Memorandum re
Wanganui Byproducts Ltd
(fictional case)
Completed as a requirement of LAWCOMM 402 Company Law
Issues
The main issue in this case is whether Wanganui Byproducts Ltd (Wanganui) can be held liable, or joined to an action brought under the restraint of trade provisions in the contract between John Gidman (John) and Napier Proteins Ltd (Napier), and restrained accordingly.It is important to remember, assuming Wanganui is a properly incorporated company, the common law principle from Saloman v Saloman & Co that a company has a separate legal personality.[1], [2] This means that, unless the court recognises that Wanganui has a legally enforceable obligation, Napier only has privity of contract with John. Therefore Napier’s ability to stop Wanganui’s operations is dependent on identifying a cause of action against Wanganui.
Two potential causes of action exist: an action requiring the court to negative the protection provided by a company’s separate legal status, known as ‘lifting the corporate veil’, [3] and; alternatively, an action based on attribution of John’s knowledge to the company.
Corporate veil
Lord Sumption JSC recently clarified the two principles that might justify “piercing” the corporate veil where “a company’s separate legal personality is being abused for the purpose of some relevant wrongdoing”, in a thorough analysis of Gilford Motor Co Ltd v Horne.[4]
In Gilford a former employee incorporated a company to disguise competition with his former employer, contrary to the terms of the restraint of trade provision in his contract.[5] In that case the imputed company’s shareholders and directors were the former employee’s wife and another employee of the company.
The “concealment principle” applies where the court is prepared to look past a corporate entity interposed to hide the identity of the people really involved. Lord Sumption considers this principle not to be piercing the veil but simply looking behind it to discover the relevant facts. The “evasion principle” is where a company’s separate legal personality is interposed to prevent enforcing a legal right, existing independently of the company, against a person in control of that company.[6] In Gilford, according to Lord Sumption, the concealment principle was applied in the injunction against Mr Horne and the evasion principle in the injunction against the company.[7]
Application to this case
The facts in the present case are analogous to Gilford, with the distinction that John’s brothers Alan and Rex are the shareholders and directors of Wanganui. The difficult question of fact this case will turn on is regarding the level of control John has in Wanganui’s business or whether John is merely a contractor.
If the court is satisfied that Wanganui is being used to disguise the level of John’s involvement in competing against Napier, in order to frustrate the restraint of trade provision in his contract, then the evasion principle could be applied. It would be relevant to this finding that John is providing technical knowledge and advice to Wanganui, and that he was providing it to Alan prior to the company’s incorporation. It could be inferred from this that John was always intending to compete with Napier, contrary to the restraint of trade provision.
Counter-argument
The counter argument is firstly that the court should recognise the legitimate incorporation of the company and apply the principle of separate legal personality from Saloman,[8] noting the fact that Alan and Rex are genuine directors and shareholders, and that as CEO Alan is working in the business day-to-day. This fact distinguishes this case from Gilford, where the role of Mr Horne’s wife was considered illusory.
Secondly, the principle behind lifting the corporate veil, as explained by Lord Sumption,[9] is limited and only applies where a person “evades” or “frustrates” a legal obligation by “interposing a company under his control” and therefore, as John has no controlling interest or role in the company the doctrine does not apply.
Attribution
The alternative cause of action, if the court finds Wanganui to be a legitimate legal entity and the corporate veil remains in place, is based on the rules of attribution from Meridian Global Funds Management Asia Ltd v Securities Commission.[10]
The common law rules of attribution are utilised where a court seeks to attach the actions or omissions of a natural person to a corporate entity. These rules are needed because every company requires human players to perform the actions of the company, and the court is required to distinguish between those actions that are properly the responsibility of the human players and those that are deemed to be the responsibility of the company.[11]
Lord Hoffman’s “special rules of attribution” determine when to apply the actions or knowledge of certain people to a company in circumstances that fall outside the general rules of attribution, such as when the rules of agency do not apply. These special rules of attribution apply equally to private law rules, for example under contract, as they do to statutory and common law rules. A special rule of attribution would need to be applied to determine whose actions can be attributed to a company, given the “language, content, and policy” of the provision in the contract.[12]
A final factor to be considered in attribution cases will be the relationship between the imputed person and the other people running the company and whether the relationship is such that some kind of control or accrued benefit can be inferred.[13]
Application to this case
Attributing John’s actions or knowledge to Wanganui to enable a tortious claim for inducing breach of contract would require the court to apply a “special rule of attribution”. It is arguable that the policy behind the restraint of trade provision, to prevent other businesses competing with Napier, is potentially attributable to a company under a special rule of attribution.
In this case, John knew that providing advice to Wanganui would breach the policy of the provision and, arguably, if John is sufficiently involved in Wanganui’s business, his knowledge of the potential breach must also be attributable to Wanganui. Those actions would then be grounds for an action in tort against Wanganui for inducing a breach of contract.
This argument is supported by commentary suggesting there were potential tortious or equitable actions against the company in Gilford for knowingly inducing the breach of restraint of trade.[14] This is supported further by Lord Sumption’s obiter statement from Prest, that imputing Mr Horne’s knowledge to the company in Gilford might have justified an injunction against the company on grounds of unconscionable behaviour.[15]
Again, the difficult question for the court is whether John’s control of Wanganui’s business is sufficient to attribute his knowledge to the company. Applying the relationship factor from Americano’s to the fact that his brothers are the directors and shareholders of Wanganui will add weight to this argument.
Counter-argument
The counter argument is that, as a contractor, John has no controlling interest or management role in the company therefore his actions cannot be deemed to be the actions of the company. Further, joining the company to any action against John would unjustly impact on the innocent directors and shareholders who should be entitled to rely on the separate legal personality of a legitimately incorporated company to protect their investment.
Again, these would be questions of fact for the court to determine, bearing in mind the timing of company incorporation and all the relevant circumstances around the formation of the company.
Conclusion
Although there is discussion about whether “lifting the corporate veil” is a genuine doctrinal approach or merely a construct that explains other legal principles,[16] it appears that the first cause of action has sufficient merit to warrant further exploration of the facts.
In the alternative cause of action, if the company is deemed to be legitimately behind “the corporate veil”, the case will again turn on John’s involvement. However, the company’s defence cannot rely on its separate legal personality because the requirements of the tort include circumstances where the contract-breaker is a separate legal person from the tortfeasor.[17]
Both causes of action will depend upon discovery clarifying the circumstances around Wanganui, such as the exact timing of incorporation relative to John’s dismissal and financial information that might indicate, for example, whether John’s income is on par with Alan and Rex.
[1] Saloman v Saloman & Co Ltd [1897] AC 22 (HL).
[2] Also entrenched in the Companies Act 1993, s15.
[3] Laws of New Zealand Companies (online ed) at [17].
[4] Prest v Petrodel Resources Ltd [2013] UKSC 34, [2013] 2 AC 415 at [27].
[5] Gilford Motor Co Ltd v Horne [1933] 1 Ch 935 (CA).
[6] At [28].
[7] At [29].
[8] Saloman v Saloman & Co Ltd, at n 1.
[9] Prest, at n 4, at [35].
[10] Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 3 NZLR 7 (PC).
[11] Meridian above at n 10, at 11 per Lord Hoffman.
[12] Peter Watts, Neil Campbell and Christopher Hare Company Law in New Zealand (2nd ed, LexisNexis, Wellington, 2016) at ch 2.3.2 – citing Lord Hoffman in Meridian.
[13] Americano’s Ltd v State Insurance Ltd HC Christchurch CP146/98, 5 August 1999 at 30.
[14] Watts, Campbell and Hare, above at n 12, at ch 3.12.4.
[15] At [29].
[16] Watts, Campbell and Hare, above at n 12, at ch 3.12.4 suggests that the court in Gilford applied orthodox legal reasoning and that it is not a true case of the court ignoring the company’s separate legal personality. Rather, it is suggested, the court issued an injunction against the company to prevent it from “enabling” the breach of restraint of trade.
[17] Watts, Campbell and Hare, above at n 12, ch 3.12.4.