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ARTICLE · 21 DECEMBER 2015

Directors Must Exercise Their Powers Only For A Proper Purpose

Reed Smith (Worldwide)
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A new judgment was released by the Supreme Court on 2 December 2015, which emphasises the importance of directors acting with ‘proper purpose'.

United KingdomCorporate/Commercial Law
Natalie Ramsden
Natalie Ramsden
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A new judgment was released by the Supreme Court on 2 December 2015, which emphasises the importance of directors acting with 'proper purpose'.

The case was Eclairs Group Ltd v JKX Oil & Gas plc; Glengary Overseas Ltd v JKX Oil & Gas plc [2015] UKSC 71. A copy of the judgment can be found here.

Executive summary

  • The court considered the 'proper purpose rule' set out in section 171(b) of the Companies Act 2006 (the Act) – a director must "only exercise powers for the purposes for which they are conferred".
  • When relying on an authority granted by a company's articles of association, directors should in all cases be careful to ensure they are acting in the spirit of the company's proper purpose (which is deduced from its express terms as well as the underlying legislative intention behind the provision and its effect). If they do not, they risk their decisions being overturned by the court.

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