are acting in good faith will not give an individual director free reign to carry out their own clandestine business strategy, breach the company’s constitution, mislead other directors or undermine the board’s constitutional responsibility for managing the company.
A shareholders’ agreement in itself does not invariably prevent a board from changing strategy if circumstances change, but it should be carried out using proper decision-making channels in accordance with the company’s constitution, rather than by covert and disloyal means.
