Lee v. Lee’s Air Farming Ltd.[1960] 3 All ER 420

हिंदी में पढ़ने के लिए

Case Summary

Full Case Details

In 1954 the appellant’s husband, L., formed the respondent company for the purpose of
carrying on the business of aerial top-dressing. Of the three thousand £1 shares forming the
nominal share capital of the company, L. was allotted 2,999 shares. He was appointed
governing director of the respondent company and pursuant to art. 33 of the articles of
association was employed as chief pilot of the company at a salary arranged by him. Article
33 provided that in respect of such 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 dressings. Different forms of insurance cover for the benefit of the respondent company
and its employees were arranged by the company secretary, and certain personal accident
policies were taken out in favour of L., the premiums in respect of which were paid by the
respondent company and debited to L.’s personal account in the books of the company. The
respondent 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 during the course of aerial topdressing and the appellant claimed compensation 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. By s. 2 of that Act, “worker” was defined as “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”.
Held – L. was a “worker” within the meaning of s. 2 and the appellant was entitled to
compensation under the Act, since 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.
Appeal – Appeal by Catherine Lee from a judgment of the Court of Appeal of New
Zealand (GRESSON, P., NORTH AND CLEARY, JJ.), dated Dec. 18, 1958, on a Case Stated by
the Compensation Court of New Zealand (ARCHER, J.) pursuant to r. 5 of c. 8 of the New
Zealand Workers’ Compensation Rules, 1939, in an action brought by the appellant under the
New Zealand Workers’ Compention Act, 1922, as amended, claiming compensation of £ 2,
430 against the respondent company in respect of the death of her husband, Geoffrey
Woodhouse Lee, which she alleged arose out of and in the course of his employment by the
respondent company. She also claimed a sum of £50 for funeral expenses.
LORD MORRIS OF BORTH-Y-GEST – It is provided by r. 5 of c. 8 of the Workers’
Compensation Rules, 1939 that:
“In any action or other proceeding the court or a judge thereof may state a Case for
the opinion of the Court of Appeal on any point of law arising in the action or
proceeding.”

This procedure was adopted by the judge of the Compensation Court in the action which
was brought by the appellant in respect of the death of her husband. She claimed £2,430
compensation on behalf of herself and her four infant children and she also claimed a sum for
funeral expenses. The claim was made in reliance on the provisions of the Workers’
Compensation Act, 1922, as amended by later statutes. The appellant’s late husband died in
an aircraft accident in Canterbury, New Zealand, on Mar. 5, 1956, while engaged in the
capacity of an aircraft pilot in aerial top-dressing operations. The claim of the appellant rested
on her allegation that at the time of his death her husband was a “worker”, in that he was
employed by the respondent company. The respondent company denied that the deceased
was a “worker” within the meaning of the Workers’ Compensation Act, 1922, and its
amendments. It is provided by s. 3(1) of the Act, as follows:
“If in any employment to which this Act applies personal injury by accident
arising out of and in the course of the employment is caused to a worker, his
employer shall be liable to pay compensation in accordance with provisions of this
Act.”
Under the relevant part of the statutory definition, the term “worker” means
“any person who has entered into or works under a contract of service or
apprenticeship with an employer, whether by way of manual labour, clerical work, or
otherwise, and whether remunerated by wages, salary, or otherwise.”
The denial of the respondent company that the deceased was a “worker” was based on the
fact that the deceased was, at the time of the accident, the controlling shareholder and
governing director of the respondent company. In 1954 the deceased had instructed a firm of
public accountants in Christchurch to form a company for the purpose of conducting an aerial
top-dressing business. On August 5, 1954, “Lee’s Air Farming Ltd.”, the respondent
company, was incorporated. The nominal capital of the respondent company was £3,000
divided into three thousand shares of £1 each. The deceased was allotted 2,999 shares; the
remaining share according to the memorandum of association, was to be taken by a solicitor.
The articles of association included the following:
“32. Subject as hereinafter provided Geoffrey Woodhouse Lee shall be and he is
hereby appointed governing director and subject to the provisions of cl. 34 hereof
shall hold that office for life and the full government and control of the company
shall be vested in him and he may exercise all the powers and authorities and
discretions vested in the directors generally and that notwithstanding he is the sole
director holding office and he may exercise all the powers of the company which are
not by statute required to be exercised by the company in general meeting and any
minute entered in the minute book of the company’s proceedings signed by the
governing director shall, in any matter not expressly required by statute to be done by
the company in general meeting have the effect of a resolution of the company.

33. The company shall employ the said Geoffrey Woodhouse Lee as the chief
    pilot of the company at a salary of £1,500 per annum from the date of incorporation
    of the company and in respect of such employment the rules of law applicable to the

relationship of master and servant shall apply as between the company and the said
Geoffrey Woodhouse Lee.

34. The governing director may retire from office upon giving one month’s
    notice in writing of his intention so to do, and the office of governing director shall
    be vacated if the governing director (a) ceases to be a director by virtue of s. 148 of
    the (Companies) Act (1933); or (b) becomes bankrupt or enters into a composition
    with his creditors; or (c) becomes prohibited from being a director by reason of any
    order made under s. 216 or s. 268 of the Act; or (d) becomes of unsound mind or
    becomes a protected person under the Aged and Infirm Persons Protection Act, 1912;
    or (e) becomes incapable of carrying out the duties of a director.
35. The governing director may at any time convene a general meeting of the
    company.
36. The governing director shall not be disqualified by his office from holding
    any office or place of profit in the company or from contracting with the company
    whether as vendor, purchaser or otherwise, nor shall any such contract or
    arrangement or any contract or arrangement entered into by or on behalf of the
    company in which the governing director shall be interested be avoided nor shall the
    governing director be liable to account for any profit realised by any such contract or
    arrangement by reason of the governing director holding such office or of the
    fiduciary relations thereby established.
37. If and whenever there shall cease to be a governing director the number of
    directors of the company shall not be more than four or less than two who shall
    forthwith be appointed or elected by the company in general meeting.
38. A director need not hold any share qualification in the capital of the
    company.
39. No director shall be disqualified by his office from holding any office or
    place of profit under the company or under any company in which this company shall
    be a shareholder or otherwise interested or from contracting with the company either
    as vendor purchaser or otherwise nor shall any such contract or any contract or
    arrangement entered into by or on behalf of the company in which any director shall
    be in any way interested be avoided nor shall any director be liable to account to the
    company for any profit arising from any such office or place of profit or realised by
    any such contract or arrangement by reason only of such director holding that office
    or of the fiduciary relations thereby established but it is declared that the nature of his
    interest must be disclosed by him as provided by s. 155 of the Companies Act, 1933.”
    The deceased was appointed governing director of the respondent company and the
    secretary was Mr. Sugden, a public accountant, and a member of the firm of public
    accountants who had been instructed by the deceased to form the respondent company. On
    Aug. 16, 1954, art. 33 was amended by deleting the words “a salary of £ 1,500 per annum
    from the date of incorporation of the company” and inserting the words “a salary to be
    arranged by the governing director”. That resolution was effected by a minute signed by the
    deceased.

The Case Stated recorded that one of the assets of the respondent company was an
“Auster” aircraft equipped for top-dressing, and that the deceased was a duly qualified pilot.
The Case further recorded that, while the respondent company was in the course of being
incorporated, Mr. Sugden negotiated and obtained different forms of insurance cover for the
benefit of the respondent company and its employees. Mr. Sugden supplied to the insurance
brokers an employers’ statement of wages relative to employers’ liability insurance pursuant
to s. 8 of the Workers’ Compensation Amendment Act, 1950, and duly received an
assessment of premium. Certain personal accident policies were taken out in favour of the
deceased; the premiums in respect of these were paid by the respondent company and were
debited to the personal account of the deceased in the books of the respondent company.
Under the provisions of the Workers’ Compensation Amendment Act, 1950, every employer
of a worker in any employment to which the Act of 1922 applied was (subject to certain
exceptions) under obligation to insure with an authorised insurer against his liability to pay
compensation and was required to deliver a statement of wages to such authorised insurer.
Certain other findings recorded in the case stated were as follows:
“10. Following its incorporation the (respondent) company started operating its
aerial top-dressing business and the deceased worked for the (respondent) company
as its pilot continuously thereafter until his death on Mar. 5, 1956.

11. On July 8, 1955, the said Clyde Leslie Sugden forwarded to the said brokers
    an employers’ statement of wages for the year ended Mar. 31, 1955, and on the same
    date wrote a letter to the said brokers discussing the apportionment of the salary of
    the deceased. A copy of the said letter is annexed hereto. The relevance of the said
    letter was that a higher premium was payable on that part of the salary of the
    deceased attributable to his work as a pilot.
12. In his capacity as governing director and controlling shareholder of the
    (respondent) company the deceased exercised full and unrestricted control of the
    affairs of the (respondent) company and he expressly or impliedly authorised the acts
    and conduct of any other employee or officer of the (respondent) company including
    the said Clyde Leslie Sugden.
13. In his capacity as aforesaid the deceased made all decisions relating to
    contracts for aerial top-dressing, contract prices, the manner in which the
    (respondent) company’s aircraft was to be employed and the methods to be employed
    in carrying out the work of the (respondent) company, and in general he exercised
    complete and unfettered control over all the operations of the (respondent) company
    at all material times.
14. On Mar. 5, 1956, while the deceased was piloting the said Auster aircraft
    during the course of aerial top-dressing operations in Canterbury the said aircraft
    stalled and crashed to the ground and burst into flames and was destroyed and the
    said deceased was killed as a result of the crash.
15. The (appellant) and her said four infant children were totally dependent on the
    deceased and the salary payable to the deceased up to the time of his death was such
    that if the (respondent) company is liable in this action it must pay the said sums of
    £ 2,430 and £50 claimed by the (appellant) in the action.”

The question which was raised for the opinion of the Court of Appeal was whether at the
time of his accident the deceased was employed by the respondent company as a “worker”
within the meaning of the Workers’ Compensation Act, 1922, and its amendments. The case
stated came on for hearing in the Court of Appeal of New Zealand (GRESSON, P., NORTH and
CLEARY, JJ.) on Nov. 27, 1958, and the reasons for judgment were delivered by NORTH, J., on
Dec. 18, 1958. In the course of his judgment, the learned judge said:
“We interpret the question to mean whether on the admitted facts of this case the
deceased could hold the office of governing director of the company and also be a
servant of the company.”
Their Honours answered “the question in its amended form” in the negative. The formal
judgment records the judgment in these words:
“This court doth answer in the negative the question raised in the Case Stated and
as amended by this court namely whether on the admitted facts of the case the
deceased could hold the office of governing director of the company and also be a
servant of the company.”
The Court of Appeal recognised that a director of a company may properly enter into a
service agreement with his company, but they considered that, in the present case, inasmuch
as the deceased was the governing director in whom was vested the full government and
control of the respondent company he could not also be a servant of the respondent company.
After referring in his judgment to the delegation to the deceased of substantially all the
powers of the company, NORTH, J., said:
“These powers were moreover delegated to him for life and there remained with
the company no power of management whatsoever. One of his first acts was to
appoint himself the only pilot of the company, for although art. 33 foreshadowed this
appointment, yet a contract could only spring into existence after the company had
been incorporated. Therefore, he became in effect both employer and worker. True,
the contract of employment was between himself and the company, but on him lay
the duty both of giving orders and obeying them. In our view, the two offices are
clearly incompatible. There could exist no power of control and therefore the
relationship of master-servant was not created.”
The substantial question which arises is, as their Lordships think, whether the deceased
was a “worker” within the meaning of the Workers’ Compensation Act, 1922, and its
amendments. Was he a person who had entered into or worked under a contract of service
with an employer? The Court of Appeal thought that his special position as governing director
precluded him from being a servant of the respondent company. On this view, it is difficult to
know what his status and position was when he was performing the arduous and skilful duties
of piloting an aeroplane which belonged to the respondent company and when he was
carrying out the operation of top-dressing farm lands from the air. He was paid wages for so
doing. The respondent company kept a wages book in which these were recorded. The work
that was being done was being done at the request of farmers whose contractual rights and
obligations were with the respondent company alone. It cannot be suggested that, when
engaged in the activities above referred to, the deceased was discharging his duties as

governing director. Their Lordships find it impossible to resist the conclusion that the active
aerial operations were performed because the deceased was in some contractual relationship
with the respondent company. The relationship came about because the deceased, as one legal
person, was willing to work for and to make a contract with the respondent company which
was another legal entity. A contractual relationship could only exist on the basis that there
was consensus between two contracting parties. It was never suggested (nor, in their
Lordships’ view, could it reasonably have been suggested) that the respondent company was a
sham or a mere simulacrum. It is well established that the mere fact that someone is a director
of a company is not impediment to his entering into a contract to serve the company. If, then,
it be accepted that the respondent company was a legal entity, their Lordships see no reason to
challenge the validity of any contractual obligations which were created between the
respondent company and the deceased. In this connexion, reference may be made to a
passage in the speech of LORD HALSBURY, L.C., in Salomon v. Salomon & Co. [(1897)
A.C.22, 33]:
“My Lords, the learned judges appear to me not to have been absolutely certain
in their own minds whether to treat the company as a real thing or not. If it was a real
thing; if it had a legal existence, and if consequently the law attributed to it certain
rights and liabilities in its constitution as a company, it appears to me to follow as a
consequence that it is impossible to deny the validity of the transactions into which it
has entered.”
A similar approach was evidenced in the speech of LORD MACNAGHTEN when he said:
“It has become the fashion to call companies of this class ‘one man companies’.
That is a taking nickname, but it does not help one much in the way of argument. If
it is intended to convey the meaning that a company which is under the absolute
control of one person is not a company legally incorporated, although the
requirements of the (Companies) Act of 1862 may have been complied with, it is
inaccurate and misleading: if it merely means that there is a predominant partner
possessing an overwhelming influence and entitled practically to the whole of the
profits, there is nothing in that that I can see contrary to the true intention of the Act
of 1862, or against public policy, or detrimental to the interests of creditors.”
Nor, in their Lordships’ view, were any contractual obligations invalidated by the
circumstance that the deceased was sole governing director in whom was vested the full
government and control of the respondent company. Always assuming that the respondent
company was not a sham, then the capacity of the respondent company to make a contract
with the deceased could not be impugned merely because the deceased was the agent of the
respondent company in its negotiation. The deceased might have made a firm contract to
serve the respondent company for a fixed period of years. If within such period he had retired
from the office of governing director and other directors had been appointed his contract
would not have been affected. The circumstance that, in his capacity as a shareholder, he
could control the course of events would not in itself affect the validity of his contractual
relationship with the respondent company. When, therefore, it is said that “one of his first
acts was to appoint himself the only pilot of the company” it must be recognised that the
appointment was made by the respondent company and that it was none the less a valid

appointment because it was the deceased himself who acted as the agent of the respondent
company in arranging it. In their Lordships’ view, it is a logical consequence of the decision
in Salomon v. Salomon & Co. that one person may function in dual capacities. There is no
reason, therefore, to deny the possibility of a contractual relationship being created as
between the deceased and the respondent company. If this stage is reached, then their
Lordships see no reason why the range of possible contractual relationships should not
include a contract for services and if the deceased, as agent for the respondent company,
could negotiate a contact for services as between the respondent company and himself there is
no reason why a contract of service could not also be negotiated. It is said that therein lies the
difficulty, because it is said that the deceased could not both be under the duty of giving
orders and also be under the duty of obeying them. But this approach does not give effect to
the circumstance that it would be the respondent company and not the deceased that would be
giving the orders. Control would remain with the respondent company, whoever might be its
agent to exercise the control. The fact that so long as the deceased continued to be governing
director, with amplitude of powers, it would be for him to act as the agent of the respondent
company to give the orders does not alter the fact that the respondent company and the
deceased were two separate and distinct legal persons. If the deceased had a contract of
service with the respondent company, then the respondent company had a right of control.
The manner of its exercise would not affect or diminish the right to its exercise. But the
existence of a right to control cannot be denied if once the reality of the legal existence of the
respondent company is recognised. Just as the respondent company and the deceased were
separate legal entities so as to permit of contractual relations being established between them,
so also were they separate legal entities so as to enable the respondent company to give an
order to the deceased.
An illustration of the validity of transactions entered into between a company comparable
to the respondent company and its sole governing director is found in Inland Revenue
Comrs. v. Sansom [(1921) 2 K.B. 492]. Sansom sold his business as a going concern to a
private company, John Sansom, Ltd. He became the sole governing director of the company
and the whole direction, control and management of the business and affairs of the company
were in his hands. The company made large profits but no dividends were ever declared. He
was the only director. The capital of the company was £25,000 divided into 2,500 shares £10
each. Sansom held 2,499 shares and had given one share to someone who had previously
been employed by him. By its memorandum, the company had power to lend money to such
persons and on such terms as it should think fit. The company made what were described in
the balance sheets as “loans or advances” to Sansom. They were made without interest and
without any security. Sansom was assessed to supertax on the loans; he was so assessed on
the basis that the amounted received by him were in fact not “loans or advances” but
constituted an income received by him from the company. Sansom appealed to the
commissioners. They found that the company was a properly constituted legal entity; that it
had power to make loans to such persons and on such terms as it should think fit; that it did
make such loans to Sansom; and that such loans did not form part of Sansom’s income for the
purposes of supertax. On appeal by the Crown on a Case Stated, the judge (ROWLATT, J.)
made an order remitting the case to the commissioners to find whether, in point of truth and in
fact, the company did carry on the business or whether Sansom really carried it on to the

exclusion of the company; whether, if the company did carry on the business, it carried it on
as agent for Sansom who was to be regarded as a principal standing outside the company;
whether the company carried on the business on its own behalf and for the benefit of the
corporators. On appeal to the Court of Appeal, it was held that the findings of the
commissioners being on questions of fact were conclusive and involved the negativing of the
questions which the judge had directed to be put to them; accordingly, the order remitting the
case to the commissioners were discharged. In his judgment, YOUNGER, L.J., said:
“It is conceded that the entire property in this business was bought and paid for
by the company, that it passed to the company nearly ten years ago, that every
transaction thereafter was carried out by and in the company’s name, and has now
been carried to completion in a liquidation regularly constituted. In those
circumstances unless the company’s legal status is to be denied to it – and this is
expressly disclaimed by the learned judge – there appears to me to be no room on this
case as stated for directing any such inquiry.”
He further said:
“In my judgment so long as such a company as this was is recognised by the
legislature there can be no reason why the contracts and the engagements made in its
name or entered into on its behalf, and themselves ex facie regular, should not
everywhere until the contrary is alleged and proved be regarded as the company’s…”
An illustration of circumstances in which a person may possess dual roles is seen in
Fowler v. Commercial Timber Co., Ltd. [(1930) 2 K.B. 1]. In that case, the plaintiff was
appointed managing director of the defendant company (which was not a so called “one man
company”) for a period of years. The company did not prosper, and the time came when it
became clear that, if it were not voluntarily wound-up, it would be compulsorily wound-up.
The directors, including the plaintiff, resolved that it was desirable to wind-up the company
voluntarily. An extraordinary general meeting was called at which the plaintiff was present,
and it was unanimously resolved to wind-up the company voluntarily. The liquidators gave
the plaintiff notice that his agreement was terminated and that his services were no longer
required. He claimed damages for wrongful dismissal, and it was held that there was no
implied term in his agreement that he should lose his right to recover damages for breach of
his agreement if the company went into voluntary liquidation with his assent or approval.
SCRUTTON, L.J., said:
“Such a complicated term cannot be implied for this reason: the two positions of
the plaintiff (1) as managing director, who claims damages for breach of the contract
of employment, and (2) as a director and shareholder of the company who thinks that
in its own interests the company ought to stop business are quite consistent.”
In the present case, their Lordships see no reason to doubt that a valid contractual
relationship could be created between the respondent company and the deceased, even though
the deceased would act as the agent of that company in its creation. If such a relationship
could be established, their Lordships see no reason why it should not take the form of a
master and servant relationship. The facts of the present case lend no support for the
contention that, if a contract existed, it was a contract for services. Article 33 shows that what

was designed and contemplated was that, after its incorporation, the respondent company
would, as a master, employ the deceased, as a servant, in the capacity of chief pilot of that
company. All the facts and all the evidence as to what was actually done point to the
conclusion that what purported to be a contract of service was entered into and was operated.
Unless this was an impossibility in law, then the deceased was a worker within the statutory
definition as referred to above. It is said that the deceased could not both give orders and
obey them and that no power of control over the deceased was in existence. It is true that an
inquiry whether a person is or is not employed on the terms that he will, within the scope of
his employment, obey his master’s orders may constitute an important inquiry if it is being
tested in a particular case whether there is a contract of service as opposed to a contract for
services. But in the present case their Lordships can find nothing to support the contention
that there was, or may have been, a contract for services but not a contract of service.
Ex facie there was a contract of service. Their Lordships conclude, therefore, that the real
issue in the case is whether the position of the deceased as sole governing director made it
impossible for him to be the servant of the respondent company in the capacity of chief pilot
of that company. In their Lordships’ view, for the reasons which have been indicated, there
was no such impossibility. There appears to be not greater difficulty in holding that a man
acting in one capacity can give orders to himself in another capacity than there is in holding
that a man acting in one capacity can make a contract with himself in another capacity. The
respondent company and the deceased were separate legal entities. The respondent company
had the right to decide what contracts for aerial top dressing it would enter into. The deceased
was the agent of the respondent company in making the necessary decisions. Any profits
earned would belong to the respondent company and not to the deceased. If the respondent
company entered into a contract with a farmer then it lay within its right and power to direct
its chief pilot to perform certain operations. The right to control existed even though it would
be for the deceased, in his capacity as agent for the respondent company, to decide what
orders to give. The right to control existed in the respondent company and an application of
the principles of Salomon v. Salomon & Co. demonstrates that the respondent company was
distinct from the deceased. As pointed out above, there might have come a time when the
deceased would remain bound contractually to serve the respondent company as chief pilot
though he had retired from the office of sole governing director. Their Lordships consider,
therefore, that the deceased was a worker and that the question posed in the case stated should
be answered in the affirmative.