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Introduction
The primary concern, in Gilford Motor Company Ltd versus Horne, was the restrictions being made on the trade of an individual. However, the main reason why this case is cited more often than not is because this case is also about lifting of the corporate veil to uncover fraud or a sham and hold the directors of the company personally liable for the wrongdoings done by them under the garb of the corporate identity. The segregated corporate identity is often used by the agents of the company to hide their wrongdoings, sitting behind a cloak where they cannot be reached for the same, having been protected by the corporate identity. However, every now and then, the Court may resolve to pierce this corporate veil and uncover the directors of the company and hold them personally liable for the ostensible wrongs done by them.
Facts of the Case
Gilford was a businessman who was involved in the business of selling assembled products under the name of Gilford Motor Vehicles online. Gilford purchased the motor parts from the manufacturers, assembled them, and sold them online. The business also included selling the spare parts and servicing the motors which had been sold online.
Gilford later hired Horne, as a managing director. It was a contractual employment for the period of six years. However, the contract contained a restriction on trade to be carried on by the employee, wherein the employee was not allowed to entice any of the customers of the employer while at the company or after termination of the contract.
Unfortunately, the contract of employment between Gilford and Horneended after two and a half years, and Horne left the company. However, shortlyafter he left the employment at Gilford Motor Vehicles, he set up a smallbusiness in his personal residence, under the name J.M. Horne & Co. Ltd. Healso solicited some customers, whom he had enticed from his dealings with themwhile he had been employed at Gilford Motor Vehicles.
Issues
The Court considered two major questions as follows –
- Can the court pierce the veilof J.M. Horne & Co. Ltd.?
- Has Horne violated the covenantin the previous employment contract regarding the restraint on trade?
Held
In the initial action, the petitioner lost the case. Court held thatthe restriction sought to be enforced against Horne by Gilford suffered fromtwo reasons–
- The restraint was a part of the employment contract, and thus, did not survive the termination of the employment, when it was terminated without any notice or reason; and
- The restraint so sought to be imposed was too wide and it could not be made enforceable any more.
In consideration of these, the Court initially did not explore the question that whether the company incorporated by Horne was a sham or not. The Court initially opined that the restriction was prima facie was unenforceable against Horne on account of being too wide in ambit.
However, the same was not true on appeal. The Court of Appeals disagreed with the decision taken by the lower court. The Court of Appeals treated the company incorporated by Horne to be what it was – a cloak or a sham which Horne had devised to circumvent the requirements of the employment agreement and the restrictive covenants contained therein.
Analysis
The case is used as an example to demonstrate the cases where thecorporate veil may be pierced by the Court to assess whether the company beingrun is being used as a sham to cover up the acts of the directors or theagents. In this case, Horne and his wife were the only two directors of thecompany, they were using the same advertising material, as well as the factthat the customer/clients which they were gathering were the ones with whomHorne had had the opportunity to work with while Horne had still been employedat Gilford Motor Vehicles. The same customers were being enticed by Horne,which was a clear violation of the restrictive covenant in the employmentcontract, but Horne sought to bypass this restriction by doing so behind theprotection of the corporate veil.
