Gilford Motor Co Ltd v Horne
Rule established
The corporate veil will be lifted where a company is formed as a mere cloak or sham to evade a contractual obligation such as a non-compete covenant
Facts
- Horne was employed as managing director of Gilford Motor Co Ltd.
- His contract contained a covenant not to solicit customers after leaving.
- Horne left employment and formed a company in his wife's name.
- The new company began soliciting Gilford's customers.
- Gilford Motor sought an injunction against both Horne personally and the new company.
- Horne argued the company was a separate person not bound by his covenant.
Issue
- Whether the corporate veil can be lifted where a company is used to evade a pre-existing contractual obligation; whether the injunction can be granted against a company that was not party to the original covenant.
Held
- The Court of Appeal held that the company was a mere device used by Horne to mask his activities and evade his contractual obligation. The corporate veil was lifted and an injunction was granted against both Horne and the company. The court refused to allow the separate entity doctrine to be used as an instrument of fraud.
- Lord Hanworth MR stated that the company was formed as a device, a stratagem, to mask the effective carrying on of business by Horne in breach of his covenant.
Ratio Decidendi
Where a company is formed as a mere cloak or sham to enable a person to evade a legal obligation (such as a restrictive covenant), the court will lift the corporate veil and treat the company's acts as the acts of the person behind it. The separate entity principle will not be allowed to be used as an engine of fraud or evasion.
How to use it in an exam
- This is a leading case for the "sham/cloak" ground of lifting the corporate veil. Use it alongside Jones v Lipman in any answer on judicial exceptions to Salomon. It is especially relevant when the question involves using a company to evade pre-existing contractual obligations.
- Key quotable line: "The company was a mere cloak or sham: a device to evade the covenant."
Source
Source: Court of Appeal (England)
This is an educational summary, not the judgment itself. Cite the reported version in professional or academic work.
Cited in study notes
Company LawLifting the Corporate VeilLeading authority for lifting the veil where company is used to evade contractual duties