Analysis of the Principles of law highlighted in Lee v Lee’s Air Farming Ltd

Relationship of
Worker or not master and
servant exist or Dual capacity
Exist
not

Separate legal entity

1. Whether Lee is a worker or not?

Section 3(1) of the Workers’ Compensation Act 1922

Article 33

Relationship of master and servant exist or not?

Test of control

Allen v. Minister of Pensions and National Insurance1

Dual Capacity

Regarding whether a person can hold a position as a director at the same time as a
servant, the judge in the current case said that there may be the dual capacity of director
and servant and used a few authorities to support the view. The first case is Anderson
v. James Sutherland (Peterhead) Ltd where the judge said that it is possible for the
dual capacity of director and servant and went further established that a managing
director can be a servant.

There is a case namely, the case of Inland Revenue Commissioners v Sansom2

shares the similar fact with the current case which the appellant was a governing
director of a company. In this case, 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 of £10 each. Sansom held 2,499 shares and had given one
shares to other. By virtue of the company’s memorandum (constitution), the company
had the power to lend money to such persons and on the terms as it should think fit.
The company gave loans to Sansom without interest and any security. Sansom was
then assessed to super-tax on the ground that the amounts received by him were in fact

1
The Times, March 29,1956
2
[1921] 2 K.B. 492
not “loan or advances” but constituted an income he received from the company.
Sansom appealed to the commissioners and they found that the company was a
properly constituted legal entity that it had power to make loans to such persons and
on the terms as it should think fit, that it did make such loans to Sansom and that such
loans did not form part of the income of Sansom for the purposes of super-tax. The
Younger L.J of Court of Appeal said that “ 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
name of the company and has now been carried to completion in a liquidation regularly
constituted.” He further stated that “as long as a company is recognized 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…”
Lord Sterndale M.R. in the case also held that it was legally possible for the company
to make loan to Sansom in the circumstances in which it did.

The judge in this current case disagreed with the view of the court of appeal’s
judge which stated that the two offices, employer and worker are clearly incompatible
as in the current case the deceased himself had the duty both giving orders and obeying
them. They had given an example of the case of bankruptcy where the liquidator would
manage the affairs of the company and the deceased would remain as employee unless
and until dismissed.

The court also cited the case of Fowler v. Commercial Timber Co Ltd.3 where it has
showed the circumstance in which a person may possess dual roles, although it may
be an artificial position, it is one which House of Lords has upheld that it should be
maintained. In the case, the plaintiff was appointed managing director of the defendant
company. 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. An
extraordinary general meeting was called at which the plaintiff notice that his
agreement was terminated and that his services were no longer required, He claimed

3
[1930] 2 K.B. 1
damages for wrongful dismissal and it was held by the court 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 voluntarily liquidation with his assent or
approval.

By virtue of these cases, the court held that the company of Lee was a separate
and distinct legal entity from him and it was his employer. The contract between Lee
and the company was a valid contract between two different legal persons even if the
company in making the contract acted through Lee.

In Sansom’s case, the judge treated that the employer company and the
employee governing director as two different persons. The judge of the current case
opined that Sansom’s case was the correct view of the position between a company
and its sole proprietor.

Separate legal entity

Section 20 of Companies Act 2016 provides that a company incorporated under

Companies Act 2016 is a body corporate and shall have legal personality separate from
that of its members; and continue in existence until it is removed from the register.

There are two types of person in law, namely natural person and artificial person.
A company is an artificial person. Once it is incorporated by complying with the specified
procedure, it comes into existence and is separate legal entity from its members and officers.
The principle which distinguishes an incorporated company from a partnership and a sole-
proprietorship is that it is a separate legal entity from its members and officers4.

The significance of the principle of separate of legal entity was established in the
landmark case of Salomon v Salomon & Co Ltd (1897). In Sunrise Sdn Bhd v First Profile
(M) Sdn Bhd5, the Federal Court held that:

“We are in complete agreement with the basic principles of the fundamental
attribute if corporate personality, i.e. that the corporation is a legal entity distinct

4
Chan, W. M. (2017). Essential Company Law in Malaysia: Navigating the Companies Act 2016. Selangor:
Sweet & Maxwell.
5
[1997] 1 AMR 1
 from its members, be they individuals or corporate bodies under a principle firmly
established since Salomon v Salomon & Co Ltd.”

In the case of Salomon v Salomon & Co Ltd6, Mr Salomon was a sole-proprietor,

manufacturing boots. The business was successful. Mr Salomon incorporated company and
sold his business to the company in consideration for 20,000 shares and debentures of
£10,000 issued in favour of Mr Salamon. Mr Salomon ended up holding 20,001 of the
20,007 shares issued. The other 6 shares were held by his wife and five children as
nominees of Mr Salomon. However, the company unfortunately experienced financial
difficulty and despite efforts by Mr Salomon, the company became insolvent and was
compulsorily wound up. An action for a court order to postpone his priority under the
debentures to rank after the unsecured creditors of the company and also to indemnify the
company for all the debts due to its unsecured creditors was brought against Mr Salomon.
In order words, it means that if it had been approved by the court, not only the unsecured
creditors of company would have priority over debentures issued in favour of Mr Salomon
but Mr Salomon would also have been liable to the creditors of the company. In favour of
Mr Salomon, House of Lord held that:
“The company is at law a different person altogether from the subscribers
to the memorandum; and though it may be that after incorporated the
business precisely the same as it was before, and the same persons are
managers, and the same hands receive the profits, the company is not in
law the agent of the subscribers or trustee for them. Nor are the subscribers
as members liable, in any shape or form, except in the manner provided by
the Act.”
The above case has established the core principle that a company upon its
incorporation is a separate legal entity from its members. The creditors can look to the
company only but not its members for repayment when the debts were incurred by the
company. The impact of this doctrine and doctrine of privity is that only the parties to
the contract can sue and be sued. Besides, in the Salomon’s case, Lord Macnaghten
also commented that “there is nothing in the Act requiring that the subscribers to the

6
[1897] AC 22
memorandum should be independent or unconnected or that they or any of them
should take substantial interest in the undertaking or that they must have a mind and
will of their own.”7 From this case, it is obviously can be concluded that all the shares
are held for the benefit of one person will not affect the status of the company as a
separate legal entity. It will not cause the company and the sole beneficial owner of
the shares to be one legal person.

According to the case of Macaura v Northern Assurance Co Ltd8, the House

of Lords held that even if a person is the beneficial owner of all the shares in the
company, he does not have any legal or equitable interest in the property of the
company. The property in the company belongs to the company. The facts of this case
are all the shares in Irish Canadian Sawmills Ltd were solely owned by Mr Macaura.
The shares were registered in his and the name of his nominees. Mr Macauara sold all
the timber in his estate to the company. However, the timber the timber was destroyed
in a fire. As Mr Macaura had insured the timber against the fire, he claimed indemnity
from the insurance company. The House of Lords held that after Mr Macaura sold the
logs to the company, he had no more interest in them based on the principle of separate
legal entities. The company and Mr Macaura were separate legal entities. Mr Macaura
could not claim for indemnity from the insurance company as he had no more
insurable interest in the timber, the insurance policy was void. This case is essential
in establishing the principle that it is immaterial that there is only one beneficial owner
of all the shares in the company and that this sole member has full control of the
company.

The 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 company to give an order to the deceased.

7
Salomon v Salomon & Co Ltd [1897] AC 22
8
[1925] AC 619
References
Chan, W. M. (2017). Essential Company Law in Malaysia: Navigating the
Companies Act 2016. Selangor: Sweet & Maxwell.