This case analysis was done by Adwitiyo Raha, Amity University, Kolkata, LL.M, during his internship at Le Droit.

CASE NAME : CATHERINE LEE V LEE’S AIR FARMING LIMITED
CITATION(S) : [1961] UKPC 33, [1961] AC 12
JUDGES SITTING:  VISCOUNT SIMONDS, LORD REID, LORD TUCKER, LORD DENNING, LORD MORRIS OF BORTH-Y-GEST
RULING COURT : JUDICIAL COMMITTEE OF THE PRIVY COUNCIL. 

(Sharma and Sharma, 2020)

Abstract : 

In the case of Salomon v. Salomon & Company Ltd. (1895), [1] the House of Lords delivered a unanimous judgment that established the principle of a company’s separate legal entity. (GeeksforGeeks, 2024)

The House of Lords, in its judgment, underscored the significance of the corporate entity. It unanimously determined that the company constituted a separate legal entity, possessing its own rights and liabilities. The court affirmed the validity of the company’s incorporation, emphasizing that once the requirements for incorporation were satisfied, the company emerged as a distinct legal entity. The limited liability of shareholders was confirmed, with the court holding that shareholders’ liability was confined to the nominal value of their shares (the amount they have invested in the company). Mr. Salomon, as the majority shareholder, was not personally liable for the company’s debts beyond the amount unpaid on his shares. The judgment highlighted the importance of respecting the corporate form and cautioned against disregarding the separate legal personality of a company, even in instances where the shareholders were closely related. (Salomon v. Salomon & Company Ltd (1895-95) All ER Rep 33, no date)

The central issue in Lee v Lee’s Air Farming Ltd. (1960) [2] pertains to the application of the principle of a separate legal entity. (Agrawal, 2024)

Facts: 

In 1954, Geoffrey Woodhouse Lee established Lee’s Air Farming Ltd. with the objective of operating an aerial top-dressing enterprise. The company’s 3,000 shares were acquired by G. W. Lee, who was allocated 2,999 shares, with the remaining share being allocated to a solicitor. According to Section 32 of the articles of association of the company (AoA), he was designated as the sole governing director, thereby granting him “Full government and control of the company.” 

On the basis of Section 33 of the company’s article of association (AoA) employed himself as the chief pilot for the company, with an annual salary of £1,500. The stipulation provided in the article of association (AoA) read, “In respect of such employment the rules of law applicable to the relationship of master and servant shall apply as between the company and the said Geoffrey Woodhouse Lee.” 

The roles of governing director and controlling shareholder endowed Lee with comprehensive and unrestricted authority over the company’s affairs, enabling him to make all decisions pertaining to contracts for aerial top-dressing. Personal accident insurance policies covered all employees, including G. W. Lee. (Wilson, 1961)

In 1956, while piloting an aircraft owned by the company equipped for top-dressing, he was killed in an accident. The appellant, Lee’s widow, Catherine Lee, claimed £2,430 as compensation under the Workers’ Compensation Act, 1922.

Her claim was based on the fact that at the time of his death her husband was a “worker” in that he was employed by the company within the meaning of Section 3 (1) of the same Act.

Section 3 (1) of the Workers Compensation Act, 1922 defined “worker” as, “Any person who has entered into or works under a contract of service or apprenticeship by way of manual labour, clerical work, or otherwise, and whether remunerated by wages, salary or otherwise.” (New Zealand, 1922)

The Judge of the Compensation Court submitted a case to the Court of Appeal, which determined that the deceased was unable to simultaneously hold the position of governing director and serve as an employee of the company. Lee’s widow subsequently appealed this decision to the Privy Council. (Wilson, 1961)

Respondent’s Argument : 

The insurance company asserted that Mr. Lee, as the governing general director and the principal shareholder of the company, could not be classified as an employee. The respondent contended that a worker is defined as any individual who has entered into or works under a contract of service with a company as an employer; however, Mr. Lee occupied the position of director. Mrs. Lee claimed her eligibility for compensation under the New Zealand Workmen’s Compensation Act of 1922. The appellant further argued that her husband died while engaged in company-related work. Additionally, the appellant refuted the respondent’s argument by asserting that Mr. Lee is also considered an employee of the company according to the Workers Act of 1922. (Lawjure, 2022)

Issues Before the Court : 

The issue that the Privy Council had to take into consideration after hearing both the appellant and the respondent were ;

Whether the principle of Separate Legal Entity applied as formulated by the House of Lords in judgement to Salomon v. Salomon & Co. Ltd. (1895) [1] creating a legal distinction between Mr. Lee and Lee Air Farming Ltd.

Whether Mr. Lee, holding 2999 shares out of the company’s total share capital of 3000 and being the governing director of the company could enter into a contractual relation with the same company as an employee.

Did Section 3 (1) of the Workmen’s Compensation Act, 1922 that provided the statutory definition of “worker” applied to Mr. Lee.

Whether Mrs. Catherine Lee was entitled to claim compensation from the insurance company.

Judgement : 

Upon thorough examination of the facts and relevant legal precedents, the Privy Council rendered a decision in favor of Mrs. Lee. The Court reaffirmed the doctrine of “Separate Legal Entity” as formulated by The House of Lords in the landmark judgement of Salomon v. Solomon & Co. Ltd. (1895) [1], underscoring that Mr. Lee and Lee’s Air Farming Ltd. are distinct entities under the law. Despite Mr. Lee’s substantial control and ownership interest in the company, the Court acknowledged the existence of a legitimate contractual relationship between Mr. Lee and the company. (Agrawal, 2024)

The Court ruled that Mr. Lee’s position as the chief pilot of the company constituted an employment contract distinct from his responsibilities as a director and shareholder. The Privy Council overruled the decision of the Court of Appeal which held that being the governing director of the company, it was not possible for Mr. Lee to serve in the capacity of an employee. (Wilson, 1961)

Consequently, Mr. Lee was recognized as an employee of Lee’s Air Farming Ltd., thereby qualifying for compensation under the Workmen’s Compensation Act, 1922. (Agrawal, 2024)

Reference : 

[1] https://www.geeksforgeeks.org/salomon-vs-salomon-case-summary/

[2] https://casetext.com/case/lee-v-lee-162

Agrawal, A. (2024) Lee v Lee’s Air Farming Ltd. https://lawbhoomi.com/lee-v-lees-air-farming-ltd/#:~:text=Issues%20Involved,-The%20issues%20raised&text=Whether%20the%20principle%20of%20separate,Lee’s%20role%20within%20the%20company.

GeeksforGeeks (2024) Salomon vs Salomon: Case summary. https://www.geeksforgeeks.org/salomon-vs-salomon-case-summary/.

Lawjure (2022) Case Analysis: Lee vs. Lee’s Air Farming Ltd 1960. https://www.lawjure.com/case-analysis-lee-vs-lees-air-farming-ltd-1960/.

New Zealand (1922) Workers’ Compensation Act, 1922, New Zealand.

Salomon v. Saloman & Company Ltd (1895-95) All ER Rep 33 (no date). https://www.drishtijudiciary.com/landmark-judgement/company-law/salomon-v-saloman-&-company-ltd-1895-95-all-er-rep-33#:~:text=It%20unanimously%20held%20that%20the,became%20a%20distinct%20legal%20entity.

Sharma, R. and Sharma, R. (2020) Case Summary: Lee vs. Lee Air Farming  Limited, 1960. https://lawlex.org/lex-bulletin/case-summary-lee-vs-lee-air-farming-lee-limited-1960/24542.

Wilson, A. (1961) Salomon’s Case deters Attempts to lift the Veil: Lee v. Lee’s Air Farming Ltd, University of Malaya Law Review. National University of Singapore (Faculty of Law), pp. 115–118. https://www.jstor.org/stable/24874789.