A

PROJECT0 REPORT

ON

“CASE STUDY ON LEE V. LEE’S AIR FARMING CO. LTD. (1960)”

IN PARTIAL FULFILLMENT OF THE REQUIREMENT

PRESCRIBED FOR

B.A. LLB (HONS.) SEMESTER-V

Submitted To: Submitted By;

Dr. Mona Mahecha Name: Tanay Khandelwal

Assistant Professor Registration No. : 161401106

MANIPAL UNIVERSITY, JAIPUR

(Dehmi Kalan, Jaipur-Ajmer Highway, Jaipur-303007)

2018

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 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
cooperation and encouragement which help me in completion of this project.

_______________
TANAY KHANDELWAL

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 CERTIFICATE

This is to certify that Ms. Tanay Khandelwal, student of B.A. LL.B. (Hons.) Semester V,
School of Law Manipal University, Jaipur has completed his COMPANY LAW project work
entitled “Case Study on Lee v. Lee’s Air Farming Co. Limited(1960)” under my supervision
and guidance.
It is further certified that the candidate has made sincere efforts for the completion of this
project.

DATE: 29/09/2018
_______________
Dr.Mona Mahecha

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Contents
INTRODUCTION .................................................................................................................................. 5
SEPARATE LEGAL ENTITY ............................................................................................................... 5
CASE: LEE V. LEE’S AIR FARMING COMPANY LIMITED........................................................... 8
FACTS: ............................................................................................................................................... 8
ARGUMENT: ..................................................................................................................................... 8
VERDICT: .......................................................................................................................................... 8
SOME INDIAN CASES ......................................................................................................................... 9
CONCLUSION ....................................................................................................................................... 9
WEBLIOGRAPHY............................................................................................................................... 11

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 INTRODUCTION
Since 1897, the principle of the separate legal personality of a company has become a vital
part of company law. This date marks a quasi Copernican revolution of the entire UK system
of company law. In fact, while the company legal relationships until that time had been
principally based on transactions and activities between ‘natural’ or ‘real’ persons, namely
human beings, from that time forward these legal relationships have been increasingly
extended also to relations with company, as ‘legal’ personality. Thus, the principle of
separate legal personality of a company has conjured up many practical as well as theoretical
considerations about its application and correlated consequences.

SEPARATE LEGAL ENTITY

The separate legal personality of a company, as aforementioned, represents one of the most
fundamental principle of company law. Established by the House of Lords in the Salomon
case1, this principle delineates the legal relationship between a company and its members.
According to this principle, the parts of such relation are thoroughly two diverse legal
entities, or legal persons. As Lord Macnaghten stated in Salomon case, “the company is at
law a different person altogether from the subscribers to the memorandum".

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
(1897) AC 22

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 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.

The point-“Company's property is company's property”- had been applied in Macaura v

Northern Assurance Co.2. 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 favour of the person registering the company, these principles should also
be applied.

2
(1925) AC 619

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The point—“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 Co. Ltd.3 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
worker’s 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

3
[1961] AC 12

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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”.

CASE: LEE V. LEE’S AIR FARMING COMPANY LIMITED

FACTS:
This case is concerning about the veil of incorporation and separate legal personality. Mr Lee
is the owner and sole working director of a company engaged in the business of aerial crop
spraying. Mr Lee held 2999 of 3000 shares, was the sole director and employed as the chief
pilot. He also took an insurance for his employees. While he was performing his job, he was
killed in an accident while piloting the aircraft in the course of employment. His widow, the
plaintiff, attempted to collect what was rightfully due to a widow of a man killed on the job.
The actual defendant was the insurance company. The company was insured (as required) for
worker compensation.

ARGUMENT:

 The insurance company does not want to pay the employer since the employer is the
employee.
 Nevertheless, Mrs. Less sticks with the application of Doctrine of Separate Legal Entity.

VERDICT:

 The Lee's Air Farming case confirmed the Salomon principle. Lee's Air Farming Ltd.
was not a mere sham. It was a legitimate corporation, established for legitimate
purposes, and had carried on a legitimate business. His employment by the
corporation was well-documented, through government records of tax deductions,
workmen’s' compensation contributions, etc., and was not something his widow had
attempted to piece together after the fact of his death. There was no reason in law why
a person could not perform corporate functions and employee functions within the
same corporation.
 Mrs. Lee won the case and the compensation was paid.

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 SOME INDIAN CASES
1. State Trading Corporation of India Ltd. 4

It was held that As soon as citizens form a company, the rights guaranteed to them by article
19(1)c has been exercised and no restraint has been placed on the right and no infringement
of that right is made. Once a company or corporation is formed, the business which is carried
on by the such company or corporation is the business of that company or corporation and is
not the business of the citizens who get the company or corporation incorporated and the
rights of the incorporated body must be judges on that footing and cannot be judged on the
assumption that they are the rights attributed to the business of individual citizens.

2. In C.I.T. v. Meenakshi Mills Ltd.5

The court held that the income-tax authorities were entitled to pierce the veil of corporate
entity and to look at the reality of the transaction to examine whether the corporate entity was
being used for tax evasion. In this case, a separate corporate entity was brought into existence
outside the taxable territory with the ulterior motive of evading the tax obligation by the
assessee mills.
The Supreme Court observed: "It is true that from the juristic point of view, the company is a
legal personality entirely distinct from its members and the company is capable of enjoying
rights and being subjected to duties which are not the same as those enjoyed or borne by its
members.
But in certain exceptional cases the Court is entitled to lift the veil of corporate entity and to
pay regard to the economic realities behind the legal facade. For example, the Court has
power to disregard the corporate entity if it is used for tax evasion or to circumvent tax
obligation."

CONCLUSION
As analysed, it is possible to do some considerations. Firstly, the separate legal personality
since Salomon v Salomon has been followed assiduously. This has implied that if at the
beginning of twenty century there were few company and more partnership, nowadays it is
true the contrary. It shows that it has answered both to a political will and social need. In fact,
on the hand it has facilitated the growth of economy, on the other it has allowed to give the
opportunity for everyone to be part of economy without be involved in any liability except to
4
AIR (1963) SC 1811
5
AIR (1967) SC 819

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the extent of her or his investment. This has implied that the company as a separate legal
personality conducts its business, owns its property, enters into contracts and can sue and be
sued, not its members.

Few examples that have been evaluated show how the separate legal personality has
influenced this relationship between the company and its members. In the cases Macaura v
Northern Assurance Co Ltd and Lee v Lee’s Air Farming Ltd the consequence of separate
legal personality are evident. While in the former case a member cannot claim any rights on
the property of the company, in the latter case the company cannot deny a right that belong to
an employee, even though this employee is also a majority shareholder and sole
director/employer.

In addition, several theories have tried to give answers for how it should be interpreted the
separate legal personality. Every theories have taken the separate legal personality or as a
point from where starts its analysis such as the artificial-entity theory of separate legal
personality and the concession theory, or as point of comparison with it to assert their
theories such as for the group of individualistic view, or for the group of realist. Therefore,
the result of these theories, even though not univocal, is the acknowledge of separate legal
personality.

However, the application of the separate legal personality has created questions. Such as in
which way to react in the event that the consequences of separate legal personality are
misused to avoid previous obligations or to claim rights not direct to the claimant. In these
cases, well-known as piercing the veil of incorporation, the examples reported show that the
separate legal personality has not always been interpreted in the same way. On the one hand,
the legislator has provided some statute rules to avoid these misuses such as in the Insolvency
Act 1986. Therefore it seems clear when it is possible to pierce the veil of incorporation. On
the other hand, the case-law has supplied the statutory absence, but the result has been not
always clear and coherent.

In conclusion, I believe that it is highly improbable to claim with absolute certainty whether
or not the separate legal personality of a company rise more question than it answers, because
it depends in which prospective this principle evaluated.

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 WEBLIOGRAPHY
1. https://www.lawteacher.net/free-law-essays/business-law/separate-legal-personality-
of-a-company-business-law-essay.php
2. http://www.lexvidhi.com/article-details/case-study-on-separate-legal-entity-of-a-
company-129.html
3. http://milleniasociety.blogspot.com/2010/04/lee-v-lees-air-farming-ltd.html
4. https://www.lawteacher.net/free-law-essays/company-law/the-separate-entity-
principle.php

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