Gilford Motor Co. v. Horne
Horne, a former managing director bound by a promise not to solicit his old employer's customers, set up a new company and solicited those customers through it. The Court of Appeal held that the new company was a mere cloak or sham formed to escape his promise, and granted an injunction against both Horne and the company. The case is a leading example of lifting the corporate veil where a company is used to escape a legal obligation.
Published
Case at a glance
- Court
- Court of Appeal
- Subject
- Company Law (Corporate Law)
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Facts
Horne had been the managing director of Gilford Motor Company. In his service agreement, he promised that after leaving the company he would not solicit its customers.
After he left, he formed a new company. His wife and one other person were the only shareholders and directors of this new company. Through this company, Horne began soliciting the customers of his old employer, Gilford Motor Company.
Issues
Whether Horne could escape his promise not to solicit his former employer's customers by carrying on the soliciting through a separate company that he had formed.
Whether the court should look behind the new company's separate legal identity and grant relief against both Horne and the company.
Arguments
Horne argued that it was the new company, not he, that was soliciting the customers of Gilford Motor Company. He therefore claimed he was not breaking his own promise.
Judgment
The Court of Appeal rejected Horne's argument. It held that the new company was a mere cloak or sham, formed to escape his promise.
The Court granted an injunction against both Horne and his company, stopping them from soliciting the customers of Gilford Motor Company.
Legal principles
A person cannot use a company to do what he himself has promised not to do.
Where a company is a mere cloak or sham formed to escape a legal obligation, the court will look behind its separate legal personality (lift the corporate veil) and grant relief against both the person and the company.
Importance
The case is a key authority in the group of veil-lifting cases dealing with fraud, or the use of a company to escape a legal obligation. It shows that the separate legal personality of a company is not allowed to become a tool for breaking one's own promises.
The lecture specifically advises students to learn Gilford together with Jones v. Lipman as a pair, since both show that a company used to evade an existing legal obligation will be ignored.
Easy explanation
Horne was the managing director of Gilford Motor Company. When he joined, he promised that after leaving he would not try to take away the company's customers.
After leaving, he tried to be clever. He started a new company, made his wife and one other person its shareholders and directors, and used that company to approach his old employer's customers. He said, "I am not doing it, the company is."
The Court of Appeal did not accept this trick. It said the new company was just a cover (a sham) made to escape his promise. So the court stopped both Horne and his new company from soliciting those customers. The lesson: you cannot hide behind a company to do what you personally promised not to do.
Practical example
Hypothetical: Farhan works as managing director of Prince's company and signs an agreement that, after leaving, he will not approach the company's customers. After resigning, Farhan forms a new company in which Zoya (his wife) and Aadil are the only shareholders and directors, and uses it to contact Prince's customers. If Prince goes to court, applying the Gilford principle, the court can treat the new company as a sham and grant an injunction against both Farhan and the new company.
Key points
- Horne, ex-managing director of Gilford Motor Co., had promised not to solicit its customers after leaving.
- He formed a new company (wife and one other person as only shareholders/directors) and solicited customers through it.
- The Court of Appeal held the new company was a mere cloak or sham to escape his promise.
- An injunction was granted against both Horne and his company.
- Principle: a person cannot use a company to do what he himself has promised not to do.
- Learn it as a pair with Jones v. Lipman (company used to evade an existing legal obligation is ignored).
Video explanation
Case explained
Gilford Motor Co. v. Horne
Practise Company Law (Corporate Law) MCQs
24 questions. Every answer comes with an explanation and the legal provision behind it.
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