Court of Appeal rules that UK directors must act honestly towards the company's board and members

The Court of Appeal has clarified the standards of honesty that directors must achieve to demonstrate compliance with section 172 of the Companies Act 2006, the duty to act in the best interests of the company. 

The decision in Saxon Woods Investments Limited v Francesco Costa [2025] overturned the High Court's judgment in 2024 that had given surprising leeway to directors to assert that a decision knowingly to breach a company agreement, if made in good faith, did not constitute a breach of duty.

This ruling is a clear warning that directors cannot consider misleading the board or members of the company in the expectation that they will "thank me in the long run". Whether or not a decision by a director has been made in good faith will also be assessed both subjectively and objectively in the context of section 172.

Director's duty to promote the success of the company

Section 172 of the Companies Act 2006 requires directors to act in a way which they consider "in good faith" will promote the success of the company for the benefit of its members as a whole. The provision sets out a non-exhaustive list of factors which directors must take into account in order to comply with this duty, including the interests of the company's stakeholders and the need to act fairly as between members of the company.

Compliance with section 172 is a fundamental feature of the role of a director. It is also a fundamental standard considered by those who wish to examine directors' conduct, whether as part of shareholder litigation or a more public consideration of the wider impact of board decisions and the need for directors to look beyond short-term financial gain.

Over the years, a defence of honest belief that actions are for the good of the company has provided a refuge for those who might be accused, in fact, of promoting their own interests and want to gamble on being a believable witness: the obligation under section 172 is, at least at first blush, subjective.

The High Court decision

The proceedings resulted from an unfair prejudice petition which was brought by Saxon Woods Investments Limited under section 994 of the Companies Act 2006 in relation to Spring Media Investments, a company in which Saxon Woods was a minority shareholder. Saxon Woods alleged that Spring Media had acted in breach of a requirement in a shareholders’ agreement to work in good faith towards an exit by a particular date, and that Francesco Costa, who was both an executive director of and a substantial investor in Spring Media, was responsible for its breach.

At first instance, the High Court concluded on the facts that Mr Costa had deliberately caused Spring Media to breach the terms of the shareholders' agreement by deferring the exit process and had concealed this from his fellow directors and members. However, the judge held that Mr Costa "sincerely" believed that he was following the course which was most likely to promote the success of his company and therefore acted in good faith in accordance with his duties as a director.

No room for dishonest conduct

The High Court's approach was resoundingly rejected by the Court of Appeal for having ignored the second "limb" of the test of compliance with section 172 as set out in the UK Supreme Court judgment in Ivey v Genting Casino: even if a director subjectively believes they have acted in good faith, their conduct in reliance upon that belief must have been objectively honest.

The Saxon Woods ruling has clarified and restated several important principles of which all company directors should be aware. In acting in a way which is most likely to promote the success of the company for the benefit of its members, section 172 requires a director to act honestly towards the company "in all he does".

To assess honesty in this context, the court will not only listen to the evidence of the director as to their stated belief, but will also apply the (objective) standards of "ordinary decent people". There is no requirement that the director must have appreciated that their conduct fell below the objective standards of ordinary decent people for the Court to find that their conduct was dishonest.

A director deliberately deceiving the board of a company "must, either always or almost always", be found to be acting inconsistently with their duty under section 172. The Court of Appeal acknowledged that there may be "wholly exceptional circumstances" where this is not the case, but it will not be sufficient for a director to argue that they subjectively believed that they were acting in the best interests of the company and that the directors and members would "thank me in the long run".

Breach of fiduciary duties

In this particular case, the Court of Appeal also determined that Mr Costa had separately breached his fiduciary duties as a director by causing Spring Media to breach the terms of the shareholders' agreement which expressly provided that the 'success of the company for the benefit of its members as a whole' meant seeking to facilitate an exit by a specific date.

By ensuring that Spring Media acted contrary to the members' interests, as defined in the shareholders' agreement, it was found Mr Costa's conduct could not have complied with his duties as a director.

Osborne Clarke comment

The Saxon Woods ruling raises the question of how can directors ensure compliance with the duty to promote the success of the company?

To the extent the rules around compliance were relaxed following the first instance decision in Saxon Woods, there is now no doubt that directors acting dishonestly towards their company (even believing themselves to be doing the right thing) are likely to be breaching their directors' duties.

As ever, where directors have to take difficult decisions, proving compliance with fiduciary duties is key. Directors will want to ensure they consider:

• Have the fact of and reasons for decisions taken by directors in the best interests of the company been properly documented?
• When including a statement that directors have acted in the best interests of the company in board minutes, to what extent can this be properly evidenced and what would be found if it were scrutinised by the courts?
• If directors consider that it is no longer in the company's best interests to comply with the terms of a shareholders' agreement, the directors should avoid actively concealing any non-compliance from directors and/or members. They should seek external legal advice on the most suitable way to extricate the company from its legal obligations and/or to seek to vary such obligations as might be deemed harmful.