Anonymized Summary of a UK Supreme Court Judgment
Factual and Procedural Background
The appeal concerned the standard of conduct required of a company director who genuinely disagrees with the other directors about the best strategy to promote the company’s success. The dispute arose from the conduct of an Appellant Director, who was a director (and formerly board chair) of Company A, a holding company incorporated in Jurisdiction A for a group providing creative services in certain consumer brand sectors.
Company B, a minority shareholder of Company A (holding shares as nominee for a trust), brought proceedings alleging unfair prejudice. The relevant corporate documents included: (i) adopted model articles stating that directors are responsible for management; (ii) Company A’s articles requiring board decisions by majority at meetings or written resolutions; and (iii) a shareholders’ agreement executed in 2016 (the “SHA”) under which the parties agreed to work in good faith towards an “Exit” by 31 December 2019, with specified post-deadline steps if an Exit had not occurred.
The trial judge found that the board had delegated the conduct of the sale/Exit process to the Appellant Director, and that he pursued a slower sale strategy than that contemplated by the SHA. The findings included that he sought to keep other directors and shareholders uninformed, rebuffed requests for information, misled the board about compliance with the SHA, and used delaying tactics. The trial judge found the Appellant Director sincerely believed he was acting in the best interests of the company and its investors and therefore held there was no breach of section 172(1) of the Companies Act 2006, while nonetheless holding that unfair prejudice was established. The trial judge made a conditional buy-out order, contingent on proof at a later quantum hearing of a sufficiently high counterfactual offer by the end of 2019.
On appeal, the Court of Appeal dismissed the Appellant Director’s appeal and allowed Company B’s appeal, ordering an unconditional buy-out at an undiscounted pro rata value as at 31 December 2019, with valuation to be determined later. The Court of Appeal’s departure from the trial judge’s remedy was driven principally by its conclusion that the Appellant Director was in breach of section 172, including by dishonest deception of the board assessed using an objective dishonesty test.
The Appellant Director appealed to the Supreme Court. The Supreme Court dismissed the appeal.
Legal Issues Presented
- Whether conduct by an individual director in covertly pursuing a strategy contrary to the board’s agreed approach can constitute a breach of the duty to promote the success of the company under section 172(1) of the Companies Act 2006, notwithstanding the director’s genuine belief that the strategy was best for the company.
- Whether, in assessing breach of section 172(1), the court is confined to a purely subjective inquiry into the director’s belief, or may evaluate the director’s conduct (including by reference to objective standards such as dishonesty or bad faith).
- Whether the Court of Appeal was entitled to set aside the trial judge’s discretionary remedy and substitute an immediate, unconditional buy-out order in unfair prejudice proceedings.
Arguments of the Parties
Appellant Director’s Arguments
- Section 172(1) protects a director who genuinely believes the chosen course is most likely to promote the company’s success; therefore, how the director acts to achieve that objective is for the director, and the court cannot treat concealment or misleading conduct as a breach of section 172(1) if the belief is genuine.
- The Court of Appeal was wrong to apply an objective test (including for dishonesty) to determine breach of section 172(1); the inquiry is subjective.
- A decision to procure that a company act in breach of contract is not per se a breach of section 172(1); the question is whether the director genuinely believed it was in the company’s interests.
Respondent Shareholder’s Arguments
- The section 172(1) requirement of “good faith” extends to the director’s conduct in pursuit of company success, not merely the director’s internal thought process.
- Even if courts do not second-guess business judgments on an objective merits basis, good faith/bad faith assessment is not limited to the director’s asserted belief and may involve objective evaluation of conduct.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Re Smith and Fawcett Ltd [1942] Ch 304 |
Courts will not interfere with directors’ discretionary business judgment if exercised bona fide in what directors consider (not what the court considers) to be the company’s interests and not for a collateral purpose. |
Used to frame the “business judgment” principle, while emphasising it concerns board decision-making and does not support a single director covertly subverting the board. |
| Onyl de Falbe International Ltd v Jefferies (unreported) 1 July 1992 |
Application of business-judgment/loyalty concepts to assessing alleged breaches by individual directors. |
Noted as an example of authorities applying the approach to individual directors; not treated as authority for covert subversion of board governance. |
| Regentcrest plc (in liquidation) v Cohen [2001] 2 BCLC 80 |
Subjective element in assessing directors’ good faith in fiduciary duties; referenced for a “test” applied by the trial judge. |
The trial judge relied on it to find no section 172 breach; the Supreme Court distinguished the scope of subjectivity and held it does not give carte blanche for disloyal covert conduct. |
| In re National Funds Assurance Company (1878) 10 Ch D 118 |
Good faith/bona fides assessed in relation to conduct; courts will not simply accept a director’s claimed honest intention where acts constitute misappropriation with knowledge of facts. |
Used to support that bona fides is not merely internal belief and that courts may assess conduct objectively in fiduciary/breach contexts. |
| In re Marzetti's Case (1880) 42 LT 206 |
Directors have discretion and are relieved from liability for want of judgment or error if they act bona fide. |
Relied upon to reinforce that bona fides relates to acting (conduct), not solely intention. |
| Ivey v Genting Casinos (UK) Ltd (trading as Crockfords Club) [2017] UKSC 67; [2018] AC 391 |
Modern objective test for dishonesty. |
The Supreme Court noted the Court of Appeal used Ivey, but held the case could be resolved within the fiduciary “good faith/loyalty” framework without needing to elaborate dishonesty via Ivey. |
| Item Software (UK) Ltd v Fassihi [2004] EWCA Civ 1244; [2005] 2 BCLC 91 |
Duties of disclosure can be treated as aspects of the fundamental duty of loyalty (predecessor of section 172), rather than separate freestanding duties. |
Used to support treating duties of openness to the board (and not acting covertly) as within section 172’s loyalty/good faith duty. |
| Mutual Life Insurance Co of New York v Rank Organisation Ltd [1985] BCLC 11 |
Characterisation of the duty of loyalty as “time-honoured.” |
Quoted within Item Software extracts to support the centrality and flexibility of the loyalty duty. |
| Winkworth v Edward Baron Development Co Ltd [1986] 1 WLR 1512 |
Statement about equity’s operation (quoted in Item Software). |
Referenced via quotation to illustrate the flexible application of fiduciary principle. |
| Meinhard v Salmon (1928) 164 NE 545 (US) |
Quoted for a broad conception of fiduciary loyalty. |
Used (via Item Software quotation) to support the breadth of loyalty obligations. |
| Shepherds Investments Ltd v Walters [2006] EWHC 836 (Ch); [2007] 2 BCLC 202 |
Affirms (following Item Software) that breach lies in doing impermissible acts without disclosure and permission, grounded in the overriding “good faith best interests” duty. |
Used to reinforce that covert conduct and failure to disclose can constitute breach within the loyalty/section 172 framework. |
| Bristol and West Building Society v Mothew [1998] Ch 1 |
Identification of the core fiduciary duty as a duty of loyalty. |
Used to support that fiduciary duties are assessed with objective rigour and are not displaced by mere genuine belief. |
| Recovery Partners GP Ltd v Rukhadze [2025] UKSC 10; [2026] AC 209 |
Modern Supreme Court discussion of fiduciary obligations (accounting for profits). |
Cited as evidence that objective approaches to fiduciary duties continue “unabated.” |
| Eclairs Group Ltd v JKX Oil & Gas plc [2015] UKSC 71; [2015] Bus LR 1395 |
Referenced for limits of genuine belief as a defence in directors’ duty contexts. |
Used to support that genuine belief is not a complete answer where fiduciary obligations are breached. |
Court's Reasoning and Analysis
Interpretive approach mandated by the statute. The Supreme Court held that section 172 must be interpreted in line with its common law and equitable predecessors because section 170(3) and (4) require regard to corresponding common law rules and equitable principles, and the codification was intended mainly to codify rather than change prior law.
Section 172 encompasses the complained-of conduct. The Court characterised the alleged breach as principally about how the Appellant Director pursued his preferred strategy—by covertly subverting the board’s constitutionally assigned role—rather than merely about holding a dissenting view. Although a duty not to subvert board governance is not expressly stated in Chapter 2, the Court held it is best treated as part of the section 172 loyalty/good faith duty, because (i) promoting the company’s success is ordinarily a board function decided collectively; (ii) effective governance requires individual directors to bring their independent views to colleagues and not pursue covert alternative strategies; and (iii) the statutory scheme (including section 171 and section 173) is designed to operate harmoniously with constitutional governance.
“Good faith” in section 172 applies to conduct, not only belief. While acknowledging that a purely grammatical reading might suggest “in good faith” modifies “considers,” the Court preferred the construction that good faith also governs the director’s conduct in pursuing company success. The Court gave three main reasons grounded in the judgment: (i) consistency with pre-existing fiduciary law, which applied objective assessment to fiduciary conduct and did not permit disloyal covert conduct to be immunised by professed belief; (ii) consistency with the context and purpose of Chapter 2, which is to codify directors’ duties in harmony with corporate constitutions and board governance; and (iii) the implausibility (“straining credulity”) of Parliament intending a regime that would permit covert deception and disloyal tactics so long as the director sincerely believed the strategic objective was best.
Relationship to dishonesty and Ivey. The Court noted the Court of Appeal had focused on dishonesty using Ivey. The Supreme Court held its own analysis was broader: the fiduciary duty of loyalty/good faith supplied the correct analytical framework, and it was unnecessary to elaborate breach by importing Ivey (though dishonesty could be evidentially relevant within the broader inquiry).
Breach established on the facts found. On the findings of fact, the Appellant Director’s concealment, misleading of the board, and unilateral control of the Exit process to frustrate the agreed strategy amounted to manifest disloyalty and bad faith towards the company. The Court emphasised that, for these purposes, the board were the “human manifestation” through which the company acted, so deceiving the board was deceiving the company.
Whether the SHA conclusively determined the company’s route to success. The Supreme Court held that, even if the Court of Appeal’s second reason (that the SHA determined the success strategy) were debatable, it was unnecessary to decide it. The Court stated it would not be easy to determine because directors may sometimes need to reconsider contractual commitments due to changed circumstances, and changing course could be a matter for the board’s business judgment; however, the Appellant Director was not entitled to subvert the board’s collective decision by covert means.
Remedy and appellate discretion. Because the trial judge’s no-breach conclusion under section 172 was an important error affecting the discretionary remedy in the unfair prejudice petition, the Court agreed the trial judge’s remedial discretion could not stand. The Court held the Court of Appeal was required to exercise discretion afresh and was entitled to replace the conditional buy-out with an immediate buy-out order; no criticism of that exercise was advanced.
Holding and Implications
DISMISSED. The Supreme Court dismissed the appeal and upheld the Court of Appeal’s conclusion that the Appellant Director breached section 172(1) by acting in bad faith/manifest disloyalty through covertly subverting board governance, notwithstanding any genuine belief about strategy.
The direct effect was that the Court of Appeal’s remedy—an unconditional buy-out of Company B’s shares at their pro rata undiscounted value as at 31 December 2019 (with valuation to be determined later)—could not be impugned on the basis advanced. The judgment proceeded by applying established fiduciary principles and statutory interpretation tools mandated by section 170(3)-(4); it did not purport to decide broader questions beyond what was necessary, and it expressed no concluded view on whether the SHA alone conclusively fixed the company’s success strategy.