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An accountant studying ...... Company Law!?

Hi guys,

I have a law module whilst at uni and I'm really struggling to get to grips with the case study I've been given. Looking over it breifly it consists of;

Veil of incorporation
Preincorporation Contracts
Memorandum and articles of association
Directors Duties
Minority Shareholders

So the case study states that there are 3 brothers whi set up a company and they incorporate and each of them is a director and each owns one 3rd of the shares. Anil (one of the brothers) previously worked for a local company and is prevented by a covenant in his contract of employment from engaging in competition with his former employers for 5 years. Someone advised him that by incorporating the company, it is now the company- not anil that is competing with the former employers so he can escape the restriction imposed by the covenant.

My thoughts initially was that a 5 year restriction was too long and the courts would rule this to be unreasonable?

Due to the company and shareholders/managers being separate legal entity's was the advice correct that was given?

Any help would be amazing!! :smile:

Lauren

Reply 1

Clip

5 years sounds like a very long time for a restrictive covenant. The implied term of confidentiality doesn't hold a great deal of water after employment has ended, and only really restricts with regard to trade secrets and client contacts. The leading case is Faccenda Chicken and it boils down to not generally restricting much further than will protect an ex-employer's proprietary interest taking regard of the industry and the geography,

Geography and trade are taken together - someone operating a fast food restaurant in London is not likely to have a covenant restricting trade for 2 years upheld. On the other hand, someone like a salesman operating in a small geographic area might. In Fitch v Dewes, a lifelong covenant within 7 miles of a small town was upheld.

In short, it depends what Anil does and where he does it. Incorporation shouldn't really affect it, assuming he would be an employee of the new business. Unless the covenant had some bizarre construction, it wouldn't be looking at whether or not Anil is self-employed or employed.

Reply 2

Forum User

Original post by laurie93

Someone advised him that by incorporating the company, it is now the company- not anil that is competing with the former employers so he can escape the restriction imposed by the covenant.

Gifford Motor Co v Horne suggests that this is one of the instances where the corporate veil can be lifted. However, depending on the wording of the covenant, it may not be necessary to lift it at all. It may be that the covenant covers the situation where Anil is employed by someone else that is competing with the business. I don't remember what the wording of the covenant in Gifford was.

Of course the covenant will likely too broad although there is at least one case where a 'forever, and everywhere in the world' restrictive covenant was upheld - think it was Nordenfeld v Nordenfeld. Depends on the facts of the case.

Reply 3

laurie93

Thanks guys! It is becoming more clear as I now know where to start looking and which case law to be looking at! I wanted to get some pointers on the kind of law that I will be dealing with.

After some months trading, Sunil is approached by Martin who runs a company supplying fibreglass which is used to make car bodywork kits. Martin tells Sunil that, if he can persuade his brothers to order fibreglass from his company, Martin will ‘see him right’. At a board meeting later that week, Sunil tells Anil and Nazir that he has compared the products of various suppliers and that Martin’s company produces the best fibreglass (which is true) but does not mention his conversation with Martin. On the basis of Sunil’s recommendation, the brothers agree to place a regular order with Martin who, two weeks later, sends Sunil a cheque for £1,000.(Is this wrong, I cant find anything about going behind the back of other shareholders....is it classed as fraud?)

Over the past year Nazir has felt increasingly isolated within the company. Anil and Sunil take all of the decisions and, because he is always outvoted, Nazir feels that there is little that he can do.(What can he do? Have a look at the articles of association?) The relationship between Nazir and the other brothers has become intolerable and so Nazir decides to leave the company. However, a clause in the company’s articles provides that any member wishing to sell their shares must sell them to the other members. Nazir has approached Anil and Sunil and asked them to buy his shares but has been told that they are not interested because they can get their own way anyway and so he should just ‘put up with it’. - I was thinking about the equitable winding up case, that tobacco company but I feel like i'm way off :/

Cheers guys - I'm no good with this law thing as you can see!! D:

Reply 4

Forum User

Original post by laurie93

... sends Sunil a cheque for £1,000.(Is this wrong, I cant find anything about going behind the back of other shareholders....is it classed as fraud?)

You need to look at the directors' duties set out in s 171-177 Companies Act 2006. One (or more) have almost certainly been breached here.