Gilford Motor Co Ltd v Horne [1933] Ch 935
Citation:Gilford Motor Co Ltd v Horne [1933] Ch 935
Rule of thumb 1:Where there is a restriction of trade clause, can a person set up a company as a separate person to avoid this? No. The Court in this case held that where someone sets up a company to run it themselves to avoid a ‘restriction of trade clause’ against them personally then this is an exception to the separate personality principle.
Rule of thumb 2:What happens if a person actually running a company & making the money from it is not listed as a shareholder or director? This is deemed to be a ‘cloak or a sham’. An exception to the separate personality rule will be created to make the actual people running the company liable.
Judgment:
The facts of this case were that Horne had been an employee with Gilford Motor Co Ltd selling cars. One of the terms of Horne’s contract was a restrictive trade clause, which was that after he left Gilford, he was not allowed to set up a business and compete with Gilford within a certain radius. Gilford had become well known in the area for selling cars, knew how to run the business properly and had built up a lot of contacts for running the business, and desired to sell cars within the radius. Gilford knew that he personally was not allowed to do this by the terms of his contract, and so he so he set up a company whereby he personally was not actually competing against Gilford, but a company was competing against Gilford. The Court held that that where the company structure is only used to avoid a pre-existing contractual obligation, then this is not a proper purpose and the company set-up will be ignored – this is opposed to companies which are set up to minimise obligations which is a different position. The Court emphasised in this case that the underlying purpose of the company was an important consideration. Gilford were able to obtain an injunction against Horne to stop him setting up a car sales business and competing against him.
Ratio-decidendi:
‘I am quite satisfied that this company was formed as a device, a stratagem, in order to mask the effect carrying on of a business of Mr EB Horne. The purpose of it was to enable him, under what is a cloak or sham, to engage in business which, on consideration of the agreement which had been sent to him before the company was incorporated, was a business in respect of which he had a fear that plaintiffs might intervene and object’, Lord Hanworth MR
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