Understanding the duty to promote the success of the company – and what counts as “dishonest” behaviour under Section 172 of the Companies Act 2006 (CA).
As is fairly widely known, sections 171-177 of the CA codifies the duties that directors of companies are required by statute to uphold. These provisions supplement additional common law duties. One of the statutory duties, Section 172 CA, specifies the duty of company directors to act in good faith to promote the success of the company for the benefit of its members as a whole.
It is sometimes thought that it is enough for a director to have a defence to any accusation of a failure to uphold section 172 if they simply believe the decision they have made is in the best interests of the company and its shareholders as a group. However, directors must take note of the important Court of appeal ruling in Saxon Woods Investments Limited v Francesco Costa [2025] EWCA Civ 708. The Court of appeal drew upon the case of Ivey v Genting Casinos (UK) Ltd (trading as Crockfords Club) [2017] UKSC 67 (“Ivey”) to explain the test for directors who may have acted dishonestly.
Background
Saxon Woods Investments Limited (“SW”) owned a 22.33% stake in Spring Media Investments Limited (the “Company”), which provides various services to beauty and luxury brands. Mr Costa was a director and the chairman of the Company and held a substantial indirect interest in the Company (through an investment vehicle).
A Shareholders Agreement (“SHA”) was entered into by all shareholders and the Company on 27 February 2013 with a revised version dated 20 May 2016. Critical to the SHA were provisions for an exit via sale of the Company’s share capital by 31 December 2019 (the “Exit”) and a requirement that the Company and investors to work in good faith towards this goal.
On 20 November 2018, the Company hired Jefferies LLC (“Jefferies”) as the Company’s investment bank to commence the Exit. It was resolved that Mr Costa would lead the relationship with Jefferies, supported by a sub-committee.
No Exit was achieved by the 31 December 2019 deadline and the COVID pandemic took hold in the early part of 2020 which had severe consequences on the Company’s share value.
It was argued by SW that Mr Costa caused the Company to fail in its objective of acting in good faith towards achieving the Exit, thereby breaching the SHA. The Company alleged that this conduct was due to his own personal objectives being favoured and a desire to retain control over the Exit process.
When considering Mr Costa’s section 172 duty, the initial ruling in the High Court applied a subjective test and ruled that Mr Costa “believed” that at the time he was acting in the best interests of the Company. That is, despite the Court having found that Mr Costa had misled the board of directors by giving the impression that positive steps were being taken to achieve the Exit (when, in fact, they were not). Nevertheless, the High Court found that SW had been unfairly prejudiced by Mr Costa’s actions.
The Test for Dishonesty
On appeal, the Court of Appeal held that the approach taken by the High Court on dishonesty was incorrect as no consideration was made to the test for dishonesty as set out in Ivey.
The Court confirmed that regard must be had to the two limb test, namely:
- The subjective limb: The individual’s genuine knowledge or belief of the facts; and
- The objective limb: Whether the conduct was honest or dishonest by applying standards of that of an ordinary person.
The Court applied the two limb test in Ivey and highlighted that Mr Costa’s deliberate deception of the board and strategy to delay the Exit constituted dishonesty under section 172 CA. The conduct led to unfair prejudice to SW and deprived them of the opportunity to achieve an Exit. The Court of Appeal agreed with the High Court on the outcome (i.e., unfair prejudice), but went further and ordered an unconditional buy out of SW’s shares by Mr Costa based on the open market value as at 31 December 2019.
Key considerations
Based on this landmark judgment, it must be emphasised that it is not sufficient for directors to merely “believe” they are acting in the best interests of the company when it comes to decision making. If a director is accused of acting dishonestly, they must demonstrate that their actions would align with the standards of ordinary decent people acting in good faith at the time of the decision. Merely relying on their own purported belief that shareholders would, for example, “thank me in the long run” is not satisfactory.
How can we help?
For further information about issues raised in this article, please contact a member of our Commercial Disputes team.
