Gilford Motor Co., Ltd. v. Horne (1933)

Salomon says the motive for forming a company is irrelevant. Gilford Motor marks the outer edge of that proposition. A man under a restrictive covenant formed a company, put his wife and an associate in as its directors and shareholders, and traded through it. The Court of Appeal did not pretend the company was unincorporated. It held that the company was a device, a stratagem, a cloak or a sham for the man behind it, and granted the injunction against both the man and the company.

This is the leading English authority for the head of veil-lifting variously called evasion of a legal obligation, fraud or improper conduct, or the company as agent or sham. Note carefully what it does not do: it does not treat the company as a nullity, and it does not make the shareholders liable for the company's debts. It simply refuses to let the corporate form defeat an obligation the controller had already incurred.

The plaintiff, Gilford Motor Company, Limited, had a registered office in Holloway Road, London, and a manufacturing place in Green Lanes, High Wycombe. It bought the various parts of motor vehicles from manufacturers, assembled them on its own premises and sold the products under the name of Gilford Motor Vehicles. It also sold separate spare parts, which were handed over to the buyers for cash.

The defendant, Edward Bert Horne, was of primary importance in that business. By an agreement dated 30 May 1929 he was appointed managing director for a term of six years from 1 September 1928 — so the engagement would have run to 1 September 1934. He was to devote his whole time, attention and abilities during business hours to the company; he was entitled to a remuneration of £1,250 a year and a percentage of the profits; and during the term he was not to be interested, directly or indirectly, in any business other than the Gilford Company except as a shareholder.

Clause 9

The covenant sued on was clause 9, which the Master of the Rolls set out in terms:

"The managing director shall not at any time while he shall hold the office of a managing director or afterwards solicit, interfere with or endeavour to entice away from the company any person, firm, or company who at any time during or at the date of the determination of the employment of the managing director were customers of or in the habit of dealing with the company, and also will not at any time within five years from the determination of this agreement, either solely or jointly with or as agent for any other person, firm or company, be engaged, directly or indirectly in any business similar to that of the company within a radius of three miles from any premises wherein the business of the company shall for the time being be carried on."

It was the first limb — the non-solicitation limb, in its two branches — that fell to be construed.

The determination of the employment and what followed

Difficulties arose, and by letters of 17 November 1931, roughly three years before the term would have expired, Horne tendered his resignation as a director and joint managing director on terms arranged that day. He was to receive a total of £1,500 by three instalments of £500, and wrote that he agreed to accept that "in full discharge of all sums due to me by the company including compensation for cancellation of my joint managing" director agreement. The board accepted the resignation to operate from that day, and recorded it in a minute.

Horne then established a business at his own home, 170 Hornsey Lane, Highgate, carried on under the style E.B. Horne, supplying spare parts and service for all models of Gilford vehicles.

Becoming anxious whether this contravened his agreement, he had his solicitor write on 29 March 1932 asking the plaintiff company for copies of his agreements. The company replied on 30 March enclosing the original service agreement. Ten days after that letter, on 8 April 1932, a private limited company was incorporated under the title J.M. Horne and Co. Ltd. The existing stationery reading E.B. Horne was altered by blacking out the initials and inserting the new ones. J.M. are the initials of Jessie May Horne, the wife of Mr. E.B. Horne.

The new company had a registered office at Horne's own private address. Its directors were Mrs. Horne and Albert Victor Howard, who had originally been in the employ of Gilford Motors and was by then associated with Horne. The nominal capital was £500 divided into 500 shares of £1 each, and the allotments made on 12 April were 101 shares to Mrs. J.M. Horne and 101 shares to Mr. A.V. Howard. The solicitor of the new company was the writer of the letter of 29 March.

Circulars went out to persons who had been customers of the plaintiff company, offering Gilford spare parts at prices considerably lower than the plaintiff charged. It was admitted in court, both below and on appeal, that persons who were customers of the plaintiff company while Horne was in its service had been solicited both before and after the formation of the company.

1. Was the covenant in clause 9 too wide to be enforceable as a restraint of trade?
2. Had the covenant been released by the arrangement of 17 November 1931 under which the employment was determined?
3. If the covenant stood, could the injunction go against the company as well as against Horne, the company not itself being a party to the covenant?

Appeal allowed. The covenant was enforceable, it had not been released, and the injunction went against both defendants.

On the first issue, Farwell J had held for Horne. Persons buying spare parts for cash and taking them away would be included in the covenant; the defendant as managing director would not come into contact with those customers and would not know them or their names and addresses; "that, therefore, the covenant was too wide." The Court of Appeal reversed him, holding "that in the circumstances the covenant was not wider than was reasonably necessary for the protection of the plaintiff" and was therefore enforceable by injunction.

On the second issue, the letters and the minute recorded the shortening of the term and the compensation payable for it; in the absence of any specific term dealing with clause 9 there had been no release of it.

On the third — the company-law issue — the Court held the new company to be a mere cloak or sham and enjoined it too.

Where a company is formed as a device or stratagem to enable an individual to break, or to appear not to break, an obligation already binding on him, the court will look through the company to the individual, and relief may be granted against the company as well as against him.

Why the covenant was reasonable

The Master of the Rolls accepted "that a covenant in restraint of trade is prima facie one which the law will not enforce", subject to long-standing exceptions. The modern test he took from Rigby LJ in Dubowski & Sons v. Goldstein: "The only test of the validity of an agreement in restraint of trade now is whether or not such an agreement is reasonably necessary for the protection of the person with whom it is made". From Nordenfelt he took the proposition "that any restraint, whether general or partial, is prima facie invalid, but may be good if the circumstances of the case show it to be reasonable."

Applied to clause 9, the covenant protected the profits earned from persons who were customers at the time of Horne's employment. He rejected the reading that the phrase reached persons from whom Gilford bought and in respect of whom no profit arose: "It is intended to deal with persons who are upon their books, or with whom they deal and, in the course of dealing, earn a profit." The covenant did not extend to customers acquired after the managing director left; it was definite in date; and it concerned persons "of whom the defendant himself would have the best knowledge, for he was the managing director of the company". Farwell J's objection — that an innocent sale to an unidentified past customer might imperil Horne indefinitely — was "not a fair test to apply to the covenant."

The company-law holding

Farwell J had found the facts squarely, and Lord Hanworth adopted them, saying he agreed with every word. Farwell J had said: "The defendant company is a company which, on the evidence before me, is obviously carried on wholly by the defendant Horne." Mrs. Horne, though a director, took no part in the business or its management; the other director, Howard, was an employee; a witness said that in all his dealings with the defendant company the boss or the guvnor was Horne himself. The judge had "not any doubt on the evidence I have had before me that the defendant company was the channel through which the defendant Horne was carrying on his business."

The crucial sentence is Farwell J's concession followed by his finding: "Of course, in law the defendant company is a separate entity from the defendant Horne, but I cannot help feeling quite convinced that at any rate one of the reasons for the creation of that company was the fear of Mr. Horne that he might commit breaches of the covenant in carrying on the business". Separate personality is conceded; the finding is about purpose.

Lord Hanworth put it in the words the case is remembered by: "I am quite satisfied that this company was formed as a device, a stratagem, in order to mask the effective carrying on of a business of Mr. E.B. Horne. The purpose of it was to try to enable him, under what is a cloak or a sham, to engage in business" which, on consideration of the agreement sent to him about seven days before the company was incorporated, he feared the plaintiffs might object to. The chronology carries the finding: the solicitor asks for the agreement on 29 March, receives it on 30 March, and the company is incorporated on 8 April.

The authority for enjoining the company was Lindley LJ in Smith v. Hancock, whose rule Lord Hanworth quoted: "If the evidence admitted of the conclusion that what was being done was a mere cloak or sham and that in truth the business was being carried on by the wife and Kerr for the defendant, or by the defendant through his wife for Kerr, I certainly should not hesitate to draw that conclusion, and to grant the plaintiff relief accordingly." Counsel for the defendants had admitted that if the company answered that description an injunction against it could not be resisted. Lord Hanworth drew the conclusion, holding the company to be "a mere cloak or sham" and "a mere device for enabling Mr. E.B. Horne to continue to commit breaches of clause 9, and under those circumstances the injunction must go against both defendants".

The two are reconciled by the timing of the obligation. In Salomon the company was formed to carry on a business, and the creditors' complaint was about the consequences of a lawful structure. In Gilford the obligation — clause 9 — bound Horne before the company existed, and the company was interposed for the sole purpose of frustrating it. Salomon protects incorporation used to conduct business; it does not protect incorporation used as a screen for a breach of an existing personal duty.

Notice also that the relief is calibrated. The company was not wound up, its incorporation was not questioned, and no one was made liable for its debts. It was simply restrained, alongside Horne, from doing what Horne had promised not to do.