Gilford Motor Co Ltd v Horne [1933] Ch 935 is a landmark UK company law case that delves into the concept of lifting the corporate veil. It sets a precedent for instances where the courts may disregard the separate legal identity of a company and treat its shareholders and directors as personally liable, especially when the company is employed as an instrument of fraud.
Mr EB Horne, formerly a managing director of Gilford Motor Co Ltd, had a contractual obligation (clause 9) not to solicit the customers of the company upon leaving its employment. Upon termination of his employment, Horne initiated his own business, undercutting the prices of Gilford Motor Co. Upon legal advice that he was likely breaching his contract, Horne established a new company, JM Horne & Co Ltd. In this new company, his wife and a friend named Mr Howard were the sole shareholders and directors. They took over the business and continued its operations. Despite lacking a non-compete agreement with Gilford Motor, Horne's actions prompted the company to bring legal action, alleging that the new company was a fraudulent instrument to conceal Horne's illegitimate activities.
Farwell J held that Horne had breached the covenant not to compete. The judge expressed a belief that one of the reasons for forming the new company was Horne's fear of violating the covenant. However, due to the overly broad nature of the covenant and potential issues related to public policy (restraint of trade), the court refused to enforce it.
Lord Hanworth MR, in the Court of Appeal, granted an injunction, compelling Horne to cease competing through the new company. The court found that the company was formed as a stratagem to mask Horne's business activities, allowing him to engage in business while evading the terms of the agreement. The court, therefore, pierced the corporate veil, holding Horne personally liable for his actions through the new company.
Lord Hanworth MR explicitly stated that he was convinced the company was formed as a device or stratagem to disguise the ongoing business activities of Mr EB Horne. The purpose of creating the company was seen as a cloak or sham to enable Horne to conduct business while circumventing the terms of his agreement with Gilford Motor Co.
This case is significant as it exemplifies the circumstances under which the courts may lift the corporate veil and treat the actions of a company's shareholders and directors as indivisible from the company itself. The case underscores the court's ability to unveil the true nature of transactions and prevent the misuse of corporate structures to perpetrate fraud or wrongdoing.
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