Good Faith Is More Than Good Intentions: The Supreme Court on Section 172

What happens if a director genuinely believes that the board is taking the wrong course of action?

Directors are not required to agree with one another. Indeed, independent judgment and constructive disagreement are an important part of effective corporate governance. A director may properly form a different view from the rest of the board about what would be best for the company and should be able to put that view forward.

The harder question is what a director may do next. Does a sincere belief that their preferred course would benefit the company justify steps taken to achieve it, even if those steps cut across the approach agreed by the board?

The Supreme Court’s decision in Saxon Woods Investments Ltd v Costa answers that question by clarifying that good faith under section 172 is concerned not only with the director’s belief in the company’s interests, but also with the way in which that belief is pursued.

The Decision

In practical terms, the decision confirms that section 172 protects honest commercial judgment, but not conduct that bypasses the company’s agreed governance process. The case is therefore less about whether a director may disagree with the board, and more about how that disagreement must be pursued.

Section 172 requires a director to act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. Courts have traditionally been reluctant to second-guess directors’ commercial decisions. This reflects the reality that directors, rather than judges, are responsible for deciding how a company should be run. But the protection is not unlimited. The duty still operates within the company’s proper decision-making framework.

The case concerned Spring Media Investments Ltd and a proposed exit from the company. Mr Costa, the company’s chairman, disagreed with the board’s exit strategy. He believed that delaying the sale would ultimately result in greater value for the company and its shareholders. There was nothing inherently wrong with that view. A director does not breach their duties simply because their commercial judgement differs from that of the other directors. Nor does section 172 require a director to abandon their own assessment simply because the board takes a different position.

However, the difficulty arose from how Mr Costa pursued his preferred strategy. The Supreme Court concluded that his conduct was inconsistent with the company’s decision-making process and amounted to a breach of his duty under section 172. The distinction drawn by the Court is an important one. A director’s honest belief that a particular outcome would be beneficial to the company is not necessarily sufficient to establish compliance with section 172. The director must also act appropriately in pursuing that objective.

The Distinction: Disagreement vs. Conduct

This distinction provides the practical takeaway from the case. Directors bring different experience, perspectives and commercial judgments to the table, and disagreement can be an important feature of effective governance. However, once a director moves from challenging a decision to undermining or circumventing the company’s proper decision-making process, their personal belief in the merits of their objective cannot shield them from liability.

This is where the “good faith” requirement in section 172 becomes important. A director’s subjective belief remains relevant, but it is not the only determining factor. The manner in which a director acts in pursuit of that belief matters too.

This ruling establishes a clear boundary around the protection traditionally afforded to directors’ commercial judgement. Courts will generally not criticise a director merely because their prediction about the future proves incorrect. However, that does not mean a director can pursue a personally preferred strategy by whatever means they consider necessary. The company’s interests must be pursued within the framework of its governance arrangements.

Why Does This Matter in Banking and Finance Transactions?

The principles in Saxon Woods extend beyond disputes about corporate strategy. They are particularly relevant to banking and finance transactions because lenders consider not only whether a transaction is commercially justified, but also whether it has been properly authorised through the company’s governance procedures.

For lenders and transaction advisors, the practical point is that authority cannot be assessed by looking only at whether a director subjectively believed the transaction was in the company’s interests. The process by which the company reached and implemented its decision remains central.

In such transactions, lenders routinely rely on evidence that the company has properly authorised the relevant transaction. This often includes obtaining board and shareholder approvals and reviewing the company’s constitutional documents. These documents are particularly important when board members hold competing views about a proposed refinancing, acquisition or restructuring.

A director may genuinely believe that a different financing structure would place the company in a stronger position. They are entitled to make that case, to question the proposed transaction, seek further information and advocate for an alternative. However, if the board has properly considered the matter and reached a decision, the director’s personal conviction that another course would be better does not grant them authority to act independently.

The case also highlights the wider relationship between section 172 and other directors’ duties, particularly section 171 which requires directors to act in accordance with the company’s constitution and to exercise their powers for proper purposes. These duties must be considered together when assessing whether a director’s conduct is permissible.

Conclusion

The Supreme Court’s decision reaffirms the value of independent judgment while drawing a clear line. Directors may challenge board decisions, but they cannot step outside the company’s proper governance framework to impose their preferred outcome.

That distinction matters because section 172 does not permit a director to treat personal conviction as a substitute for board authority. A genuine belief in the company’s best interests must still be acted on through the company’s proper decision-making processes.

Ultimately, the case reinforces a simple but important principle: directors must not only believe they are pursuing the right outcome but also take the right route to get there. In the context of section 172, the ends do not justify the means.

For more information, please contact Kerrie Emerson or another member of the Banking & Finance Team.

*This information is for guidance purposes only and does not constitute, nor should be regarded as, a substitute for taking legal advice that is tailored to your circumstances.