Objectivity in section 172: Re-examining the Current Position after Saxon Woods Investments Ltd v Costa

Section 172 of the Companies Act 2006 outlines a director’s duty to promote the success of the company (the s172 duty). Traditionally, the court examined the subjective intention of a director (whether the director believed they were acting in the company’s best interests) to ascertain whether they have complied with the s172 duty. However, in recent cases, the court has shown an increased willingness to incorporate some objective elements (whether a reasonable person would agree the director acted in the company’s best interests) into the analysis of section 172. This article aims to explore the objective element in the s172 duty and its implications for directors in light of the latest case on the topic, Saxon Woods Investments Ltd v Costa [2025] (Saxon Woods).

The Subjective Test

The traditional and well-established position when the courts assess whether a director has breached their s172 duty is to examine their subjective intentions. This is even to the extent that the court has at times refused to examine the objective correctness of the director’s decision so long as they had a bona fide consideration of the interests of the company in the honest belief of the director.

The Role of Reasonableness

There are differing views as to whether a director’s belief must also be reasonable. One view is that an honest but unreasonable and mistaken belief that a particular course of action is in the company’s best interests is not sufficient to amount to a breach of the s172 duty. In this analysis, unreasonableness affects the weighing of evidence but the test remains a subjective one.

The alternative view is that there must be some rational basis for the director’s decision, and that acting in a way that is completely irrational or lacking any reasonable justification could amount to a breach of duty. Recent cases have highlighted that, while honesty remains central, the courts may look at whether a director’s actions were within the reasonable scope of running the company.

Qualifications to the Subjective Test

The courts have identified certain situations where an objective assessment of a director’s actions is required, even where a director claims to have acted honestly.

Creditor interests in financial distress

When a company is facing financial difficulties, directors must give priority to the interests of creditors. In these circumstances, the court will objectively assess whether the director properly considered creditors’ interests;

Failure to consider company interests

Where there is no evidence of actual consideration of the best interests of the company, then the court will ask whether a reasonable director in the same position could have believed the action was for the company’s benefit;

Overlooking material interests

Where a very material interest (such as a major creditor for example) is unreasonably overlooked and not taken into account, the objective test must be applied to assess whether this was a breach of the s172 duty. 

One might still argue that these qualifications are merely preliminary assessments. They limit the scope of the subjective test but do not alter the nature of subjectivity in section 172, as once these preliminary objective hurdles have been passed, the test remains purely subjective. 

However, a recent Court of Appeal decision has provided clarity on the subjective nature of the test.

The impact of Saxon Woods

In Saxon Woods, the Court of Appeal explored the interaction between the s172 duty and the honesty test. In this case, the shareholders’ agreement stipulated that the company and each of the shareholders would work together in good faith towards an exit no later than 31 December 2019. The chairman, who is also the majority shareholder, pursued a strategy of delaying a sale because he believed a better price could be achieved in the future and deliberately misled the board in order to achieve his preferred outcome. As a result, no exit was achieved by 31 December 2019. In 2020, the Covid pandemic had a devastating impact on the company’s business and on the value of the company’s shares. Consequently, a minority shareholder brought an unfair prejudice petition against the chairman.

At first instance, it was held that the chairman’s conduct breached the shareholders’ agreement but not the s172 duty because he ‘sincerely believe that he was acting in the best interest of the Company and its investors.’ The minority shareholder appealed against this finding.

The Court of Appeal held that the s172 duty includes, as a core fiduciary duty, a requirement that a director act honestly towards the company. The test as to whether a person has acted honestly or dishonestly requires an objective assessment of that person’s conduct, in light of the facts as they knew or believed them to be when they embarked on their course of conduct. The trial judge therefore erred in applying a fully subjective test.

Saxon Woods shows that the duty of good faith under section 172 is not a purely subjective test and the test for honesty in this context has both objective and subjective elements.

Implications for Directors

In order for a director to ensure that they have complied with section 172 of the Companies Act 2006, it is not sufficient to rely solely on their own honest belief. They must also:

Actively consider decisions

Turn their mind to the decision to be made rather than acting automatically or without thought;

Identify and address material interests

Examine whether there are any material interests being unreasonably overlooked. This may involve an analysis of the company’s financial health and the existing and potential stakeholders of the company. If the company is in doubtful solvency, then they will also need to take into account the interest of the creditors, and the omission of a large creditor may lead the court to ignore the subjective intentions of the directors and focus on analysing their conduct objectively;

Act honestly

Act honestly in their dealings with the company and its stakeholders. The standard of honesty is measured by the objective standards of ordinary decent people, in light of the director's knowledge or belief; and

Document decision-making

Keep clear records of the decision-making process to help demonstrate that the director has considered all relevant factors and acted in good faith.

By following the practical steps outlined above, directors can better protect themselves and ensure they are fulfilling their legal obligations.