Gilford Motors Co Ltd. Vs. Horne, [1933] Ch 935

Introduction:

A company incorporated by following prescribed law has a special status known as corporate personality wherein the company is recognized as a separate legal person and has all the right to sue, be sued and even has the right to possess properties. Knowing this fact, people tend to misuse (taking shelter behind companies) companies for every fraudulent activity they commit thereby escaping from liabilities and jeopardize the interests of other members of the company. Therefore, the concept of ‘lifting of corporate veil’ or ‘piercing through the corporate veil’ was introduced. Lifting of corporate veil essentially prevents members from hiding behind the company for committing fraud by piercing or breaking through the corporate veil and looking into core facts and analyze the situation; Thereby relieving the company from the liabilities. Now, the UK company law case of Gilford Motors Co Ltd. Would be analyzed; Afer all, it is the pioneer case for the corporate veil.

Facts:

Mr Horne was serving as a Managing Director of the company – Gilford Motors Co Ltd. One fine day, he was suddenly got fired by Mr Gilford. Mr Horne’s employment contract specifically stipulated that he must not solicit the customers – getting the customers – of the company if he were to leave the employment or got fired. Mr Horne cleverly incorporated a company named as JM Horne Co Ltd. in the name of his wife and his friend (they were being the only directors) and undercut the prices of Gilford Motors Co Ltd. Consequently, the customers' interests shifted towards JM Horne Co Ltd. Therefore, Mr Gilford filed a suit against Mr Horne for violating the employment contract and for using JM Horne Co Ltd. as the corporate veil to escape from liabilities.

Verdict:

In the High Court, J Farewell observed that the covenant (employment agreement) was too wide and against public policy – restricting trade. Hence, he held that the covenant should not be enforced at all. Whereas in the Court of Appeal, Lord Hanworth MR was satisfied that the JM Horne company was incorporated with an ulterior motive to solicit the customers of Gilford Motor Co Ltd; The court of appeal viewed that one cannot sit behind the company to escape from liabilities and hence, made Mr Horne liable.

Comments:

The above case clearly shows the significance of lifting of the corporate veil and its application. This case may be a great illustration to understand the piercing of the corporate veil. However, speaking of the judgment of the case, I’m not quite satisfied with the Court of Appeal. The justification for the same is as follows: It is important to observe that the employment contract restricted only Mr Horne to solicit the customers of Gilford company and not his wife or his friend. It is evident from the fact that the only two directors of JM Horne Co Ltd. are his wife and his friend; Mr Horne had no business to the company in the eyes of law but still, he was made liable which implicitly restricting the right to trade. Adding on to that, when Mr Horne was not at all existed in the affairs of the company, how can the court lift or pierce the corporate veil? I hope that the court of appeal had some evidence to prove that Mr Horne was included in the JM Horne company affairs apart from the marital and friendly relationship. Otherwise, Mr Horne should not have been held liable.