Director’s ‘sincere belief’ no defence to breach of duty, rules Court of Appeal

The Court of Appeal has ruled that a company director cannot avoid liability for breaching duties by arguing that they acted sincerely in what they thought was the best interests of the business.

Lewis Jackson, Trainee Solicitor working in our Business Services team, reports on this recent case:

The case, Saxon Woods Investments Ltd v Costa, concerned a shareholders’ agreement which required the parties to “work together in good faith towards an Exit” by the end of 2019. An exit was defined as a sale of the business.

No sale took place and the value of the company later declined. A minority shareholder brought a claim of unfair prejudice under section 994 of the Companies Act 2006, arguing that the chair of the board had frustrated the agreed process.

The High Court found there had been unfair prejudice but accepted that the chair had genuinely believed delaying the sale was in the best interests of the company. On that basis, the judge concluded there was no breach of section 172, which requires directors to act in good faith to promote the success of the company.

The Court of Appeal disagreed. It held that while a director’s belief is relevant, the test also includes an objective standard of honesty. Conduct that involves misleading the board or allowing a process contrary to an agreed obligation of good faith will amount to a breach, even if the director believed they were doing the right thing.

Lord Justice Snowden, giving the lead judgment, said directors cannot rely on the “sincerity of their subjective belief” if their behaviour falls short of what honesty requires. The court therefore upheld the finding of unfair prejudice and ordered an unconditional buy-out of the minority shareholder’s stake.

The ruling underlines the importance of exit provisions in shareholder agreements, and the weight courts will place on duties of good faith. For directors, it emphasises that decisions must not only be made with honest intentions but must also satisfy objective standards of fairness and honesty.

Private companies considering sale processes will need to ensure that board conduct is consistent with both the letter and the spirit of any agreed obligations.

If you would like more information about the issues raised in this article or any aspect of company law, please contact Lewis on 01228 516666 or click here to send him an email.