Article / 11 Aug 2026
In this month’s update we:
In the landmark decision of Saxon Woods Investments Ltd & Ors v Costa [2026] UKSC 21, the Supreme Court has given important guidance on the scope of a director’s duty under section 172 of the Companies Act 2006. The Court held that the requirement of good faith in section 172 is not only concerned with a director’s subjective belief but also extends to their conduct. A director who genuinely believes that a course of action will promote the company’s success must still pursue that course in a way that is consistent with fiduciary loyalty and good faith.
The decision provides a useful lesson to directors, confirming that they cannot hide behind an honest belief if their conduct falls short of the objective standards of fiduciary loyalty and good faith.
Section 172 requires a director to act in the way they consider, in good faith, would be most likely to promote the company’s success for the benefit of its members as a whole. That duty is owed to the company, and not directly to the shareholders.
Whilst a court will generally avoid “second-guessing” a director’s business judgement, the consequences of breaching section 172 can be severe. Directors may be held personally liable for losses caused to the company or, in the context of shareholder disputes, may be subject to unfair prejudice remedies, such as being ordered to buy out a shareholder’s interest.
Although section 172 has been the subject of a great deal of comment and debate, the Supreme Court decision in Saxon Woods is the first to address directly whether the good faith requirement applies to a director’s conduct as well as to their thought processes.
Saxon Woods Investment Ltd (Saxon Woods) was a minority investor in Spring Media Investments Ltd (the Company). Saxon Woods brought an unfair prejudice petition against the Company, alleging that it had acted in breach of a requirement in a shareholders’ agreement “to work together in good faith towards an Exit” by 31 December 2019.
Saxon Woods also alleged that Mr Costa, the Company’s Chair and a majority shareholder, was responsible for the prejudicial conduct, and that he had acted in breach of his fiduciary duties to the Company. Saxon Woods sought an order requiring Mr Costa to buy its shares at a value reflecting what they would have been worth if the agreed exit strategy had been followed and an exit achieved in 2019.
The High Court initially held that Saxon Woods had established unfair prejudice. However, it concluded that Mr Costa was not in breach of his fiduciary duties as a director. This was based on a subjective test for section 172 – the question was “whether the director honestly believed that his act or omission was in the interests of the company”. The Judge found that Mr Costa sincerely believed that he was acting in the best interests of the Company and, therefore, had acted in good faith in accordance with his duties as a director. This was despite the fact that Mr Costa had deliberately misled the board and concealed relevant information from it.
Both parties appealed. The Court of Appeal reversed the High Court decision, finding that Mr Costa had acted in breach of his duties to the Company. Rather than treating section 172 as purely subjective, the Court of Appeal held that a director’s belief must not only be genuinely held, but also that their conduct must be objectively considered honest by the standards of ordinary people.
Mr Costa appealed to the Supreme Court on the basis that his duty of good faith under section 172 was purely subjective. He argued that provided he genuinely believed that his preferred strategy for the Company was most likely to promote its success, then it was entirely up to him how best to secure that objective and a court could not find a breach of section 172 merely because he pursued that strategy covertly.
The Supreme Court rejected Mr Costa’s argument and dismissed his appeal.
It held that the requirement of good faith in section 172 applies not only to a director’s thinking, but also to their conduct in pursuing what they believe is the best course for the company. A director’s genuine subjective belief that they are acting in the company’s interests will not automatically provide a complete defence, regardless of the way in which they pursue that belief.
The Court confirmed that, when considering an allegation of breach, a court will start by accepting the business judgement of the board, provided that belief is found to be genuine. In that sense, the test of good faith is subjective. However, that does not give directors “carte blanche” to seek to implement their strategy by any means that they consider necessary. A director will be in breach of their section 172 duty if, objectively speaking, their conduct involves what any reasonably well-informed observer would regard as bad faith.
The Court held that despite sincerely believing that he was acting in the best interests of the Company, Mr Costa had breached his section 172 duty. His conduct in misleading the other directors as to his intentions was manifestly disloyal to the Company and in bad faith.
The Supreme Court’s decision is a warning that section 172 is not a shield for directors who believe that they know what is best for their company.
Section 172 remains partly subjective – a court will not substitute its own commercial view for a director’s genuine business judgement. However, when deciding whether there has been a breach of duty, a court may objectively assess whether the director’s conduct was consistent with fiduciary loyalty and good faith. Pursuing a personal strategy, misleading the board or undermining the company’s agreed governance process will almost certainly fail that test.
The decision also underlines that delegated powers must be used for their intended purpose and that directors must work openly and honestly with their board. If the board delegates a task to one director, that director cannot use the delegation to pursue a conflicting strategy behind the board’s back. A dissenting director can challenge strategy, put forward alternatives and seek to persuade colleagues. What they cannot do is “go it alone” by concealing material information, misleading fellow directors or subverting the collective decision-making process.
In McCarthy v Marshall [2026] EWHC 1585 (Ch), the High Court held that a director’s unauthorised use of company funds for personal expenditure through a director’s loan account was a breach of fiduciary duty. Crucially, the Court held that, in the circumstances of this case, the conduct amounted to a fraudulent breach of duty, even though the director intended to repay the money.
The claim arose out of the affairs of two companies, Emerald Meats (London) Ltd and Emerald Properties (London) Ltd (the Companies). The claimant, Mr McCarthy, and the defendant, Mr Marshall, had been shareholders and directors of the Companies for many years, with Mr Marshall responsible for the day-to-day running of the businesses. Following their liquidation, Mr McCarthy took an assignment of certain of the Companies’ claims and pursued them against Mr Marshall.
Among numerous allegations, Mr McCarthy claimed that Mr Marshall had, for many years, used company money to fund personal expenditure through a director’s loan account (DLA) without proper authority. Mr Marshall argued that Mr McCarthy had either tacitly or expressly agreed to the DLA and that he had repaid much of the money.
The Court accepted Mr McCarthy’s evidence that he did not know about or approve of Mr Marshall operating a DLA in the way that he had. As a result, the Court held that Mr Marshall’s use of company funds for personal expenditure was unauthorised and constituted a breach of fiduciary duty, even if he intended to repay the money.
Applying the test for fraudulent breach from earlier case law, the Court held that the unauthorised use of company money as an interest-free personal loan amounted to such reckless indifference to the company’s interests that the breach was fraudulent. The company obtained no benefit from this course of conduct and faced potential downside through reduced liquidity, increased borrowing costs or a reduced ability to profit through trading. Alternatively, the Court held that ordinary decent people would consider it dishonest for a director to use company assets to fund their personal lifestyle through interest-free loans where the practice had not been authorised.
The Court’s finding of fraud meant that the claims against Mr Marshall were not time-barred under the Limitation Act 1980.
The Court also noted that loans to directors generally require shareholder approval under section 197 of the Companies Act 2006, unless an exception applies. If relying on informal shareholder approval, that approval or ratification must be clearly established; informal practice or assumed acquiescence may not be enough.
This decision highlights the dangers of “informal” corporate governance. Directors of owner-managed companies may fall into the trap of treating a company they run as their own personal bank account, believing that if the money is to be repaid, the temporary use of company funds for personal purposes is acceptable.
McCarthy v Marshall demonstrates that this assumption is unsafe. The critical issue is not simply whether the money is repaid, but whether the transaction was properly authorised in the first place.
Directors should ensure that personal expenses are kept separate from corporate accounts. If a DLA is to be used, it should be properly documented and supported by board minutes and shareholder approval where required.
In HMRC v BlueCrest Capital Management (UK) LLP [2026] UKSC 18, the Supreme Court provided important guidance on when LLP members will be treated as employees for tax purposes.
The case arose from HMRC’s application of the salaried member rules introduced by the Finance Act 2014. Those rules are designed to identify LLP members whose position is closer to that of an employee rather than a traditional partner and, in those circumstances, tax them as employees rather than self-employed partners.
Under the relevant provisions, an LLP member who meets three conditions is taxed as an employee, but a member who “fails” one or more of the conditions is taxed as a partner. The three conditions are:
BlueCrest Capital Management (UK) LLP is an investment management business. In 2014, it had 82 individual members, most of whom were investment managers, together with a number of corporate members. Although individual members had substantial responsibility for investment decisions involving very significant sums of money, the LLP’s governance was largely exercised through its board and executive committee. The LLP agreement gave members limited voting rights on certain strategic matters and exceptional transactions. However, a corporate member held 100 votes, meaning the individual members could not outvote it even if they were unanimous.
HMRC concluded that the vast majority of BlueCrest’s individual members satisfied the statutory conditions for treatment as salaried members and should therefore be taxed as employees.
BlueCrest challenged that assessment. It argued that many members failed Condition A because their remuneration was linked to the LLP’s profits and failed Condition B because their investment responsibilities gave them significant influence over the LLP’s affairs.
The dispute progressed through the courts, with the Court of Appeal ultimately ruling in HMRC’s favour. BlueCrest then appealed to the Supreme Court.
The Supreme Court unanimously dismissed BlueCrest’s appeal.
The Court confirmed that, when assessing whether a member has “significant influence” over an LLP’s affairs under Condition B, the focus is on the member’s formal legal rights and duties under the LLP agreement. Informal influence arising from an individual’s commercial success, seniority, expertise or personal relationships is not relevant. The Court explained that “significant influence” means influence of real commercial substance over the affairs of the LLP viewed as a whole. This is likely to involve participation in, or the ability to influence, high-level management or strategic decisions. By contrast, day-to-day operational decision-making, even where it involves substantial sums of money, will not necessarily amount to significant influence over the LLP’s affairs.
The Court also held that the relevant partners in this case satisfied Condition A because their remuneration was essentially based on individual performance rather than a genuine share of the LLP’s overall profits and losses. Most members received “discretionary allocations” based primarily on the performance of their own investment portfolios. Although BlueCrest operated a profit cap under which total allocations could not exceed the LLP’s total profits, that cap had never actually reduced payments because the business remained highly profitable. The remuneration was fundamentally driven by individual performance rather than a sharing of the LLP’s profits and losses. The members’ remuneration therefore constituted “disguised salary” for the purposes of Condition A.
The judgment reinforces that LLPs cannot rely on an individual member’s commercial importance or operational responsibilities to establish “significant influence”. The key question is whether the member’s formal rights under the LLP agreement give them meaningful influence over the LLP’s affairs as a whole.
The decision also confirms that remuneration structures based principally on individual performance are unlikely to avoid Condition A merely because payments are subject to an overarching cap linked to firm profitability.
Businesses operating through LLPs should consider reviewing both their profit-sharing arrangements and governance documentation to assess whether members are at risk of being treated as employees for tax purposes.
First published on Accountancy Daily.
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