The UK Supreme Court's New 'Good Faith' Standard For Directors

A landmark unanimous ruling from the UK Supreme Court has reshaped the legal landscape for company directors, introducing a stricter and more objective test for the duty to act in 'good faith' under the Companies Act 2006.

The case arose from a dispute between Saxon Woods, an investment business and minority shareholder in Spring Media Investments, and one of Spring Media's directors, Francesco Costa.

Saxon Woods alleged that Costa had breached his statutory duty by overseeing a transaction without the knowledge or approval of the board, causing unfair prejudice to minority shareholders. The company argued that 'good faith' requires more than a director's personal belief that they are acting in the company's interests.

Costa appealed, but the Supreme Court, in a panel that included the court's deputy president, upheld the earlier ruling.

What does this mean in practice? Until now, the prevailing view was that a director could satisfy the good faith requirement simply by showing that they genuinely believed their actions served the company. That low bar offered considerable protection.

The Supreme Court has now moved the goalposts. Belief alone is no longer enough – the court will also look at what a director did and how openly they did it. A director who acts behind closed doors, without the board's knowledge, can't fall back on the argument that their intentions were good.

Implications for corporate governance

The ruling sends a clear message that directors must act loyally and transparently. A director's subjective belief that a decision is in the company's interests will not, by itself, excuse covert or disloyal conduct.

Shareholder agreements will carry greater weight and directors may find it harder to justify pursuing strategies based solely on their own commercial judgment. Transparency is essential, both in communications with fellow board members and in maintaining accurate, up-to-date board minutes and records of decision-making.

What directors should do now

In light of this ruling, directors should review their governance processes to ensure that decisions, particularly those that diverge from a previously agreed board strategy, are properly communicated and documented. Getting this right matters more than ever.

Boards need clear records showing why decisions were made and how they were communicated. Those who cut corners now risk personal exposure and their directors' and officers' insurers may also seek to recover payouts where a director has fallen short of the new standard.

This decision marks a significant shift toward objective accountability in UK corporate law, reinforcing that honest belief alone is no defence where a director's conduct falls short of the standards expected of a loyal fiduciary.