Lee v. Lee's Air Farming Ltd.
A controlling shareholder and governing director may at the same time be an employee of his own company, because the company is a separate legal person capable of contracting with him.
Citation
Lee v. Lee's Air Farming Ltd.
[1961] AC 12
- Court
- Privy Council (on appeal from New Zealand)
- Statute
- Company law — corporate personality
Facts, issue and held
Facts
Mr Lee formed a company to carry on the business of aerial top-dressing. Of the 3,000 shares issued, he held 2,999. He was appointed governing director for life and was also employed by the company as its chief pilot at a salary fixed by the company. He was killed in a flying accident while piloting an aircraft in the course of the company's business. His widow claimed compensation under the New Zealand Workers' Compensation Act, which required the deceased to have been a 'worker' — that is, a person working under a contract of service with an employer.
Issue
Whether a person who controlled the company almost completely and was its governing director could simultaneously be a 'worker' employed by that company under a contract of service.
Held
The Privy Council held that Lee and the company were distinct legal entities, and were therefore capable of entering into a contractual relationship with one another. The company could and did employ Lee as its chief pilot. He was accordingly a 'worker' within the statute, and his widow was entitled to compensation.
- The company, being a separate legal person following Salomon, could contract with the very person who controlled it.
- Lee acted in two distinct capacities — as the company's controlling mind when directing it, and as its employee when flying the aircraft.
- That he himself, as governing director, effectively fixed the terms of his own employment did not make the contract of service unreal.
- Nothing in the statute excluded a controlling shareholder from also being a worker.
Ratio decidendi
Ratio decidendi
Because a company is a legal person separate from its members, a person may validly hold the positions of controlling shareholder, director and employee of the same company simultaneously.
Why it matters
The case takes the Salomon principle to its logical conclusion and is the standard authority for the proposition that separate personality has real, practical consequences — it creates a relationship capable of supporting a contract of employment.
Current standing
The principle continues to be followed. Note that Indian statutes may impose their own conditions on a director being treated as an employee for particular purposes, so the general principle should be applied alongside the specific statute in question.
Using it in an answer
In Lee v. Lee's Air Farming Ltd. [1961] AC 12, the Privy Council held that a person holding almost the entire share capital and serving as governing director could nevertheless be an employee of the company, since the company is a separate legal person capable of contracting with him.
On the present facts, the individual therefore acts in two capacities, and his position as controlling shareholder does not by itself defeat the existence of a contract of service between him and the company.
The claim is accordingly maintainable.
In the exam
The standard companion case to Salomon. Cite both together in any question asking you to establish or apply separate legal personality — Salomon for the principle, Lee for its practical consequence.
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Talk to usHow is Lee's case different from Salomon's case?
Salomon established that a company is a separate person and that its controller is not liable for its debts. Lee applied that same separateness in the opposite direction — to give the controller a right against the company, by holding that he could be its employee. Together they show that separate personality cuts both ways.
Can a director of an Indian company also be its employee?
Yes in principle, and the Lee decision supports it. But whether a particular director is treated as an employee for a specific purpose — managerial remuneration, provident fund, gratuity — depends on the governing statute and the terms of appointment, so apply the specific provision alongside the general principle.
Please note
These summaries are prepared for CA exam preparation and are not legal advice. Case law develops — a decision may be distinguished, read down or superseded by later judgments or by legislative amendment. Verify the current position against ICAI's study material for your attempt and against the reported judgment before relying on any principle stated here.
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