GILFORD MOTOR CO LTD V HORNE

The defendant was the plaintiff’s former managing director. He was bound by a restrictive
covenant after he left them. To avoid the covenant, he formed a company and sought to transact
his business through it. At first instance, Farwell J had found that the company had been set up to
enable the business to be carried on under his own control but without incurring liability for
breach of the covenant. The reality was however that the company was being used as ‘the
channel through which the defendant Horne was carrying on his business.’ In fact, he dismissed
the claim on the ground that the restrictive covenant was void.
Held: The ruse was ineffective, and an injunction was issued to prevent Horne and his company
from breaching the covenant he had given.
Lord Hanworth MR said: ‘I have 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. 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 the company was the fear of Horne that he might commit breaches of covenant . . and
that he might possibly avoid that liability if he did it through the Defendant company . . I am
quite satisfied that this company was formed as a device, a stratagem, in order to mask the
effective carrying on of the business of 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 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.’