Lee v. Lee's Air Farming, Ltd. (1960)

Salomon decided that a company is a person distinct from its members. Lee asks the next question, and the harder one: how real is that distinctness? Is it real enough that a man who owns the company, controls the company, and takes all its decisions can at the same time be its employee, so that when he dies at work his widow may claim compensation from it?

The answer is yes, and the reasoning matters more than the result. If the company is a person, then there are two persons in the room even when only one human being is present, and they may contract with each other. That is the proposition every problem about a one-man company turns on.

In 1954 the appellant's husband, L., formed the respondent company for the purpose of carrying on the business of aerial top-dressing — spraying fertiliser on farmland from a light aircraft.

The share capital tells the story. Of the three thousand £1 shares forming the nominal capital, L. was allotted 2,999. He was appointed governing director, and pursuant to article 33 of the articles of association he was employed as chief pilot of the company at a salary arranged by him. Article 33 provided that in respect of that employment "the rules of law applicable to the relationship of master and servant should apply between the company and him."

In his capacity as governing director and controlling shareholder, L. "exercised full and unrestricted control of the affairs of the respondent company" and made all decisions relating to contracts for aerial top dressing.

Two further facts were relied on by the widow and are worth noticing, because they show the company behaving as a real employer. Different forms of insurance cover for the benefit of the company and its employees were arranged by the company secretary. And certain personal accident policies were taken out in favour of L., the premiums being paid by the company and debited to L.'s personal account in the books.

The company owned an aircraft equipped for top-dressing, and L. was a duly qualified pilot. In March 1956 L. was killed while piloting the aircraft in the course of aerial top-dressing.

The appellant, Catherine Lee, claimed compensation of £2,430 under the New Zealand Workers' Compensation Act 1922, s. 3(1), under which, if personal injury by accident arising out of and in the course of any employment to which the Act applied was caused to a worker, the employer was liable to pay compensation. She also claimed £50 for funeral expenses.

Everything turned on the definition in s. 2, by which worker meant "any person who has entered into or works under a contract of service" with an employer, "whether by way of manual labour, clerical work, or otherwise, and whether remunerated by wages, salary, or otherwise".

The Compensation Court stated a case; the Court of Appeal of New Zealand (Gresson P, North and Cleary JJ) decided against the widow in December 1958. She appealed to the Privy Council.

Could a man who was the governing director and beneficial owner of virtually the whole of a company's share capital also be a worker employed by that company under a contract of service?

The objection is intuitive and was pressed hard: a contract requires two parties, and here there was in reality only one man, giving orders to himself. To speak of a master–servant relationship in which the same person is both master and servant looked to the Court of Appeal like nonsense.

Appeal allowed. L. was a worker within s. 2, and his widow was entitled to compensation under the Act.

Lord Morris of Borth-y-Gest, delivering the advice of the Board, held that L.'s special position as governing director and principal shareholder did not preclude him from making, on the company's behalf, a contract of employment with himself, nor preclude him from entering into, or working in the capacity of servant under, a contract of service with the company.

Once a company is incorporated it is a legal person distinct from its controller, and the two may enter into a binding contract with each other, including a contract of service. The fact that the controller acts for the company in making the contract, and performs it himself, does not make the contract a nullity.

The Board's method is Salomon applied consistently. If the company is a separate person — and after Salomon it plainly is — then the company was the party of the first part and L. the party of the second part, and nothing in the law prevents one human being from acting in two distinct legal capacities in the same transaction. He signs once as the company's organ and once as himself.

Article 33 is the fact that decides the case. It is not a piece of paper the parties forgot about: it is the company's own constitution declaring that as between the company and L. the rules of law applicable to master and servant apply. The company had, in other words, chosen to engage its pilot on a contract of service, and it happened that its pilot was also its governing director.

The Board's answer to the objection that L. gave orders to himself is that the objection confuses control with identity. A company is always controlled by somebody, and the fact that the person who controls it is also the person it employs does not merge the two. On the contrary, the concentration of control is the very feature Salomon held to be irrelevant.

Notice also how the surrounding conduct supported the conclusion. The company arranged insurance cover for its employees. It took out and paid for personal accident policies on L., debiting them to his personal account — that is, it distinguished between its own money and his. A company that keeps a personal account for its governing director is a company behaving as a separate person.

Lee completes the Salomon line by showing that separate personality is not merely a shield against liability but a positive source of rights and obligations running in both directions. Two propositions to carry away:

• The company may owe the controller money, including as a secured creditor (Salomon) or as an employer (Lee).
• A director may also be an employee. Holding the office of director is not employment — a director is not a servant of the company, as Lush J put it in Moriarty v. Regent's Garage Co. — but a director may in addition hold a contract of service in a different capacity, and the two capacities are kept apart.

Under the Companies Act 2013, the same result follows from s. 9, which makes the company a body corporate with power "to contract and to sue and be sued, by the said name." The person on the other side of the contract is not excluded merely because he is also the person who signs for the company; ss. 184 and 188, on disclosure of interest and related party transactions, exist precisely because such contracts are lawful and need regulating rather than forbidding.