Does the end justify the means?
“Never attempt to win by force what can be won by deception” is a maxim often attributed to Nicollo Machievelli, most famous perhaps for another maxim that “the end justifies the means”. The question whether the end can ever be said to justify the means came up for discussion in a recent Court of Appeal decision in the context of the scope of the duties a director owes to his company and its shareholders.
Directors of companies in England & Wales are subject to various duties, which have been codified in the Companies Act 2006. This includes, under section 172 Companies Act 2006, a duty to act in the way they consider, in good faith would be most likely to promote the success of the company for the benefit of its shareholders as a whole. Where the company is insolvent, the interests of the Company’s shareholders are effectively replaced by the interests of the Company’s creditors. That is why this duty is sometimes referred to as the “creditor duty.”
Some classic examples of where we, as a litigation finance company, normally see directors breaching the so called “creditor duty” include where the company is insolvent and: directors choose to repay themselves their director’s loan accounts that are in credit or to repay family members in respect of loans they have advanced to the Company, whilst not treating arm’s length creditors the same way; or to advance sums to themselves so that there is an overdrawn loan account which is ultimately not repaid; or to declare and pay dividends to themselves whilst not paying the Company’s creditors.
The law in England and Wales is actually quite settled in terms of the test for whether matters such as these constitute a breach of the creditor duty by the director. In simple terms, the question is whether the director believed that procuring these payments was genuinely in the best interests of the company’s creditors as a whole, regardless of whether it ultimately actually was or not.
If the director actually applied their mind to that question the test is a subjective one – did they hold a genuine belief (mistaken, unreasonable or otherwise) that what they were doing was in the best interests of the company’s creditors? If so, they will not have breached their duty. The test isn’t concerned with whether, with hindsight, they made the right decision but rather whether at the time they made the decision, they genuinely believed that what they were doing was in the best interests of the company’s creditors.
However, if the director did not apply their mind to the question, the test is an objective one. Namely would a reasonable and honest director have considered what was being done to be in the best interests of the Company’s creditors.
A novel question on the scope of a director’s duty under section 172 recently came before the Court of Appeal in the case of Saxon Woods Investments Ltd vs Francesco Costa [2025] EWCA Civ 708. In a nutshell, the question was this: what is the position where a director acts dishonestly towards a company’s shareholders (in the sense that he chooses to deliberately mislead them) but in the genuine belief that what he was doing was in their best interests? If so, can he be said to have breached his duty under section 172?
In the instant case, and in very brief summary[1], a director/shareholder, Mr Costa, misled his fellow shareholders by claiming that he had instructed the company’s advisors to actively pursue a sale of its business, when in reality he had not (and in fact had done the opposite). At this point in time the Company had purchasers interested in the business and it could have been sold for a significant sum but not enough as far as Mr Costa was concerned. The reason he misled his fellow shareholders was because, in his view, the time was not right to sell and the shareholders would thank him in the long run, when they had ultimately achieved a significantly higher price for their shares. Unfortunately for Mr Costa, the delay in actively seeking a purchase proved catastrophic because COVID unexpectedly intervened and ultimately decimated the Company’s business. A breach of duty claim was brought against Mr Costa by his fellow shareholders.
At first instance, the Court held that, whilst Mr Costa had misled his fellow shareholders, he had not breached his duty to act in the bests interests of the company (and its shareholders). This was because he had applied his mind to the question of whether what he was doing was in the best interests of the company and genuinely believed that the company’s shareholders would ultimately thank him in the long run because he genuinely thought he would ultimately attain a higher price for their shares if he delayed a sale.
This finding was appealed to the Court of Appeal on the grounds that, if Mr Costa had deliberately misled his fellow shareholders, he cannot at the same time have been acting in good faith towards them (good faith being a requirement of the duty under section 172 and consistent with the fiduciary nature of that duty).
The Court of Appeal overturned the first instance decision on this point. It explained that the requirement to act in good faith means that a director cannot act dishonestly towards the company or its shareholders (or its creditors) whatever his motivations for doing so. Acting with honesty towards a principal is an integral part of a fiduciary duty (which is founded upon fidelity and loyalty).
In addition, the question of whether someone is being honest or not, is not purely subjective. Rather, the law is clear that when deciding whether someone has been dishonest they are to be judged by the objective standards of ordinary and decent people. Merely because they didn’t think they were being dishonest, does not mean they weren’t being dishonest.
The Court of Appeal held that Mr Costa had breached his duty to the company and its shareholders. The shareholders had agreed to seek an exit and he had not done that whilst being at pains to give them the impression that he had. On the contrary, he had actively sought to delay an exit. In summary - when it comes to section 172 – the end does not justify the means.
[1] This summary has been simplified for the purposes of this article and for the sake of brevity. For example, the shareholdings were held by various corporate entities rather than the individual shareholders.
Author: Brett Eeles - Associate Director, Manolete Partners Plc | brett@manolete-partners.com | 07958 650269