UK: Directors' Duties: Supreme Court Confirms Application Of The Proper Purpose Rule

Last Updated: 8 November 2016
Article by Sedgwick Chudleigh


The 'proper purpose rule', which is now codified in English law by section 171(b) of the UK's Companies Act 2006 (the Companies Act), is a principle of company law that ensures that directors of companies only exercise powers for the purposes for which they are conferred.

It is a rule rooted in equity and it is concerned, not so much with the objective legality of the exercise of a power, but with the subjective motivation behind its exercise.

As a result, a decision made by a director in good faith and in a company's best interests may still be in breach of the rule if the decision is made for a collateral purpose, outside of the purposes provided for in the company's constitutional documents.

The 'proper purpose rule' has now been subjected to detailed consideration by the Supreme Court of the United Kingdom in Eclairs Group Ltd v JKX Oil & Gas plc [2015] UKSC 71 (2 December 2015), in a decision which is likely to have highly persuasive effect in jurisdictions such as Bermuda, the Cayman Islands, the British Virgin Islands and the Isle of Man.


The dispute in the case concerned the decision by the directors of JKC Oil & Gas plc (the Company) to impose restrictions on the exercise of rights attaching to the shares of two minority shareholders, Eclairs Group Ltd and Glengary Overseas Ltd (the Shareholders), whom the Company considered were planning a 'corporate raid'.

Due to this perceived threat, in March 2013, the Company issued disclosure notices to the Shareholders under section 793 of the Companies Act requesting information about the number of shares held, their beneficial ownership and any agreements or arrangements between the persons interested in them. The Shareholders admitted the existence of interests in the Company's shares but denied any agreements or arrangements.

On 23 May 2013, however, Eclairs publicly invited shareholders to oppose resolutions for the re-election of certain directors at an upcoming Annual General Meeting (AGM) and on 30 May 2013, the Company considered that there were, in fact, agreements or arrangements between the Shareholders which had not been disclosed. Pursuant to article 42 of the Company's Articles of Association, which enabled the directors of the Company to impose restrictions on the exercise of rights attaching to shares, the Company issued restriction notices suspending the Shareholders' right to vote at general meetings and their right of transfer.

The Shareholders challenged the notices on the ground that the directors had, contrary to section 171(b) of the Act, exercised their powers under article 42 for an improper purpose as article 42 provided expressly for three purposes only: to induce the shareholders to provide the information; to protect the Company from having to make a decision without the information; or to punish a shareholder that failed or refused to provide the information.

In the High Court of England and Wales, Mann J invalidated the directors' decision, holding that the notices had been imposed for the improper purpose of influencing the outcome of the resolutions at the AGM. This decision was overturned, however, by the Court of Appeal (by a majority) on the basis that the proper purpose rule did not apply to article 42.

The Supreme Court subsequently overturned the Court of Appeal's decision, confirming that the proper purpose rule did apply to the exercise of powers such as those provided under article 42.

The Supreme Court rejected the Court of Appeal's reasoning that a power under article 42 was not a unilateral power, i.e. that the shareholder could overcome the restrictions by simply providing the information requested in the disclosure notice.

In Lord Sumption's view (with which all of the Supreme Court Justices agreed), if the exercise of a power would otherwise be an abuse 'it cannot be an answer to say that the person against whom it is directed had only himself to blame'.

Lord Sumption also expressed a view on the position of shareholders in a company as distinguished from the position of directors: 'Directors owe a duty of loyalty to the company, but shareholders owe no loyalty either to the company or its board. Within broad limits ... they are entitled to exercise their rights in their own interest as they see it and to challenge the existing management for good reasons or bad'.

Where the purpose of a power is not expressly provided for in a company's constitutional documents (as they were in article 42), the Supreme Court held that the purpose would be inferred from the 'mischief of the provision conferring it, which is itself deduced from its express terms, from an analysis of their effect, and from the court's understanding of the business context'.

Although all of the Supreme Court Justices were in agreement as to the application of the proper purpose rule to article 42, and that the directors' decision to impose restrictions on the shares was liable to be set aside on the basis that it was made for an improper purpose, there was a split between the Justices as to the proper causation test applicable where powers are exercised for multiple purposes.

In his judgment, Lord Sumption (with whom Lord Hodge agreed), relied on Australian case law, and preferred the imposition of a 'but for' test, i.e. a decision should not be set aside if, but for the improper purpose, the decision still would have been made in any event. Such a test would depart from the current test that the principal purpose is the one which weighs heaviest in the directors' minds, i.e. that which they felt the strongest about.

However, the majority of the Supreme Court (Lord Mance, Lord Neuberger and Lord Clarke), preferred to defer a final determination on the appropriate causation test until a future case, where it could be more fully argued.

In practical terms, directors of offshore companies, and their professional advisors, should keep the 'proper purpose' rule in mind whenever making a corporate decision, and recording such a decision in their minutes and resolutions.

In light of the Supreme Court's judgment, the 'proper purpose' rule is likely to be an increasingly fertile ground for corporate complaints, whether asserted by shareholders, creditors or liquidators, in the event of a dispute.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.