Company Law

Lee v. Lee's Air Farming Ltd.

[1961] AC 12

Facts

Lee formed Lee’s Air Farming Ltd. to conduct the business of aerial top-dressing and crop-spraying.
The company had a share capital consisting of 3,000 shares.
Lee held 2,999 shares, while the remaining share was held by another person.
He was appointed the company’s governing director.
The company’s articles gave him extensive control over its affairs.
In his capacity as director, Lee caused the company to employ him as its chief pilot.
He therefore acted in two different capacities:
as the controlling director who managed the company; and
as a salaried pilot performing work for it.
While piloting an aircraft for the company during an aerial top-dressing operation, Lee was killed in an accident.
His widow claimed compensation on the basis that Lee was a worker employed by the company.
The New Zealand Court of Appeal rejected the claim.
It reasoned that Lee controlled the company and could not effectively give orders to himself or be both employer and employee.
His widow appealed to the Judicial Committee of the Privy Council.

Whether Lee could legally be an employee of a company which he almost wholly owned and controlled.
Whether a valid contract of employment could exist between Lee and the company.
Whether his position as governing director was incompatible with his position as chief pilot.

An incorporated company is a legal person separate from its shareholders and directors.
A person may deal or contract with a company even where that person controls it.
The same individual may possess different legal capacities in relation to the company.
A director may also be an employee where:
a valid contract of service exists;
the work performed is distinct from directorial functions; and
the company and individual remain legally separate persons.
Control of the company does not merge the shareholder’s personality with the company’s personality.

The Privy Council treated Lee and Lee’s Air Farming Ltd. as two separate legal persons.
The company was the employer; Lee, in his capacity as chief pilot, was the employee.
Although Lee exercised control through his position as governing director, that control belonged to him in his corporate capacity.
His duties as pilot were different:
he flew aircraft;
performed aerial operations;
worked for remuneration; and
exposed himself to employment-related risks.
The company’s articles authorised the governing director to enter contracts on its behalf.
Therefore, Lee could validly act for the company when arranging the employment and could separately perform the resulting contract as an employee.
There was no legal impossibility in one human being occupying both positions.
The company could act only through human agents, but those agents did not thereby become identical to the company.
The lower court had focused on practical control instead of legal personality.
In law, the directions given through the corporate machinery were directions of the company, not merely Lee’s personal directions to himself.
His dominant shareholding did not remove the contractual relationship.
The separate-entity doctrine therefore allowed Lee to be:
controller of the company;
governing director;
shareholder; and
servant or employee, at the same time.
Avtar Singh describes the result as corporate personality enabling a person to be “master and servant” in different legal capacities.

The Privy Council reversed the New Zealand Court of Appeal.
Lee was capable of entering into a valid contract of employment with his company.
At the time of the accident, he was working as the company’s chief pilot and was therefore its employee.
His widow was entitled to claim statutory compensation arising from his employment.
The case confirms that separate corporate personality creates real legal relationships between a company and its controlling member.
Use this case for: a controlling shareholder and director can also be an employee of the company because the company remains a separate legal person.