Case name & citation: Lee vs Lee’s Air Farming Ltd. (1961) A.C. 12 (P.C.)
Year of the case: 1961
Jurisdiction: The Privy Council
What is the case about?
Because a corporate body (i.e., a company) is a legal formation, it is not a human being; rather, it is an artificial judicial person (i.e., created by law) and is endowed with many rights, obligations, powers, and duties prescribed by law. One of the main characteristics of a company is that it has a separate legal entity distinct from its members. The case of Lee vs Lee’s Air Farming Ltd. throws light on this principle.
Facts of the case (Lee vs Lee’s Air Farming Ltd.)
Lee, a qualified pilot, incorporated a company named “Lee’s Air Farming Ltd.” of which he was the managing director. The company was formed for the manufacturing of aerial top-dressing. In the capacity of the managing director of the company and by virtue of the Articles, he appointed himself as a chief pilot in the company at a salary.
Of the 3,000 £1 shares constituting the nominal share capital of the company, Lee was allotted 2,999 shares.
Lee, in the capacity of the governing director and controlling shareholder, exercised complete and unrestrained control over the business of the company and made all decisions pertaining to contracts for aerial top dressings.
While doing business for the company, he lost his life in an aircraft accident.
His widow claimed compensation for his death on the ground of personal injuries caused to her husband during the course of his employment. She claimed that her husband was killed while piloting the company’s aircraft and thus, was liable for compensation under the Workmen Compensation Act of New Zealand.
The insurance company opposed the claim. It was argued that no compensation could be paid because Lee and Lee’s Air Farming Ltd. were the same person. It was contended that Lee was not a worker because the same person cannot be the employer and the employee.
Can Lee, being the controlling owner and having the maximum number of shares in the company, be entitled to receive compensation under the Workmen Compensation Act?
Can he be treated as an employee in the company for the grant of compensation or can he be denied such compensation because he was also the managing director?
Does a master and servant relationship exist between Lee and his company, Lee’s Air Farming Ltd.?
This case illustrates the application of the principles established in the landmark case of Salomon v. Salomon and Co. Ltd. Salomon’s case is well known for establishing the principle of corporate personality. Once a company is validly constituted, it becomes a legal person distinct from its members.
The principle of corporate personality holds that a company formed under the Companies Act is vested with a separate corporate personality, which allows it to carry its own name, act under its own name, have its own seal, and have assets separate and distinct from those of its members. It is a distinct ‘person’ from the individuals who form it.
As a result, it can own property, incur debts, borrow money, have a bank account, hire people, enter into contracts, and sue or be sued in the same way as an individual can. Its members are its owners, but they might also be its creditors. Even when a shareholder owns nearly the entire share capital, he cannot be held accountable for the company’s actions.
The company cannot be bound by the actions of the shareholders because they are not the agents of the company. Moreover, members cannot file a lawsuit to assert the company’s rights or be sued in connection with its obligations because the company does not hold its property as an agent or trustee for its members.
Judgement of the Court in Lee vs Lee’s Air Farming Ltd.
The Court held that Lee was a separate person having an identity distinct from the company he formed. Contractual relationships were entered into between Lee and his company, both being distinct legal persons, under which Lee became a chief pilot, and a servant of the company.
The Privy Council observed that in the capacity of being the managing director of the company, he could give himself orders (in his other capacity as a pilot) on behalf of the company. The relationship between himself, as a pilot and the company, was that of a servant and a master.
Hence, compensation was payable to him for the loss suffered during the course of his employment. The compensation was recovered by his widow under the Workmen Compensation Act. In effect, the principle of corporate personality enabled Lee to become the master and servant at the same time and still enjoy the benefits of both.
The Court further held that a member of a company can contract with the company of which he is a shareholder. Valid contracts of service can be entered into between a member and a company as both operate as separate legal entities.
Moreover, for the purpose of claiming the amount under workmen’s compensation legislation, the directors are not precluded from being an employee of a company. Thus, directors are also eligible for compensation.
Regardless of the level of control that Lee had over the affairs of the company, a valid contract of service existed between Lee and the company. Therefore, Lee was deemed to be a worker. And Mrs. Lee was entitled to get compensation.
The Privy Council rendered a fair verdict after carefully considering all the facts in the case, concluding that even though the director participates in the decision-making process, he is not to be regarded as an agent or trustee of the company. Because it is a distinct legal entity, the company is allowed to enter into contracts with both its own members and third parties, as well as bring and defend legal actions in its own name. It should be highlighted that despite being the company’s acting mind and will, a director is not responsible for the company’s actions.
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