Company Law Case: Lee v. Lee’s Air Farming Ltd. 1961 A.C. 12 UK.
Case: Separate Legal Entity of a Company and the Capacity of a Director/Shareholder to Be an Employee of the Company
Plaintiff: Catherine Lee
Defendant: Lee’s Air Farming Ltd
Citation: [1960] 3 All ER 420; [1960] UKPC 33; [1961] AC 12.
This case is related to separate legal entity of a company and the Capacity of a shareholder to be an employee of the company.
Facts of the Case:
In 1954, Geoffrey Woodhouse Lee formed Lee’s Air Farming Ltd. for the purpose of carrying on the business of aerial top-dressing. The company had a nominal share capital of 3,000 shares of £1 each, of which Lee held 2,999 shares. He was appointed as the governing director of the company. Under Article 33 of the company’s articles, he was also employed as the chief pilot at a salary, and the relationship of master and servant was to apply to that employment. Lee exercised extensive control over the company’s affairs in his capacity as governing director and controlling shareholder. On 5 March 1956, while piloting the company’s aircraft during aerial top-dressing operations in Canterbury, the aircraft crashed and Lee was killed. His widow, Catherine Lee, claimed compensation under the New Zealand Workers’ Compensation Act 1922, alleging that her husband’s death arose out of and in the course of his employment by the company. The issue arose because Lee was simultaneously the company’s controlling shareholder, governing director and chief pilot. The New Zealand Court of Appeal held that his position as governing director prevented him from being regarded as a worker employed by the company.
Plaintiff’s Claim:
Catherine Lee claimed compensation under the New Zealand Workers’ Compensation Act 1922 for the death of her husband, on the ground that he was a worker employed by Lee’s Air Farming Ltd. and had died while working in the course of that employment.
Defendant’s Arguments:
The central contention against the claim was that Geoffrey Lee could not simultaneously be the governing director who controlled the company and its servant or employee. The New Zealand Court of Appeal considered that the two positions were incompatible because there was no effective power of control over Lee in his capacity as chief pilot.
Legal Issue:
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Whether Geoffrey Lee, despite being the controlling shareholder and governing director of Lee’s Air Farming Ltd., could also be an employee/worker of the company under a contract of service?
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Whether his widow was entitled to workers’ compensation for his death?
Decision of Courts:
The Court of Appeal of New Zealand: held against Catherine Lee, considering that Geoffrey Lee could not be both the governing director and a servant of the company and the matter was appealed to the Judicial Committee of the Privy Council
Judicial Committee of the Privy Council: It allowed the appeal and held that the company was a legal entity separate from Geoffrey Lee. Consequently, there was no legal impossibility in Lee occupying the position of governing director while simultaneously entering into a contract of service with the company as its chief pilot. The Privy Council therefore held that Lee was a worker within the meaning of the Workers’ Compensation Act, and Catherine Lee was entitled to compensation.
Established Principles:
1. Company has a separate legal personality: A company is a legal entity separate and distinct from its shareholders and directors. The fact that one person controls almost all of the company’s shares does not destroy the company’s separate identity.
2. A shareholder can have a contractual relationship with the company: A person does not lose the capacity to contract with a company merely because he is its controlling shareholder. The company and the shareholder are legally distinct persons.
3. A director can also be an employee: A person may simultaneously act as a director of a company and its employee. The two capacities are not necessarily legally incompatible.
4. One person may function in dual capacities: Geoffrey Lee acted in one capacity as the governing director and in another capacity as the chief pilot/employee. The Privy Council recognized that these different capacities could coexist.
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