The Proper Purpose Rule as a Constraint on Directors’ Autonomy – Eclairs Group Limited v JKX Oil & Gas Plc

In the UK, directors, as fiduciaries, are subject to duties and constraints to ensure they act in the interests of the company. One of these is the proper purpose rule, now codified in section 171(b) of the Companies Act 2006. This section provides that a director of a company must only exercise powers for the purposes for which they are conferred. Debate about the scope and contours of the proper purpose rule is longstanding, and the scope of the rule was the key aspect of the decision of the Supreme Court of the United Kingdom in Eclairs Group Limited v JKX Oil & Gas plc [2015] UKSC 71.

This case assumes particular importance in our understanding of the proper purpose rule, especially due to the different interpretations regarding the scope of the rule expressed by the Court of Appeal and the Supreme Court. The majority of the Court of Appeal provided a narrow interpretation of the rule. A much broader interpretation was provided by the Supreme Court. In the words of Lord Sumption, ‘The rule that the fiduciary powers of directors may be exercised only for the purposes for which they were conferred is one of the main means by which equity enforces the proper conduct of directors. It is also fundamental to the constitutional distinction between the respective domains of the board and the shareholders.’

In a recent article, we focus on the implications for the autonomy of directors of different judicial interpretations of the proper purpose rule.  We discuss three issues relating to the interpretation of the rule that have important consequences for whether directors have broad or narrow autonomy in their decision-making. These are the scope of the proper purpose rule, the objective or subjective nature of the test employed in the application of the rule and the test for causation where a director is motivated by mixed purposes.

We conclude that, in defining the scope of the proper purpose rule, the Supreme Court restricted the autonomy of directors. In imposing an objective test in the application of the rule (despite the terminology used by Lord Sumption not being entirely clear) the Court also limited this autonomy. The approach to causation favoured by the Court does, however, give directors more autonomy than the test applied in public law, although the precise contours of the causative test were not resolved. Resolution by the Court of some of the key issues involved in the application of the proper purpose rule is to be welcomed given the pressures faced by directors in the context of changes of control.

Rosemary Teele Langford is a senior lecturer with the Melbourne Law School, University of Melbourne and Ian Ramsay is the Harold Ford Professor of Commercial Law and Director of the Law School's Centre for Corporate Law and Securities Regulation.