Key Takeaways
- The Companies Act, 2013 dealt with the concept of Separate legal entity.
- Separate legal entity, as the name implies, means that the company and its members are two separate persons.
- The director and the company cannot be considered as the same person.
Date of Judgement:
11th October,1960
Bench:
Viscount Simons, Lord Red, Lord Tucker, Lord Denning, Lord Morris of Borth-Y Gest
Parties:
Catherine Lee (Appellant), Lee’s Air Farming Limited (Respondent)
Subject
This case dealt with concept of separate legal entity. As per the Companies Act, 2013, a company, unlike a partnership firm, is distinct from the persons who constitute it. It answers the question as to whether Lee, who was the owner and sole director, can be the employee of the company, as he was also working in the capacity of the employee in the company. The question before the Honorable court was whether Lee can be treated as an employee for the grant of compensation under the Employees Compensation Act or can he be denied compensation because he was also the director of the company.
Overview
- In 1954, Mr. Lee (appellant’s husband) formed the company named Lee Air Farming Limited. He was the sole director and owner of the company.
- The share capital of the company was 3000 Euros with each share having a value of 1 Euro. Lee held 2999 shares in the company and the remaining 1 share was held by his wife, who was the also the nominee of the company.
- The company was involved in the business of aerial top dressing; besides the business, he was also a pilot. Lee Air Farming limited had entered into a contract of insurance policies for its employees, all paid through the Company’s account.
- Mr. Lee was also involved in the business as an employee, and was killed while piloting the airplane during aerial top dressing. Lee’s wife claimed compensation under the Workers Compensation Act,1922 which was denied by the New Zealand High Court, claiming a person cannot employ himself as the employee.
Issues
- Whether the employer and employee can be the same person?
- Whether Mrs. Lee shall be entitled to any compensation?
- Whether Mr. Lee had a contract of service between Lee Air Farming Limited?
Judgement Analysis
A company is treated as a separate legal person distinct from its members, owners, shareholders, and directors. Mrs. Lee’s claim for compensation under the Workers Compensation Act, 1922 was rejected by Lee Air Farming limited. The court of law drew the following analysis:
- Mrs. Lee’s claim for compensation was initially rejected by the New Zealand High Court stating that the governing director and the worker cannot be the same person. The court stated that since the person giving orders and person taking orders are the same person, Mr. Lee cannot be regarded as an employee.
- Further, the court relied heavily on the judgement of Salomon v. Salomon & Co. Ltd. Citing the judgement the court stated that the company, being a separate legal entity, is distinct from its members. Therefore, the contention of the trade creditors could not be maintained and Solomon & Co. Ltd cannot be regarded as agent or trustee for Solomon.
- The court held that since there was a valid contract of service between Mr. Lee and Lee Air Farming Limited and neither had Mr. Lee acted fraudulently, Mrs. Lee is entitled to claim compensation on the ground of him being a worker.
Conclusion
The Privy Council, after a careful examination of all dimensions of the case, gave a fair judgement that though the director partakes in the decision-making process, he is not to be regarded as an agent or trustee of the company. The company, being a separate legal entity, can enter into contracts with its members and outsiders and can sue and be sued in its own name. It is to be noted that though the director is the acting mind and will of the company, he is not to be held liable for acts of the company.
Click here to download the original copy of the judgement
