Subjective or Objective standards of honesty? Clarity from the Court of Appeal
The recent Court of Appeal decision in the case of Saxon Woods Investments Limited v Francesco Costa [2025] EWCA Civ 708 has provided clarity on the duties required of directors pursuant to Section 172 of the Companies Act 2006 (“CA 2006”).
Background
Saxon Woods Investments Limited (“SW”) owned a 22.33% stake in Spring Media Investments Limited (“the Company”). Francesco Costa (“Costa”) was the chairman of the Company, controlling 56% of the shares. The Company entered into a shareholder agreement which was amended in 2016, requiring the parties to pursue an exit by 31 December 2019. It was argued by SW that Costa influenced the decisions of the exit due to his own personal objectives and as such failed to achieve an exit by 31 December 2019, as per the contractual obligation under the shareholder agreement.
Costa believed that ‘it was in the best interest of the Company’s shareholders for it not to comply with the requirements of clause 6.2 on the timetable [requiring the exit by 31 December 2019] that it specified, on the basis that a considerably higher value might be obtained for them by delaying the process’.
In addition, SW argued that Costa had deliberately misled the board.
Costa’s actions resulted in it being impossible for SW to exit on favourable terms following the COVID-19 pandemic reducing the value of the Company.
One element of this case for the Court of Appeal to consider was whether Costa had breached his fiduciary duties under section 172(1) CA 2006, which SW claimed he had.
This duty requires a director of a company to ‘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’.
Lord Wolfson in the High Court focused solely on Costa’s subjective state of mind and whether or not Costa ‘believed’ that he was acting in the best interests of the Company.
Despite accepting that Costa knew he was breaching the shareholder agreement and that some of the shareholders would disagree with his actions, the High Court considered that ‘Costa did sincerely believe that he was acting in the best interest of the Company and its investors… I therefore do not find that Mr Costa was in breach of his duties under s.172(1)’.
On appeal, the Court of Appeal had to consider whether the High Court had applied the right test when deciding whether Costa had breached his section 172 CA 2006 duty.
The Court of Appeal held that the approach of the High Court was incorrect, and that the High Court had given ‘no consideration to the second limb of the approach set out in Ivey’.
The approach set out in Ivey v Genting Casinos (UK) Ltd (trading as Crockfords Club) [2017] UKSC 67; [2018] AC 391 (“Ivey”) is as follows:
- First Limb: Consider the individual’s knowledge or belief of the facts and whether their belief was genuinely held, rather than reasonable (subjective element).
- Second Limb: Once a genuine belief is established, an objective test needs to be applied. To establish if the decisions of the individual were in good faith and honest, you need to apply the standards of ordinary decent people and the individual’s beliefs are irrelevant.
Since the High Court had found that Costa had misled the board and concealed the fact that the shareholder agreement was not going to be complied with, the Court of Appeal found that there was no doubt that Costa had acted dishonestly, as per the test in Ivey. The Court of Appeal went on to say that the High Court’s ‘approach deprives the phrase “in good faith” of all content and meaning. On his approach, section 172 would work just as well if those words were simply deleted from it. However, they cannot be deleted and must be given meaning.’
Ailsa Anderson, Legal Director, Commercial Dispute Resolution comments:
“In light of this recent decision, well advised directors will not focus solely on what they, even sincerely, believe is in the best interest of the company when it comes to making unilateral decisions that would prejudice shareholders. The Court of Appeal has made it clear that directors must ensure that their actions and beliefs would be considered to be, in the standards of ordinary decent people, honest and in good faith. A director cannot mislead a company by pretending that they were pursuing a course of action which benefited the company’s members, whilst secretly pursuing their own objectives.”
For any queries relating to Commercial Disputes, please contact our Team.
