Question

Question 4: Separate legal identity

1. Harry was managing director of Grantham Plumbers Limited (Grantham). A restraint of trade clause in his contract of employment prevented him from soliciting Grantham’s customers after he left its employment. Harry left and set up a company called Right As Limited (Right As), which successfully marketed its services to Grantham’s customers. Grantham wishes to sue Harry, who claims he has not breached his contract. Explain the legal basis on which Grantham might sue Harry as the owner of the separate legal entity, Right As. Refer to relevant provisions in the Companies Act 1993, and case law to support your answer. (Ignore any application of s145 Companies Act 1993).

2. Ricardo is a director and shareholder of Dodge Limited (Dodge), a company formed to take over Peel Limited (Peel), a company that is no longer trading. One of Peel’s assets transferred to Dodge is a lease of a BMW car. The motor vehicle dealer was unaware that Peel was no longer trading and prepared a new lease in Peel’s name. Ricardo signed the lease agreement on behalf of Peel. Dodge subsequently runs into difficulties and becomes insolvent. Can the motor vehicle dealer hold Ricardo personally liable for the unpaid lease on the car? Refer to any relevant provisions (including subsections) in the Companies Act 1993 to support your answer.

3. Comprehende Ltd (Comprehende) controls the composition of the board of Pharoah Developments Ltd (Pharoah). Pharoah owns 80% of the shares in Piety Ltd (Piety). Piety becomes insolvent after engaging in highly risky behaviour. Refer to provisions (including subsections) in the Companies Act 1993 to support your answers.

(a) Explain if Piety is a subsidiary of Comprehende.

(b) Explain if Pharoah might become liable for the debts of Piety.

Answer 1

1. Facts of the case: Harry is the managing director of Grantham Plumber ltd having a restraint of trade after relieving from employment and prevents from soliciting its customers. But he sets a new companyRight as Ltd and solicits its customers. Now Grantham wants to sue Harry for restraining of trade

Provisions in Companies act 1993:

There are some conditions where the seperate legal entity concept can not be applied and thelaw will lift the corporate veil.

One of the situations is restraint of trade, this is an exception to the provision of seperate legal entity.

The same was held in the case of Gilford Motor Co Ltd v Horne. The brief facts of this case are that Gilford employed Horne as a managing director for a six year term. Horne’s employment contract contained a restraint of trade clause where he agreed if he terminated his employment he would not solicit customers away from Gilford. Horne did leave Gilford and set up a rival business in which enticed customers away from Gilford. Gilford sued Horne to enforce the restraint of trade clause, however Horne argued on the grounds of separate legal entity that it was the company that enticed the customers away not Horne personally. The Court of Appeal allowed the enforcement of the clause in contract against the company. They did this because Horne had used the company as a “mere cloak or sham" [12] , the court lifted the corporate veil and allowed liability to be imposed on the reasons of fraud, Horne used a separate legal personality to carry out an action that was personally prohibited for him to do.

As the case of Gilford [13] has demonstrated the court will disregard corporate personality if it is used as a sham or façade to avoid personal contractual obligations, however this fraud must be clear. Paterson J did pierce the corporate veil in this final demonstration on when the courts will lift the veil. In Official Assignee v 15 Insoll Avenue Limited [14] Paterson J held that it was appropriate to pierce the corporate veil because of special circumstances indicating that it was a façade concealing the true facts. As well as the company formed had not been genuinely and honestly used. He measured he was able to put the company structure to one side on the basis, that the company was a façade and a sham, and that the corporate veil could be lifted.

Therefore Harry can be sued and held liable by the Grantham Plumbers Limited under Restraint of trade.

2. Facts of the case: Ricardo is the director and shareholder of Dodge Ltd, a company formed to take over Peel Ltd. An asset is transferred having the lease. and Ricardo is signed on behalf of Peel Ltd. and the company Dodge Ltd has become insolvent, Ricardo is held liable by Leasing company.

Provions of the act: As a general rule, since the company and its Director are separate entities, the Director has no personal liability on behalf of the company.

A Director can be held liable on some circustances like loss to the Government, Nin payment of Taxex, Situations relating to Lifting of Corporate veil etc... But there is no specific provisions in law for the present case. So Ricardo can not be held liable. But the leasing company can claim from Dodge ltd as it has aquaired Peel Ltd and it can recover something as Dodger Ltd is getting liquidated

3. Comprehende is the holding company of Pharoah Developments ltd which is the holding company of Piety Ltd

So subsidiary of Subsidiary is Subsidiary to the holding company. So Piety is also a subsidiary company of Comprehende ltd.

b) Subsidiary company has seperate legal status from the parent company or holding company.Subsidiaries are separate, distinct legal entities for the purposes of taxation, regulation and liability. ... In other words, a subsidiary can sue and be sued separately from its parent and its obligations will not normally be the obligations of its parent.