CASE NAME: Catherine Lee v. Lee’s Air Farming Limited
CITATION(S): [1961] UKPC 33, [1961] AC 12
As per the Companies Act, 2013 Separate legal entity means that a company which is registered under this act as a non-profit organization, private limited company, public company, government company, or chit fund company shall have a legal identity of its own and will have rights under the law and will treat as a separate entity from its shareholder. It can own property in its name enter into contracts with other persons and represent itself in a court of law through its representative.
A separate legal entity also acts as a veil between the company and its members. This means that the assets of the company shall be used only for the objective of the company as set in the Memorandum of Association and its liabilities should be paid by itself and not from a personal asset of the member of the company.
FACTS OF THE CASE
In 1954 the appellant’s husband Lee formed the company named Lee’s Air Farming Ltd. to carry on the business of aerial top-dressing with 3000 thousand shares of 1euro each forming share capital of the company and out of which 2999 shares were owned by Lee himself. Lee was also the director of the company. He exercised unrestricted power to control the affairs of the company and made all the decisions relating to contracts of the company.
The company entered into various contracts with insurance agencies for the insurance of its employees and a few premiums of the policies were paid through the company's bank account for the personal policies taken by Lee in its name but it was debited in the account of Lee in the company's book. Lee apart from being the director of the company was also a pilot. In March 1956, Lee was killed while piloting the aircraft during aerial top-dressing.
His widow claimed compensation for his death on the grounds of personal injuries caused to her husband during 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.
ISSUES OF THE CASE
- 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.?
GOVERNING LAW
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 name, act under its name, have its 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
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 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, to claim 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.
