Lee v. Lee Air Farming Ltd. (1961) A.C. 12

The case of Lee v Lee Air Farming Ltd. revolves around the principle of Separate Entity regarding the Company Law established in the landmark case of Salomon v. Salomon & Co Ltd also known as the Salomon Principle.
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Introduction

The case of Lee v Lee Air Farming Ltd[1]. revolves around the principle of Separate Entity regarding the Company Law established in the landmark case of Salomon v. Salomon & Co Ltd[2] also known as the Salomon Principle. It is also an important case for UK Company Law and Indian Companies Act, 2013. Separate Entity is the basis of modern capitalism and enhanced the law regulating and generating immense social and economic wealth. It is the pillar of the Company law and applied globally. The objective of this case comment is to analyse the implications of the above mentioned principle and to distinguish between the subject of duality invested in a single person as regards to the employer and employee relationship. This concept is seen as impossibility in most of the cases but when tested logically and legally it comes across as a different perspective.

Facts

Geoffrey Lee, the deceased formed a company in 1954 through Christchurch accountants working in Canterbury, New Zealand. The company was formed to conduct the business of aerial top-dressing which meant the spraying of fertilisers from the air on the farms. He had the majority shares i.e. 2999 shares of 1 pound each out of the 3000 shares except the one share owned by his wife as the nominee. He was the sole governing director of the Lee Air Farming Ltd. (respondent company) and was employed as the chief pilot according to Article 33 of the Articles of Association at a salary arranged by him. One day during the course of his duty of aerial top dressing he died in a plane crash. Mrs Catherine Lee, the appellant claimed 2430 pounds under the Worker’s Compensation Act, 1922 on the context that her husband died while carrying out an employee duty, that means whether he is a worker or not under this New Zealand legislation.

The New Zealand Court of Appeals held that an employer cannot be a worker, and that the two offices are incompatible and impossible to exist together. But the Privy Council said that a man in his dual capacity can hold the responsibility of both the offices and applying the separate entity principle the deceased and the respondent company were separate legal entities. Therefore Mr. Lee was working in the capacity of a servant and had made himself a contract of employment on behalf of the company.

Issues

  1. Whether the principle of Separate Entity applicable or not?
  2. Whether Mrs. Lee (appellant) liable to claim compensation under the Worker’s Compensation Act, 1922?

Relevant Laws

  1. Separate Entity Principle

The Separate Entity Principle also known as the Salomon Principle was taken from the case Salomon v. Salomon & Co Ltd. This principle states that a company has separate legal identity and is a different and individual entity from its members and shareholders. The company has separate assets and limited liabilities, it can own property, have legal obligations and contractual relations with its members, employers and third parties. The company has to deal with its own legal implications and no one is reliable for it.

This was a landmark in UK’s Company law and since has acted as a foundation or the fundamental principle for various company law cases. In India it is incorporated under Section 2(20) of Companies Act, 2013[3]. It is a body incorporating persons to attain the economic, social and political ends. The independent corporate existence meaning a company is regarded as a natural person before the law was described by Supreme Court of India in Tata Engineering & Locomotive Co. Ltd. v. State of Bihar[4].

  • Worker’s Compensation Act, 1922

Under the mentioned Act and its amendment the New Zealand’s Workers’ Compensation Rules, 1939 the term worker means under Section 2 as:

“any person who has entered into or works under a contract of service or apprenticeship with an employer, whether by way of manual labour, clerical work, or otherwise, and whether remunerated by wages, salary, or otherwise.”

And also it is provided by Section 3(1) of the Act[5]

“If in any employment to which this Act applies personal injury by accident arising out of and in the course of the employment is caused to a worker, his employer shall be liable to pay compensation in accordance with provisions of this Act.”

This act was used in the particular case to validate and decide the claim of the appellant in ascertaining the deceased’s role as a governing director and the single controlling authority of the company from the employee or the worker while discharging his duties resulting in his death.

Judgement & Decision

The case went for appeal before the New Zealand’s Court of Appeal to decide whether the deceased was employed by the respondent company as “worker” under the Worker’s Compensation Act, 1922. The decision came in negative and the judgment said that the deceased was the sole governing director for life vested with full control over the company, yet there can be a contract of employment between the director and that of company but in this case the company only had a single person with authority and he cannot be the one giving orders and obeying them. Therefore, in such a matter both the offices cannot exist together in a single person and are incompatible. Also the Court of Appeal decided that the position of the director precluded the deceased from being an employee of the respondent company, therefore he cannot be servant or worker of the company.

The appellant appealed then in the Privy Council where the Lordships took into view the precedent set by the Salomon v Salomon case which decided that a person can work in dual capacities and yet the company and its single owner or shareholder will be separate legal entities. Similarly in this case there was a contractual relationship between Mr. Lee and the respondent company as soon as the company was incorporated and it cannot be invalidated due to the circumstance of the deceased being the majority shareholder and controlling force in the company. It shall be unclear that what position he might be enacting while performing his duties when he died but it was being done at the request of the farmers whose contractual rights and obligations were with the respondent company. Also merely the position of the deceased cannot undermine the fact that a contractual relationship can only be established between two individual legal entities which has already been proved. Thus, the appellant was able to receive the compensation as there was a contract of service between the company and the worker.

Analysis

According to my opinion after  studying the case thoroughly it seems that the court has decided the case fairly, taking into consideration all the aspects and with a logical view based upon the landmark principle in the history of Company law. Also the differentiation between a worker and an employer was quite technical but legally the contract is the basis of any role or relationship and here it was evident that there was a contract of service even though his role at the time of death was not clear but still he was an agent of the company and can take decisions on behalf of the company. It was his duty to perform those contracts because how will the company get things done if it were not for a living person who could carry them out on company’s behalf.

The court’s decision was based on separate entity principle which protects the interests of the individual members and shareholders of the company having limited liability and also highlights the company’s individual responsibility. In this case it helped the deceased’s wife to claim compensation because he was declared as worker and the respondent company had insurances for the workers as an obligation under the provisions of Worker’s Compensation Amendment Act, 1950.

Though the separate entity principle are weak in protecting the interests of the creditors of the company and some company’s use it as a means of abuse through the creation of subsidiaries to avoid debt but this can be avoided through the corporate veil principle where courts have intervened to impose legal liability on the members and the directors through piercing the veil. But in this case there was no need to so do since the company was not a sham and was incorporated correctly under the Company Act, 1862 and the contracts signed between Mr. Lee and the respondent company are valid.

There is a case which can be illustrated to draw a comparison between the respondent company and its sole governing director to prove the validity of transactions between them.

  • Inland Revenue Commerce v. Sansom[6]. Sansom sold his business to a going a private company John Sansom Ltd. and became the sole governing director of the same with 2499 shares of 10 pounds each and full control over the business and its affairs. The company could lend money to the persons as it seems fit under the head loans and advances in the balance and these advances were made to Sansom without interest therefore, it was concluded that this money is not a loan rather an income to him and he is liable for super tax on it. But after the investigation by the commissioner it was found that the company was a separate legal entity and it was not carrying out business as an agent of Sansom and it could give loan to him.

This case illustrates the circumstances under which a person can possess dual roles.

  • Fowler v. Commercial Timber Co. Ltd.[7]the plaintiff was the managing director of the defendant company and the company was not earning profits so it was decided to wind up the company. This was a voluntary decision take by the directors and the plaintiff as it was desirable. But the liquidators gave him a notice that his services were no longer required against which claimed damages for the wrongful dismissal and damages for breach of contract. Here he held the capacity of the managing director claiming damages for breach of contract and as a shareholder and director of the company who takes decision of winding up for the interest of the business.

From the above-mentioned instances it is clear that there exists a master-servant relationship between the respondent company and the deceased and there is no such impossibility of dual roles in law otherwise also.

Conclusion

The outcomes of the case are very clear and the principles used to come to the judgements are fair in all states. Thought the separate entity has its own shortcomings but they are very well managed with their statutory exceptions and sometimes even the courts look beyond the provisions of law and give exceptional judgments. But in this case, the rules mentioned had a solid backing and were proved to be fit logically and evidentially in all respects without twisting the law, and the Salomon case example is itself strong and without any exceptions. Therefore it is very well considered to be consistent with the current laws and amendments along with satisfying the foundation of the company law. It is a good law solving major company disputes thus helping with the modern economic and corporate developments all over the world.

Also read Society of Motor Manufacturing Traders v. Motor Manufacturers and Traders Mutual Insurance Co. Ltd


[1]Lee v Lee Air Farming Ltd. A.C. 12 (1961).

[2]Salomon v. Salomon & Co. A.C.22, 33 (1897).

[3]Indian Companies Act, 2013.

[4] Tata Engineering & Locomotive Co. Ltd. v. State of Bihar, AIR 1964 SCR (6) 885.

[5] Worker’s Compensation Act, 1922.

[6]Inland Revenue Comrs. v. Sansom 2 K.B. 492 (1921).

[7]Fowler v. Commercial Timber Co., Ltd. 2 K.B. 1 (1930).