Lee v Lee’s Air Farming Ltd
[1961] UKPC 33, [1961] AC 12
A company is a separate legal entity that can operate in its own name. In order to completely understand this concept, you must study the case of Lee vs Lee’s Air Farming Ltd.
Introduction
According to the Companies Act of 2013, a company registered as a non-profit organisation, private limited company, public company, government company, or chit fund company will have a separate legal identity, legal rights, and treatment from its shareholders. This is referred to as a separate legal entity.
Furthermore, the separate legal entity can enter into contracts with third parties, hold property in its own name, and sue or be sued in its own name.
A distinct legal entity is a barrier between a firm and its members. This implies that the business’s assets should only be used to fulfil the goals outlined in the memorandum of association and that the corporation should be responsible for paying its debts independently rather than using the personal assets of its members.
Facts of the Case
The Lee family established Lee’s Air Farming Ltd. in 1945. The firm he founded has Mr Lee as its only managing director.
As the firm’s managing director, Lee chose himself to be its chief pilot and was hired by the company for the role.
Lee passed away in a plane accident in March 1956 while en route to a corporate business.
Lee made all decisions about the company’s contracts and had total control over the company’s operations.
The company engaged in several agreements with insurance companies for employee insurance.
The personal insurance policies that Lee purchased in his name, some of the payments were paid from business bank accounts but afterwards disputed in Lee’s account in the company book. (In other words: Some of the purchases of personal insurance policies in the name of Lee were disputed in the company book as the payments of those purchases were made from business bank accounts.)
Under the New Zealand Worker Act of 1922, Mrs Lee filed a claim for damages on behalf of the deceased worker. She said Lee worked for an organisation.
Issues
Whether Lee, who is the majority shareholder and the controlling owner of the business, be granted compensation under the Workmen Compensation Act?
Whether he (Lee) can be refused remuneration since he was also the managing director, or will he be recognised as an employee in the firm for the purposes of grant of compensation?
Does a master-servant relationship exist between Lee and his business, Lee’s Air Farming Ltd.?
Arguments Before the Court
The insurance company stated that because Mr Lee was the firm’s managing general director and owned the most significant number of shares, he was ineligible to work for the business.
Respondent (insurance company) claimed that everyone who has signed a contract of employment or is employed by a corporation qualifies as a worker, but Mr Lee served as the organisation’s director.
Mrs Lee argued that the New Zealand Worker Act of 1922 entitles her to compensation. She also stated that her husband passed away while en route to work for the company.
In support of the respondent, the appellant added that, as per the Workers Act of 1922, Mr Lee is also a corporate employee.
Governing Principles
This instance demonstrates the practical application of the rules established in the famous Salomon vs Salomon and Co Ltd decision. Salomon’s lawsuit is renowned for creating the corporate entity. A business becomes a legal person apart from its members after it has been adequately and legally established.
According to the corporate personality concept, a company established in accordance with the Companies Act has a separate corporate personality that entitles it to use its own name, operate in its own name, have its own seal, and own assets independent of its members. It stands apart from the individuals that make up its “person.”
As a result, it has the same rights as an individual to own property, incur debts, borrow money, maintain a bank account, employ personnel, enter into contracts, and bring or defend legal actions. Its members are both its owners and potential creditors. A shareholder cannot be held responsible for the company’s decisions, even if he controls almost all of the share capital.
Judgement
The Court determined that Lee was a different person with a personality independent from the business he founded. Lee and his firm, who were both separate legal entities, went into contractual arrangements via which Lee became the company’s principal pilot and an employee.
The Privy Council noted that he might issue orders to himself (in his other pilot position) on the corporation’s behalf while serving as its managing director. He and the firm had a master-servant relationship in his capacity as a pilot.
As a result, he was entitled to compensation for the loss he sustained while working. Under the Workmen Compensation Act, his widow was able to obtain the compensation.
Lee was able to serve as both the master and the servant simultaneously and still got the rewards of both because of the corporate personality concept.
The Court additionally ruled that a shareholder of a corporation may enter into a contract with that firm. A member and a business can engage in legal service contracts since they both function as independent legal entities.
Regardless of Lee’s influence on the firm’s business, Lee and the business had a legal service agreement in place. Lee was, therefore, considered to be an employee. Additionally, Mrs Lee had a right to compensation.
Conclusion
A distinct legal entity is a crucial feature for businesses since it helps to distinguish the identities of the company and its members. Thus, it may be inferred from the previous explanation that the corporation is a distinct legal person.
A corporation’s single owner, shareholder, and director may also be an individual employed by the firm who has engaged in a contract with it as an owner, director, or shareholder. The company is a different legal entity.
In my opinion, the Separate Entity Principle has greatly aided in the growth of contemporary capitalism and has produced enormous amounts of social and economic value. The Separate Entity Principle should remain a cornerstone of company law in perpetuity.
Read Next: Salomon vs Salomon – Case Explained in Easy Words
- 13 Characteristics of a Company Under the Companies Act - 5th March 2024
- Lee vs Lee’s Air Farming Ltd – Case Explained - 5th March 2024
- Relevant Facts Under the Indian Evidence Act - 14th January 2024
