Case Summary: Lee vs. Lee Air Farming Limited, 1960

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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

CONCEPT OF SEPARATE LEGAL ENTITY

Companies act, 2013 mentions following features of a company incorporated under the act:

1.     Separate Legal Entity

2.     Perpetual Succession

3.     Limited Liability

4.     Common Seal

5.     Separate property

As per Companies Act, 2013 Separate legal entity means that a company which is registered under this act as Non profit organization , private limited company, public company , government company and chit fund company shall have legal identity of its own and will have rights under law and will treated as separate entity from its shareholder. It can own property in its own name  and can enter into contracts with other person and can represent itself in court of law through its representative.

Separate legal entity also act as veil between company and its member. Which means that assets of the company shall be used only for the objective of the company as set in Memorandum of association and its liabilities should be paid by itself and not from personal asset of the member of the company.

FACTS OF THE CASE

In 1954 the appellant’s husband Lee formed the company named LEE’S AIR FARMING LTD. for the purpose of carrying on the business of aerial top-dressing with 3000 thousand share of 1euro each forming share capital of the company and out of which 2999 shares were owned by Lee himself. Lee was also the director of the company. He exercised unrestricted power to control the affairs of the company and made all the decision relating to contracts of the company. Company entered into various contract with insurance agencies for insurance of its employees and few premiums of the policies were paid through companies bank account for the personal policies taken by Lee in its own name but it was debited in the account of lee in companies book. Lee apart from being the director of the company was also a pilot. In March, 1956, Lee was killed while piloting the aircraft during the course of aerial top-dressing. Lee’s wife who is appellant claimed worker compensation under New Zealand Workers’ Compensation Act, 1922 as she claimed that Lee during work as employee of the company. The New Zealand Court of Appeal declined the claim of appellant as it refused to hold that Lee was a worker, holding that a man could not in effect, employ himself.

ISSUE RAISED BY RESPONDENT

Respondent company claimed that Lee was owner of the company and had maximum number of shares in the company so his wife is not entitled for workmen compensation as he was not the employee of the company. Respondent claimed that Mr. Lee couldn’t  be the owner of the company as there is no master-servant relation that exist between him and the company.

ADVICE BY PRIVY COUNCIL

Privy council in advised that claim of Mrs Lee is valid as Mr. lee can have a contract with the company he owned as company is a separate legal entity. Lord Morris quoted Lord Halsbury LC’s judgment in Salomon’s case, that company ‘was a real thing’ and said that:

[“… Always assuming that the respondent company was not a sham, then the capacity of the respondent company to make a contract could not be impugned merely because the deceased was an agent of the respondent company in its negotiation [of Mr Lee’s contract of service].”

CONCLUSION

This judgement is a very important with respect to U.K company law and Indian Companies act as it lays the precedent that Company is separate legal entity and it can enter into contract with its own member as both are separate legal entity. Concept of separate legal entity was first introduced I Salmon vs Salmon co. ltd. Separate legal entity is a double sided sword as it can be used in bad faith also by interested stake holder to hide behind corporate veil that it provides between the company and its member. 

There has been case law where concept of separate legal entity has been refused by court as in the case of Gilford Motor Co V Horne where court lifted the corporate veil and treated the respondent and his company as one entity to assure the validity of the contract that appellant had with respondent. Also in case of insolvency the concept of separate legal entity doesn’t apply and company and its member are treated as one entity.

In opinion separate legal entity is important feature of companies act  as it separate company’s identity with its member but it could also be used for fraud. Although our legislation has formed and implemented many rules and regulation and judicial system is vigilant so as to safeguard interest of the stakeholder.

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