A PROJECT REPORT ON “CASE STUDY ON LEE V LEE'S AIR FARMING LTD

1961”

MANIPAL UNIVERSITY OF JAIPUR

SUPERVISED BY- SUBMITTED BY-

Dr. MONA MAHECHA RAHUL YADAV

ASSISTANT PROFESSOR REG. NO. 161401073

B.A.LLB (HONS.)
CERTIFICATE:

THIS IS TO CERTIFY THAT MR. RAHUL YADAV, STUDENT OF B.A.LL.B. (HONS)

SEMESTER V, SCHOOL OF LAW MANIPAL UNIVERSITY JAIPUR HAS
COMPLETED THE PROJECT WORK ENTITLED “CASE STUDY ON LEE V LEE'S
AIR FARMING LTD 1961”UNDER MY SUPERVISION AND GUIDANCE.

IT IS FURTHER CERTIFIED THAT THE CANDIDATE HAS MADE SINCERE

EFFORTS FOR THE COMPLETION OF THIS PROJECT.

Dr. MONA MAHECHA

ACKNOWLEDGEMENT

I HEREBY ACKNOWLEDGE THE HELP AND SUPPORT OF THE TEACHERS, WHO

HELPED ME IN COMPILING THIS PROJECT. I THANK THE FACULTY AND
MANAGEMENT OF MANIPAL UNIVERSITY JAIPUR SCHOOL OF LAW AS THE
RESOURCES THAT WERE NECESSARY TO COMPLETE THE PROJECT WERE
PROVIDED BY THEM.

I AM HIGHLY INDEBTED TO MY TEACHER “Dr. MONA MAHECHA’’

FOR HER GUIDANCE AND CONSTANT SUPERVISION AS WELL AS FOR

PROVIDING NECESSARY KNOWLEDGE REGARDING THE SUBJECT AT HAND
AND ALSO FOR HER SUPPORT IN COMPLETING THE PROJECT.

I WOULD LIKE TO EXPRESS MY GRATITUDE TOWARDS MY PARENTS AND

FRIENDS FOR THEIR KIND COOPERATING AND ENCOURAGEMENT WHICH
HELP ME IN COMPLETION OF THIS PROJECT.

RAHUL YADAV
Contents
CERTIFICATE: ............................................................................................................................................. 2
ACKNOWLEDGEMENT ............................................................................................................................... 3
The separate entity principle ..................................................................... Error! Bookmark not defined.
Introduction .............................................................................................................................................. 5
A Double-Edged Sword -- Separate Entity Principle .................................. Error! Bookmark not defined.
1. Outline Of Separate Entity Principle ..................................................................................................... 5
Facts .......................................................................................................................................................... 9
Advice........................................................................................................................................................ 9
Summary ................................................................................................................................................. 10
Conclusion ............................................................................................................................................... 10
WEBLIOGRAPHY:- .................................................................................................................................... 11
 INTRODUCTION
The Separate Entity Principle is a fundamental principle of Company Law applied on a global
basis. Pursuant to this principle, a company is treated as a distinct entity from its members. The
separate entity rule pervades company law and has had wide reaching implications on theoretical
and practical company law.

This essay is divided into two main parts. In the first part, we will discuss the concept of
Separate Entity Principle, and evaluate the decision in Salomon case. In the second part we will
analyze statutory exceptions to Separate Entity Principle and consider the circumstances in
which and for the so-called ‘corporate veil' may be lifted or pierced by the court.

Separate Entity Principle

Separate Entity principle was firstly illustrated in R v Arnaud case. In this case, a registering
authority refused to register a ship on the ground that the owners of the ship include foreigners.
The ship was owned by a (British) chartered company whose members happened to include
foreigners. The court ordered the registering authority to register the ship on the basis that the
(British) company was the ship's owner rather than the members of the company. Nevertheless,
the unanimous decision of the House of Lords in Salomon v Salomon & Co Ltd is regarded as a
landmark in Company Law which confirmed that a company is a separate entity with distinct
legal personality.

The facts of the Salomon case are: Mr. Salomon sold his shoe business to a company which he
had set up for the purpose under the Companies Act. The registration under the Act was
completed and the members of the company were Salomon and his family, particularly, Mr.
Salomon received fully-paid shares and debentures to the value of ￡ 10,000 which he
subsequently assigned to another party. Business declined and the company went into insolvent
liquidation. The liquidator attempted to hold Mr. Salomon liable for the debts of the company
with arguing that the whole transaction was a fraud on the company's creditors and Salomon
should not be allowed to benefit, additionally, the liquidator claimed the company was simply an
agent of Salomon, as a result, he should indemnify the company (and its creditors) with respect
to the debts incurred by the company.
In this case, the House of Lords held that :

1. Salomon was neither under liability to the Salomon Company nor to creditors of the
Salomon Company.
2. Salomon's debentures were validly issued.
3. Lord Halsbury LC remarked that statute had enacted the formal and procedural
requirements upon registration of a company but did not enact requirements regarding the
extent or degree of interest which may be held by each of the subscribers or as to the
proportion if influence processed by one or the majority shareholder over the others.
4. The House noted that after registration of a company, although the business may be the
same as before and the same hands receiving profits, but in law the company is not an
agent of the subscribers or members.

However, it should be noted that the House of Lords in Salomon's case really only decided that
Salomon & Co Ltd was a company duly incorporated under the Companies Act 1862 (UK)
though its seven shareholders were not truly ‘independent': all of the statutory requirements were
satisfied because the company had seven shareholders. In accordance with the decision of the
House in Salomon case, we can summarize four points follow from the proposition that
incorporated companies have a separate legal personality: (a) Company's property is company's
property; (b) Company's debt is company's debt; (c) Companies can contract with their members,
directors and outsiders; (d) Companies can commit torts and crimes.

These four points had been reasserted in many cases.

Firstly-“Company's property is company's property”—had been applied in Macaura v Northern

Assurance Co. In this case, the appellant Mr. Macaura's claim for payment of insurance for his
company, but his request was refused by five insurers, these insurers claimed that Mr. Macaura
did not have an insurable interest for the insurance was bought in Mr. Macaura's name rather
than the company's name. The court upheld the insurer's decision and concluded that “the
corporator, even if he holds all the shares, is not the corporation, and that neither he nor any
creditor of the company has any property, legal or equitable, in the assets of the corporation.” In
the meanwhile, this decision that implies that although the principle is not in favor of the person
registering the company, these principles should also be applied.
Secondly-“Company's debt is company's debt”—had already been clearly addressed in Salomon
case by the House.

With regard to the point—“Companies can contract with their members, directors and
outsiders”--- was indeed developed in Lee v Lee's Air Farming Ltd. In that case, Mr. Lee's
accountant formed a company (Lee's Air Farming Ltd), and Mr. Lee was the principal
shareholder also the governing director of this company. The company contracted with farmers
to perform aerial topdressing. Mr. Lee worked for the company as a pilot and received a wage
for that work. In a work accident, Mr. Lee died then his wife claimed on a workers compensation
insurance policy that the company's solicitor had taken out naming Mr. Lee as an employee. The
insurer denied liability on the ground that Mr. Lee could not be a servant because he was a
director of the company. The Judicial Committee of the Privy Council upheld the claims made
by Mrs. Lee and firmly rejected the insurer's argument. Lord Morris quoted Lord Halsbury LC's
judgment in Salomon's case, that company ‘was a real thing' and noted 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].”

The decision in Lee v Lee's had also been applied in Industry v Bottrill (1999) case where the
court pointed out that a sole shareholder can be employed by the company and will have rights
under the Employment Rights Act 1996.

These solutions confirm that a company is able to employ one of its members under a contract of
service including its principle shareholder.

Finally, Companies can commit torts and crimes. The decision in Lee v Lee's case demonstrates
that companies may be liable to tort since companies have a separate legal personality and are
able to contract with others.

In sum, the Salomon case is regarded as a landmark in the UK's Company Law since the
Salomon case had established fundamental principles of Company Law. According to the
Salomon case, a company is both an association of its members and a legal person separate from
its members, “ a company's property is owned by the company as a separate person, not by the
members; the company's business is conducted by the company as a separate person, not by the
members; it is the company as a separate person that enters into contracts in relation to the
company's business and property”.

Mr Lee had formed a company, Lee's Air Farming Limited and held nearly all its shares. He was
the managing director, but by profession a pilot. The company was formed to conduct an aerial
top-dressing business. He appointed himself the chief pilot for the company. In the Court of
Appeal of New Zealand, 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 article 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: see Booth v Helliwell, 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." Held: Appeal allowed. "one person may function in dual capacities. "
and "Ex facie there was a contract of service. . . . the real issue is whether the position of the
deceased as sole governing director made it impossible for him to be the servant of the company
in the capacity of chief pilot of the company. . . there was no such impossibility. There appears to
be no 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 company and the deceased were separate legal entities. The
company had the right to decide what contracts for aerial top-dressing it would enter into. The
deceased was the agent of the company in making the necessary decisions."

Lee v Lee’s Air Farming Ltd [1960] UKPC 33 is a company law case from New Zealand, also
important for UK company law and Indian Companies Act 2013, concerning the corporate
veil and separate legal personality. The Judicial Committee of the Privy Councilreasserted that a
company is a separate legal entity, so that a director could still be under a contract of
employment with the company he solely owned

Facts
Catherine Lee’s husband Geoffrey Lee formed the company through Christchurch accountants,
which worked in Canterbury, New Zealand. It spread fertilisers on farmland from the air, known
as top dressing. Mr Lee held 2999 of 3000 shares, was the sole director and employed as the
chief pilot. He was killed in a plane crash. Mrs Lee wished to claim damages of 2,430 pounds
under the Workers’ Compensation Act 1922 for the death of her husband, and he needed to be a
‘worker’, or ‘any person who has entered into or works under a contract of service… with an
employer… whether remunerated by wages, salary or otherwise.’ The company was insured (as
required) for worker compensation.

The Court of Appeal of New Zealand said Lee could not be a worker when he was in effect also
the employer. North J said "the two offices are clearly incompatible. There would exist no power
of control and therefore the relationship of master-servant was not created."

Advice.
The Privy Council advised that Mrs Lee was entitled to compensation, since it was perfectly
possible for Mr Lee to have a contract with the company he owned. The company was a separate
legal person. Lord Morris of Borth-y-Gest said

“ It was never suggested (nor in their Lordships’ view could it reasonably have been
suggested) that the 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 no 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 company and the deceased...

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 company and not the deceased that would be giving the orders. Control
 would remain with the company whoever might be the agent of the company to exercise...

There appears to be no great difficulty in holding that a man acting in one capacity can make
a contract with himself in another capacity. The company and the deceased were separate
legal entities.

SUMMARY
As discussed above, we could conclude that the veil of incorporation will be pierced by the
courts in cases in these circumstances:

(a) In cases of fraud or sham. These occur where individuals have used the separate legal entity
to do something they are personally bund to do so.

(b) When an agency relationship is recognised by the court. If a subsidiary is considered as an

agent for its holding company, the veil of incorporation will be lift thus the holding company
will be liable to the subsidiary's debts.

Besides the two main circumstances, the veil of incorporate may be pierced in circumstances
such as Paramount Public Interest or Evasion of legal obligations.

Basically, the courts lift the veil and ignored the separate personality of incorporation where
justice and require them to do so.

CONCLUSION
The Separate Entity Principle established in Salomon case is regarded as a double –edged sword.
Debates concerning this principle will last and the question---‘whether the positive effects
overweight the negative one'---is best to be left unanswered, since it is far too broad.

Despite of the criticism of the Separate Entity Principle, in my opinion, it has been very
instrumental in promoting the developed of modern capitalism and it has generated immense
social and economic wealth. The status of Separate Entity Principle as a cornerstone of Company
Law should never be changed.
As the circumstances in certain cases are complex, strict application of the Separate Entity
Principle will lead to an apparently unfair result. In order to defend justice in law, in certain
circumstances, indeed, "the legislature can forge a sledgehammer capable of cracking open the
corporate shell." And, “even without statutory assistance, the courts have often been ready to
draw aside the veil and impose legal liability on members and directors.” Basically, the courts
have ignored the principle of legal corporate personality in a number of circumstances, for
example, where the protection of public interest is of paramount importance, where the company
is formed to evade legal obligations and in some cases the courts implying that a company is an
agent or trustee for its members.

Finally, it should be remembered that the Salomon case remains the general principle. If many
textbooks deal with the question of “Lifting the veil”, these cases remain exceptional. The
principle dealt with in the Salomon case is extremely strong and almost without exception. “The
Principle of limited liability is not threatened and remains as solid as a rock.”

WEBLIOGRAPHY:-
www.lawteacher.net/free-law-essays/company-law/...

www.lawreports.nz/lee-v-lees-air-farming-limited-1961...