The Supreme Court has had the final word in Saxon Woods Investments Limited and others (Respondents) v Francesco Costa (Appellant) [2026] UKSC 21 (Saxon Woods), confirming that a breach of the duty to act in good faith to promote the success of the company (under Section 172 of the Companies Act 2006) is not simply a question of the subjective thought process of that director, but also involves an objective assessment of the director’s conduct.
Section 172 Under Scrutiny
The issue of interpretation and application of Section 172 arose when Saxon Woods (& fellow minority shareholders), presented a section 994-996 unfair prejudice petition on the basis that Mr Costa (director and former chairman of Spring Media Investments Limited, the company in which Saxon Woods held its shares (the Company)) had personally been responsible for the Company’s breach of a 2016 Shareholders Agreement to work in ‘good faith’ towards a 2019 exit.
Having been authorised by the board to manage the sale of the Company (or its business), in accordance with the agreed exit strategy contained in the 2016 Shareholders Agreement, Mr Costa unilaterally decided that a later sale would achieve a better price. Acting alone, Mr Costa deliberately pursued a slower exit strategy whilst taking steps to ensure that no other director or shareholder had any knowledge of his pursuit. Mr Costa was found to have mislead the board by giving the impression he had been complying with the Shareholders Agreement despite giving instructions to the Company’s advisors that were contrary to that strategy. However, his ‘personal’ strategy of delay and concealment was upended when Covid-19 hit and destroyed the prospect of any beneficial exit at a later date.
The High Court found Saxon Woods had suffered unfair prejudice under sections 994–996 of the Companies Act 2006 (by the Company’s breach of the requirement to work in good faith towards a 2019 exit, a breach for which Mr Costa was responsible) but Mr Costa had not breached Section 172 of the Companies Act because he had genuinely believed he was acting in the Company’s best interests. On this basis, the Court declined to make an unconditional order that Mr Costa purchase Saxon Woods’ shares, instead, making a conditional order subject to quantum trial and assessment. The trial judge, relying on Regentcrest plc (in liquidation) v Cohen [2001] 2 BCLC 80 described the duty under Section 172 as a “subjective” assessment of the director’s state of mind, and not requiring any objective assessment from the Court. In this instance, Mr Costa’s state of mind, was described as: ‘they wouldn’t like it now if they knew, but they will thank me in the long run’, and in that sense, on assessment of ‘thought’ alone he demonstrated a sincere belief he was acting in the best interests of the Company.
Mr Costa and Saxon Woods appealed the decision. The Court of Appeal dismissed Mr Costa’s appeal but upheld Saxon Woods’ appeal, finding that Mr Costa was in breach of Section 172 because his deception of the board in the pursuit of his unilateral strategy had been dishonest (applying the objective test from Ivey v Genting Casinos [2017] UKSC 67) and not in good faith. Section 172, it was said, requires a director, in all he does, “to act in good faith towards the company, in the way he considers would be most likely to promote the success of the company…” and any act of dishonesty had to mean a breach of his fiduciary duty. As a result, the Court of Appeal reversed the High Court’s decision on breach and relief and granted an unconditional buy-out order at the December 2019 valuation.
Mr Costa appealed against the Court of Appeal finding, maintaining that he had acted in good faith and in the best interests of the Company (as he saw those interests) and the relief granted was therefore inappropriate.
The Supreme Court decision focuses on three assessments; the construction of Section 172 as a statutory duty; consistency with how Section 172 has been applied under common law; and consistency with the purpose of the codified duty of governance. Posing the ‘simple question’: Is a director required by section 172 to act, or merely to think, in good faith?
Section 172 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 for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to—
(a)the likely consequences of any decision in the long term,
(b)the interests of the company’s employees,
(c)the need to foster the company’s business relationships with suppliers, customers and others,
(d)the impact of the company’s operations on the community and the environment,
(e)the desirability of the company maintaining a reputation for high standards of business conduct, and
(f)the need to act fairly as between members of the company.
The answer: a director is required to act, not merely think, in good faith. In dismissing Mr Costa’s appeal, the Supreme Court held that the good faith requirement in section 172(1) must also require reference to a director’s conduct, with the alternative described as: “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.”
The Supreme Court did not comment on the Court of Appeal’s second ground for finding a breach of Section 172 (distinct from its finding of dishonesty), namely, that Mr Costa departing from the strategy agreed in the SHA, even if motivated by genuine belief and good faith, itself amounted to a breach. It was not necessary to resolve this issue in circumstances where a breach had already been found on grounds of dishonesty. It therefore remains to be seen whether the Court of Appeal’s decision on this point is later challenged, for now, diverting from an agreed contractual course, is likely to be considered its very own breach.
What does this mean for Directors?
The Court’s decision has clarified that the requirement for “good faith” under section 172(1) is not limited to a director’s thought process. Conduct matters. The exclusion of or concealment from fellow board members is unlikely to demonstrate the ‘good faith’ conduct required of directors. The takeaway for directors;
- Maintain collective board governance because the primary responsibility for managing a company rests with the board as a whole (acting by majority);
- Where there is a divergence of thought process as to what is in the ‘best interests’ of the company, it should be discussed transparently with a view to acting collectively and not by any one individual director acting unilaterally;
- Governance is by actions not just by thoughts and whilst good intentions matter, conduct that objectively diverges from or is contrary to those intentions (particularly where there has been concealment of that conduct) will be considered;
- Covert or unauthorised use of delegated powers is likely to result in a simultaneous breach of Section 171 (acting within the constitution and for proper purposes) and Section 172.
The case further demonstrates how breach of fiduciary duty findings directly affect remedies available in unfair prejudice petitions, including whether a buy-out order is conditional or unconditional and at what valuation date.