Section 172 Good Faith Requires Loyal Conduct, Not Merely Genuine Belief
Introduction
In Saxon Woods Investments Ltd & Ors v Costa [2026] UKSC 21, the
United Kingdom Supreme Court clarified an important principle of company law:
a director’s duty under section 172 of the Companies Act 2006 is not
satisfied merely because the director genuinely believes that his preferred course
would promote the company’s success. Good faith also governs the director’s
conduct.
The case arose from a failed exit process for Spring Media Investments Limited.
The appellant director had been entrusted with conducting the sale process, but he
covertly pursued a slower strategy than that agreed in the shareholders’ agreement
and approved by the board. He did so because he believed delay would produce a
better outcome. The strategy failed after the Covid pandemic destroyed the prospect
of a successful exit.
Saxon Woods, a shareholder, brought an unfair prejudice petition under
sections 994-996 of the Companies Act 2006. The central legal question was
whether a director who honestly believes he is acting in the company’s interests can
nevertheless breach section 172 by secretly subverting the board’s agreed strategy.
Summary of the Judgment
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The Supreme Court unanimously dismissed the director’s appeal.
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Lord Briggs held that section 172 requires good faith in conduct as well as in
thought.
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The court confirmed that the “business judgment” principle protects genuine
commercial judgment, but it does not permit an individual director to act covertly,
mislead fellow directors, or undermine the board’s constitutional role.
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The director’s conduct was held to be manifestly disloyal and a breach of
section 172.
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The Supreme Court agreed that the Court of Appeal was entitled to replace the
trial judge’s conditional buy-out order with an unconditional order requiring the
director to buy Saxon Woods’ shares at their pro rata undiscounted value as at
31 December 2019.
Analysis
1. The Legal Principle Established
The new and central principle is that a director cannot rely on a genuine belief
in the company’s best interests as a complete answer to disloyal conduct.
Section 172 is not merely a subjective test of belief. It requires the director to
act loyally and in good faith towards the company, including towards the board as
the company’s constitutional decision-making organ.
The Supreme Court drew a distinction between:
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the court’s reluctance to second-guess commercial decisions honestly made by
directors; and
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the court’s duty to intervene where a director’s conduct is covert, misleading,
disloyal, or destructive of proper corporate governance.
2. Precedents Cited
Re Smith and Fawcett Ltd [1942] Ch 304
This case supplied the classic statement of the business judgment principle:
directors must exercise their powers bona fide in what they consider, not what the
court considers, to be in the company’s interests. The Supreme Court accepted the
importance of this principle but stressed that it concerned decisions of the board,
not unilateral covert action by a dissenting director.
Onyl de Falbe International Ltd v Jefferies (unreported) 1 July 1992
This authority was referred to as part of the line of cases applying the subjective
approach to a director’s view of the company’s interests. However, it did not support
the proposition that a director may secretly undermine the collective decision of the
board.
Regentcrest plc (in liquidation) v Cohen [2001] 2 BCLC 80
The trial judge had relied on this case to conclude that the director had not breached
section 172 because he sincerely believed he was acting in the company’s interests.
The Supreme Court held that this was too narrow. Genuine belief is relevant, but it
does not immunise disloyal conduct.
In re National Funds Assurance Company (1878) 10 Ch D 118
This older authority was important because it showed that courts have historically
assessed fiduciary conduct objectively. A fiduciary cannot simply say that he believed
his conduct was proper if, with knowledge of the facts, he engaged in conduct the law
treats as a breach of duty.
In re Marzetti's Case (1880) 42 LT 206
This case reinforced the point that directors, as fiduciaries, are protected where
they act bona fide, but the inquiry concerns their conduct, not merely their internal
intention.
The Court of Appeal in that case treated a director’s duty to disclose relevant
information, including his own misconduct, as part of the fundamental duty of loyalty.
The Supreme Court relied on this approach to show that section 172 is broad and
flexible enough to require open dealing with the board.
Mutual Life Insurance Co of New York v Rank Organisation Ltd [1985] BCLC 11
This case was cited through Item Software as recognising the “time-honoured”
duty of loyalty owed by directors.
Winkworth v Edward Baron Development Co Ltd [1986] 1 WLR 1512
The judgment referred to Lord Templeman’s statement that “Equity is not a computer.”
This supported the idea that fiduciary duties are principled and flexible, not confined
to rigid categories.
Meinhard v Salmon (1928) 164 NE 545, 548 (US)
This American authority was cited for the proposition that fiduciary loyalty is
“undivided and unselfish.” It reinforced the broad equitable foundation of the
director’s duty.
This decision confirmed that disclosure obligations are not free-standing technical
rules but aspects of the director’s overarching duty to act in good faith in the
company’s interests.
Bristol and West Building Society v Mothew [1998] Ch 1
This case was cited for the core definition of fiduciary duty as a duty of loyalty.
That concept underpinned the Supreme Court’s analysis of section 172.
Recovery Partners GP Ltd v Rukhadze [2025] UKSC 10; [2026] AC 209
The Supreme Court referred to this case as recent confirmation that fiduciary duties
are assessed by reference to objective legal standards, not merely a fiduciary’s
personal view of propriety.
Eclairs Group Ltd v JKX Oil & Gas plc [2015] UKSC 71, [2015] Bus LR 1395
This authority illustrated that a genuine belief in the company’s interests does not
automatically excuse misuse of powers. It supported the conclusion that directors
cannot hide behind subjective belief where their conduct is legally improper.
Ivey v Genting Casinos (UK) Ltd (trading as Crockfords Club) [2017] UKSC 67; [2018] AC 391
The Court of Appeal had used the objective dishonesty test in this case. The Supreme
Court held that it was unnecessary to frame the issue through Ivey. In a fiduciary
context, the primary question is whether the duty of loyalty has been breached.
Dishonesty may be relevant evidence, but the fiduciary duty itself supplies the
governing framework.
3. Legal Reasoning
The Supreme Court’s reasoning rested on three main foundations.
First: section 172 codifies the prior fiduciary duty of loyalty
Section 170(3) and (4) of the Companies Act 2006 requires the general duties of
directors to be interpreted consistently with the common law and equitable principles
they replaced. The pre-existing duty was not merely a duty to think honestly; it was
a duty to act loyally.
Second: company governance is collective
The company’s constitution gave management responsibility to the board. Decisions
were to be made by majority decision at board meetings or by written resolution.
An individual director was not entitled to replace collective governance with a
unilateral covert campaign.
Third: good faith applies to conduct
Lord Briggs rejected the argument that the phrase “he considers, in good faith”
confines good faith to the director’s state of mind. Such a reading would allow a
director to lie, conceal, and mislead so long as he believed the end justified the
means. The court regarded that as incompatible with fiduciary loyalty and corporate
governance.
On the facts, the director:
- kept other directors and shareholders away from the exit process;
- rebuffed attempts to obtain information;
- misled the board into thinking the shareholders’ agreement was being followed;
- failed to disclose that advisers had not been instructed to achieve a 2019 exit; and
- used delaying tactics to pursue his own strategy.
This was not protected business judgment. It was disloyal conduct and therefore a
breach of section 172.
4. The Shareholders’ Agreement Issue
The Court of Appeal had also reasoned that the shareholders’ agreement fixed the
company’s route to success, so the director could not choose another route. The
Supreme Court did not decide that point. Lord Briggs observed that directors may,
in some circumstances, need to reconsider a contractual strategy if later events
change the company’s interests. However, any such reconsideration must be undertaken
through proper board processes, not through concealment or sabotage.
5. Remedy and Unfair Prejudice
Because the trial judge had wrongly found no breach of section 172, the Court of
Appeal was entitled to reconsider the remedy. The unconditional buy-out order was
upheld. This confirms that serious director misconduct affecting shareholder value
can justify robust relief under the unfair prejudice jurisdiction.
6. Impact of the Judgment
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For directors: a sincere belief in the company’s interests is not enough.
Directors must act transparently and loyally within the company’s governance
structure.
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For boards: collective decision-making is protected. A dissenting director
must raise disagreement openly, not undermine the board covertly.
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For shareholders: the decision strengthens remedies where a director’s
misconduct frustrates an agreed exit or investment strategy.
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For section 172 litigation: courts will not second-guess honest commercial
judgment, but they will scrutinise conduct that is dishonest, concealed, or
disloyal.
Complex Concepts Simplified
Section 172 duty
A director must act in the way he considers, in good faith, would most likely promote
the company’s success for the benefit of its members as a whole.
Business judgment principle
Courts usually do not substitute their own commercial view for that of directors.
But this protection does not cover disloyal or covert conduct.
Fiduciary duty
A fiduciary must act loyally for another’s benefit. Company directors are fiduciaries
of the company.
Unfair prejudice
A shareholder may seek relief where the company’s affairs are conducted in a way
that unfairly prejudices that shareholder’s interests.
Buy-out order
A court order requiring one party, often the wrongdoer or controller, to purchase
another shareholder’s shares at a court-determined value.
Conclusion
Saxon Woods Investments Ltd & Ors v Costa [2026] UKSC 21 is a significant
authority on directors’ duties. It establishes that section 172 requires loyal conduct,
not merely a genuine belief in the company’s success. A director who disagrees with
the board must engage openly with fellow directors and seek to persuade them through
proper governance channels.
The judgment preserves the business judgment principle while making clear its limit:
it protects honest commercial decision-making, not covert subversion of the board’s
authority.