Reading time: four minutes

Let’s cut to the chase – if you’re sitting on a company board in the UK, section 172 of the Companies Act 2006 isn’t just legal wallpaper, it’s your rulebook, your compass and in many cases your defence line when things hit the fan. For years, directors have leaned on the phrase ‘acting in good faith’ like it’s a get out of jail free card, hoping that their belief in their decisions being good for the company would hold water when challenged. But guess what? The legal tide is shifting. Thanks to some recent court commentary, the spotlight on director duties has never burned brighter.

Section 172: what it actually means (beyond legal jargon)

So, what is this elusive section 172 duty everyone keeps talking about? In short, it’s the legal duty placed on every UK company director to act in a way they honestly believe will promote the long term success of the company, for the benefit of its shareholders as a whole. But here’s the catch: it’s not just about what directors say they believe, it’s about how seriously they take that belief, how they prove it and whether their actions back it up.

The law gives directors a (non-exhaustive) checklist of things they must think about before making decisions – and no, it’s not just about profits. Directors are expected to consider:

• the long term consequences of their decisions (beyond the next quarter’s numbers);
• the wellbeing of employees;
• relationships with suppliers, customers and other stakeholders;
• the company’s impact on the environment and local communities;
• the importance of maintaining a reputation for ethical, high standard business; and
• fairness between different groups of shareholders.

In theory, directors have the freedom to decide what’s best. But that freedom comes with a serious expectation – they must actually think about these things properly, not performatively. Directors if challenged (in court, by shareholders, or in the public eye) will need to show their thinking, not just their feelings.

Let’s be clear – this isn’t a box ticking exercise. It’s about embedding responsibility into decision making. Also, when companies are large enough, they’re legally required to report how these factors have been considered in formal documents like the strategic report.

The bottom line is section 172 is the heartbeat of responsible directorship. In today’s climate, where decisions are scrutinised harder than ever, understanding and applying it properly isn’t just good practice, it’s survival.

The setup: a breach, a delay and a director playing solo

At the heart of this legal drama was Spring Media Investments, a company with a shareholders’ agreement that included a clear exit plan. Saxon Woods, a minority shareholder, alleged that Spring Media deliberately delayed that agreed upon exit, breaching the shareholders' agreement, and that one man was behind it all – Francesco Costa, a director and substantial investor in the company.

The allegation was that Costa didn’t just allow the breach, he orchestrated it. He hid the fact that he was pushing back the exit timeline, and he kept it from the board and shareholders.

Yet, the high court in 2024 bought Costa’s argument that, even though he knowingly breached the agreement and withheld information, he honestly believed he was acting in the best interests of the company – and the high court ruling was enough to keep him within the safe zone of section 172.

Enter the court of appeal: not so fast

The court of appeal wasn’t having it. In a sharp reversal, the judges called out the high court’s leniency and made one thing crystal clear: you can’t lie to your board and hide behind good faith. Section 172 isn’t a free pass for secret strategies, even if you think you’re doing what’s best for the company.

The court leaned on the principle established in Ivey v Genting Casinos: even if someone subjectively believes they acted in good faith, their conduct must also meet objective standards of what ‘ordinary decent people’ would consider honest.

Costa’s decision to withhold key information from other directors and unilaterally breach a binding agreement meant, as the court ruled, he failed the honesty test. As a result, it fails the section 172 test too.

The takeaway: section 172 isn’t just about belief – it’s about behaviour

The court of appeal’s ruling is a wake-up call for UK directors: you can’t cloak misconduct in claimed good intentions. Section 172 doesn’t just ask what you believed, it asks what you did, how openly you acted and whether your behaviour holds up under objective scrutiny.

Costa may have believed he was steering the company in the right direction but, by sidelining the board and breaching a clear agreement, he crossed a legal line. The message from the court is unambiguous – transparency, accountability and integrity are not optional extras, they’re legal obligations.

In an era where corporate decisions are more exposed than ever, directors mustn’t treat section 172 as a vague principle, but as a hard-edged standard. It’s no longer enough to mean well, you’ve to act well too.