Lee v Lee's Air Farming Ltd [1961] AC 12

Facts

  • Geoffrey Lee established Lee’s Air Farming Ltd, owning all but one share and acting as the sole managing director.
  • Mr. Lee also worked as the company’s chief pilot under a formal contract of service.
  • He died in an aerial topdressing accident while performing his job as a pilot.
  • Catherine Lee, his widow, claimed worker's compensation under the New Zealand Workers' Compensation Act 1922.
  • The compensation claim depended on whether Mr. Lee qualified as a "worker" under the Act, requiring an employment relationship between him and the company.

Issues

  1. Whether Mr. Lee, as sole shareholder and managing director of Lee’s Air Farming Ltd, could also be considered an employee ("worker") of the company for the purposes of compensation.
  2. Whether a valid contract of service could exist between an individual and a company controlled by that individual.
  3. Whether the principle of separate legal personality allows for such dual roles within a company.

Decision

  • The New Zealand Court of Appeal rejected Mrs. Lee's claim, finding that Mr. Lee and the company were effectively one, thus preventing an employment contract between them.
  • The Privy Council reversed this decision, holding that Lee’s Air Farming Ltd was a separate legal entity capable of entering into a contract with Mr. Lee, despite his control over the company.
  • The Privy Council determined that a valid contract of service existed and that Mr. Lee was an employee of the company for purposes of the Act.
  • The decision allowed Mrs. Lee to claim compensation.

Legal Principles

  • A company possesses a separate legal personality from its shareholders and directors, following the principle in Salomon v A Salomon & Co Ltd [1897] AC 22.
  • Even where one person owns nearly all the shares and acts as sole director, the legal distinction between company and individual is maintained.
  • A sole shareholder-director can enter into contracts and employment relationships with the company.
  • The principle of separate legal personality enables companies to be treated as distinct legal entities, allowing limited liability, contract formation, and clear legal structure, even in single-person companies.

Conclusion

The Privy Council's decision in Lee v Lee's Air Farming Ltd affirmed that a sole controlling individual can validly serve as an employee of their company, thereby strengthening the doctrine of separate legal personality and clarifying that such entities can enter into legal relationships with their controllers.

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