12

HOUSE OP LORDS [1961]

J. C. cheques which he seeks to make his own by ratification, for, if h e

lggQ ratifies at all, he ratifies the dealing by Ward and the appellant
~ with the cheques, and, if he does not ratify, nothing has been
BANKING CO. converted t h a t ever belonged to him. Their Lordships think,
OF SIDNEY with great respect to the judge, t h a t the minor differences of fact
MANN. in the two cases which he points out do not prevent the applica-
tion to t h e m both of the same principle. If authority is needed,
reference m a y be made to the full exposition of the principle by
Eolfe B . in Bird v . Brown.5
Their Lordships will for the reasons t h a t have been stated
humbly advise H e r Majesty t h a t the appeal should be allowed
and the action dismissed with costs.
Counsel for the appellant intimated t h a t in the event of success
he would not ask t h a t the respondent should pay the costs of the
appeal. Therefore there will be no order as to the costs of the
appeal.

Solicitors: Bell, Brodrick & Gray; Light & Fulton.

C. C.
» (1850) 4 Bxch. 786.

J. c * CATHERINE LEE APPELLANT;

AND
i960
Oct. l l . L E E ' S AIE FARMING LTD RESPONDENTS.

ON APPEAL FROM THE COURT OF APPEAL OF NEW ZEALAND.

Company—Director—Governing director—Whether servant of company

—Accident while working for company for wages—Whether com-
pany liable for compensation—" Worker "—Workers' Compensation
Act, 1922 (No. 39) (New Zealand), ss. 2, 3 (1).
Master and Servant—Company director—Whether servant of company—
Governing director employed as chief pilot.
New Zealand—Workers' compensation—Company—Accident to govern-
ing director while employed by company—Whether company liable
for compensation—"Worker"—Workers' Compensation Act, 1922
(No. 39), ss. 2, 3 (1).
Workmen's Compensation—Governing director—Accident while working
for company for wages—Liability of company for compensation—
New Zealand.

* Present: VISCOUNT SIMONDS, LORD REID, LOED TUCKER, LOED

DENNING and LOED MOEEIS OF BOETH-T-GEST.
 13
A.C. AND PRIVY COUNCIL.

Section 3 (1) of the Workers' Compensation Act, 1922, of New J. C.

Zealand, provides that if " 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," and " worker " LBB
is defined in section 2 as " any person who has entered into or f>.
I
" works under a contract of service . . . with an employer . . . ^,MINQB
"whether remunerated by wages, salary, or otherwise." LTO^
The appellant's husband, who had formed the respondent com-
pany for the purpose of carrying on the business of aerial top-
dressing, was the controlling shareholder of the company, and was
by its articles of association appointed governing director and
employed at a salary as its chief pilot. In his capacity as govern-
ing director and controlling shareholder he exercised full and
unrestricted control over all the operations of the company.
Pursuant to its statutory obligations the company had insured
itself against liability to pay compensation in the case of accident
to him. While piloting an aircraft belonging to the company in
the course of aerial top-dressing operations the aircraft crashed
and he was killed. On a claim by the appellant against the
respondent company for compensation, alleging that at the time of
the accident her husband was a " worker " employed by the respon-
dent company within the meaning of the Workers' Compensation
Act, 1922, as amended: —
Held, that the deceased was a " w o r k e r " within the meaning
of the Act. His position as sole governing director did not make it
impossible for him to be a servant of the company in the capacity
of chief pilot, for he and the company were separate and distinct
legal entities which could enter, and had entered, into a valid
contractual relationship, which was not invalidated by the circum-
stances that the deceased was sole governing director in whom was
vested the full government and control of the company and also
the controlling shareholder. They were separate legal entities
also so as to enable the company to give orders to the deceased.
One person may function in dual capacities, and acting in one
capacity give orders to himself in another capacity. The con-
tractual relationship was that of master and servant, and a
contract of service was entered into and operated and the deceased
was a " worker " within the statutory definition.
Salomon v. Salomon & Go. [1897] A.C. 22; 13 T.L.R. 46, H.L.;
Inland Bevenue Commissioners v. Sansom [1921] 2 K.B. 492, C.A.;
and Fowler v. Commercial Timber Co. Ltd. [1930] 2 K.B. 1, C.A.
considered.
Brown v. Okiwi Farms Ltd. [1957] N.Z.L.R. 1073 must be
regarded as turning on its own facts.
Judgment of the Court of Appeal of New Zealand [1959]
N.Z.L.R. 393 reversed.

APPEAL (NO. 18 of 1960), by special leave, from a judgment of

the Court of Appeal of New Zealand (December 18, 1958) holding
on a case stated by the Compensation Court of New Zealand
14
HOUSE OP LORDS [1961]

J. C. under the Workers' Compensation Eules, 1939, that on the facts

se
i960 * o u * * n *^e c a s e *^e appellant's deceased husband could not
hold the office of governing director of the respondent company
e™ and also be a servant of the company.
LEH'B AIB The following facts are taken from the judgment of the
L^, Judicial Committee: The judgment of the Court of Appeal of New
Zealand, from which this appeal was brought, was given as their
opinion upon a case stated by the judge of the Compensation
Court. It was provided by rule 5 of Chapter VIII of the Workers'
Compensation Eules, 1939, that " In any action or other proceed-
ing 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 upon the provisions of the Workers'
Compensation Act, 1922, as amended by later statutes. The
appellant's late husband died in an aircraft accident in Canter-
bury, New Zealand, on March 5, 1956, while engaged in the
capacity of an aircraft pilot in aerial top-dressing operations. The
claim of the appellant rested upon 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 was provided by section 3 (1) of the Act as follows: " 3.—(1)
" 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 " meant " 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,
" a n d 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
 15
A.C. AND PRIVY COUNCIL.

business. On August 5, 1954, " L e e ' s Air Farming Limited," J- C.

the respondent company, was incorporated. The nominal capital jgeo
of the company was £13,000 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 LEB'S AIB
taken by a solicitor. The articles of association included the TjTD.
following:
" 32. Subject as hereinafter provided Geoffrey Woodhouse Lee
" shall be and he is hereby appointed governing director and
" subject to the provisions of clause 34 hereof shall hold that
" office for life and the full government and control of the com-
" pany shall be vested in him and he may exercise all the powers
" and authorities and discretions vested in the directors gener-
" ally 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 resolu-
'' tion of the company.
" 3 3 . 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 section 148 of
" the Act; or (b) becomes bankrupt or enters into a composition
" with his creditors; or (c) becomes prohibited from being a direc-
" tor by reason of any order made under section 216 or 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.
" 3 5 . 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
16
HOUSE OF LORDS [1961]

J- C. " or from contracting with the company whether as vendor, pur-

1960 " c n a s e r o r 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
LEE'S AIR '' interested be avoided nor shall the governing director be liable
LTD. " *° 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.

"DIBECTOKS
" 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.
" 3 8 . A director need not hold any share qualification in the
" capital of the company."
" 43. 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
" section 155 of the Companies Act, 1933."
The deceased was appointed governing director of the respon-
dent 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 company.
On August 16, 1954, article 33 was amended by deleting the
words " a salary of £1,500 per annum from the date of incorpora-
" tion 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
A.C. AND PRIVY COUNCIL. 17

case further recorded that while the respondent company was in J. C.

the course of being incorporated Mr. Sugden negotiated and ig60
obtained different forms of insurance cover for the benefit of the
respondent company and its employees. Mr. Sugden supplied to „
the insurance brokers an employer's statement of wages relative LEG'S AIR
to employer's liability insurance pursuant to section 8 of the LTD
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 company.
Under the provisions of the Workers' Compensation Amend-
ment Act, 1950, every employer of a worker in any employment
to which the Act of 1922 applied was (subject to certain excep-
tions) 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 defendant company
'' started operating its aerial top-dressing business and the
" deceased worked for the defendant company as its pilot con-
" tinuously thereafter until his death on 5th March, 1956.
" 1 1 . On the 8th day of July, 1955, the said Clyde Leslie Sug-
" den forwarded to the said brokers an employers' statement of
" wages for the year ended 31st March, 1955, and on the same
" date wrote a letter to the said brokers discussing the apportion-
" ment of the salary of the deceased. A copy of the said letter is
" annexed hereto. The relevance of tbe 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.
" 14. In his capacity as governing director and controlling
" shareholder of the defendant company the deceased exercised
" full and unrestricted control of the affairs of the defendant
" company and he expressly or impliedly authorised the acts and
" conduct of any other employee or officer of the defendant
" company including the said Clyde Leslie Sugden.
" 15. In his capacity as aforesaid the deceased made all
" decisions relating to contracts for aerial top-dressing, contract
" prices, the manner in which the defendant company's aircraft
was to be employed and the methods to be employed in carrying
A.C. 1961. 2 (1)
18 HOUSE OP LORDS [1961]

J. C. " out the work of the defendant company, and in general he

iggO '' exercised complete and unfettered control over all the operations
" of the defendant company at all material times.
„ " 16. On the 5th day of March, 1956, while the deceased was
LEE'S AIR " piloting the said ' Auster ' aircraft during the course of aerial
LTD. " 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.
" 1 7 . The plaintiff 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
" defendant company is liable in this action it must pay the said
" sums of £2,430 and £50 claimed by the plaintiff 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, North and Cleary JJ.)
on November 27, 1958, and the reasons for judgment were
delivered by North J. on December 18, 1958. In the course of his
judgment the 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."
Mrs. Lee appealed.

1960. July 6, 7. A. C. Perry (New Zealand) and J. G.

Le Quesne for the appellant. At the time when the accident
happened the Workers' Compensation Act, 1922, was in force;
it has been amended over the years and was consolidated and
re-enacted in 1956, but the relevant sections so far as this case is
concerned have not been changed. The facts are not in dispute.

i [1959] N.Z.L.R. 393, 397.

A.C. AND PRIVY COUNCIL. 19

The contest is between the appellant and the respondent com- J- C.

pany and the latter's insurers. The first submission is that Lee 19g0
was undoubtedly a servant of the company. The matter may be
tested first on the basis of disregarding the facts that he was a v_
controlling shareholder and governing director: (1) Article 33 of LEE'S AIB
the company's articles of association provided that he should be L^,.
employed as the company's pilot and that the rules applicable to "—
the relationship of master and servant should apply. (2) It is
a fact that he did at the commencement of operations work for
the company; and he was the only person flying the aircraft.
(3) He was paid wages, and a wages book was maintained.
(4) The profits earned belonged first to the company and not to
him. (5) He worked in close co-operation with another employee,
the tractor driver, concerning whose position there could be no
doubt. (6) The aircraft which he flew was owned by the com-
pany, as was all the other equipment of the company. (7) The
aircraft was insured under a policy one of the conditions of which
was that it should be operated only by Lee or other approved
pilot. (8) The company insured him as a servant, and the insur-
ance company, knowing all the facts, accepted such insurance
over a period of two years.
On those facts there can be no doubt but that, putting aside
for the moment his position as governing director and controlling
shareholder, Lee was a servant and not, say, an independent
contractor. The contract was one of service and not for services.
The whole question is whether that position can also be held
when he is governing director of the company. There appear to
be considerable doubts as to what tests are to be applied in deter-
mining whether the relationship of master and servant exists,
but it is submitted that no matter what tests are applied Lee
was a servant but for this dual relationship of governing director.
The test of control over the worker and his work is of importance:
Simmons v. Heath Laundry Co.2; Short v. J. & W. Henderson
Ltd.3; Cassidy v. Ministry of Health4-; Stevenson, Jordan and
Harrison v. MacDonald and Evans.5
There is clear authority for the view that it would not be
inconsistent for a director also to be a servant of the company:
In re Beeton & Co. Ltd.6; see also Anderson v. James Sutherland

2 [1910] 1 K.B. 543; 26 T.L.K. * [1951] 2 K.B. 343, 351: [1951]

326, C.A. 1 T.L.E. 539; [1951] 1 All E . B . 574.
3 5
1946 S.C.(H.L.) 24, 33. [1952] 1 T.L.E. 101, 110, C.A.
6
[1913] 2 Ch. 279, 285.
A.C. 1961. 2 (2)
20 HOUSE OP LORDS [1961]

J. C. (Peterhead) Ltd.7 North J. in the present case said that there

1960 may be the dual capacity of director and servant, and Anderson's
case r has gone a step further and establishes that a managing
B director can be a servant. There is nothing unusual in a person
•LEE'S AIB being the sole director of a company. It would appear that the
LTD_ case of a governing director has only once come before the courts:
Inland Revenue Commissioners v. Sansom.8 In the judgment
in the present case the Court of Appeal said: '' 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." The company is, of course, the em-
ployer, but the judgment seems to merge the company in the
deceased. In the case of bankruptcy the liquidator would manage
the affairs of the company, and the deceased would remain an
employee unless and until dismissed.
That a person may possess dual roles is shown by Fowler v.
Commercial Timber Go. Ltd.10; although it may be an artificial
position, it is one which the House of Lords has so clearly upheld
that it should be maintained: Salomon v. Salomon & Go.11; the
sanctity of that case was reaffirmed in E.B.M. Go. Ltd. v.
Dominion Bank.12 The present decision of the Court of Appeal
introduces confusion into company law, and the only way in
which the established principle can be maintained is by holding
that Lee's company was a separate and distinct legal entity from
him and that 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. One cannot change this contract merely because
of the difficulties one encounters in company law.
In Brown v. Okiwi Farms Ltd.,13 which preceded the present
case in the Compensation Court, it was held that Brown was not
a " worker " within the meaning of the Act. That case, it is
submitted, was wrongly decided or was a decision on its particular
facts; the judge's remarks there 14 merely illustrate the diffi-
culties one gets into if one goes behind the legal entity of the
company. [Eeference was also made to Wilsons & Clyde Goal

i 1941 S.C. 203, 213, 218.
» [1921] 2 K.B. 492, 515, C.A.
9
[1914] 3 K.B. 252.
io [1930] 2 K.B. 1, 6, C.A.
" [1897] A.C. 22, 33, 53; 13
T.L.B. 46, H . L .
" [1937] 3 All E.R. 555, 563, P.C.
™ [1957] N.Z.L.E. 1073.
" Ibid. 1075.
 21
A.C. AND PRIVY COUNCIL.

Co. v. English.15] Here, as governing director, Lee engaged J- C.

himself as pilot, and thereby created the contract between the jggQ
company and himself. The company was entitled under the
contract to control both what Lee did and how he did it, and „_
this control remained the control of the company whoever might LEE'S AIR
be the agent empowered by the company to exercise it. Allen LTD
v. Minister of Pensions and National Insurance 16 was a decision
on its own facts and in complete contrast with the present case
—it has no relevance to a company law case. In all these cases
it is important that the contract should be clear cut. Lastly,
if the present case was rightly decided below, then F.A.M.E.
Insurance Co. Ltd. v. Garvey's Coal Co. Ltd.,17 in which the
present case did not go without comment, was wrong, but it is
submitted that it was rightly decided. The deceased here was
a " worker."
J. O. Le Quesne following. The Court of Appeal below said
that the company was sufficiently independent of Lee to be able
in law to make a contract with him, but later said that it was
impossible for the company to give any orders to Lee. Those
two propositions contradict each other. It is not only contra-
dictory but is also contrary to the authority which the court is
professing to follow: Salomon's case. 18 In Sansom's case 19
there was a company controlled by Sansom—.the position is
exactly comparable with Lee here—and if it is to be said that
Lee was in effect the employer and employee, and that that was
an impossibility, it should have been said of Sansom. Lord
Sterndale M.E. held that it was legally possible for the company
to make a loan to Sansom in the circumstances in which it did,
circumstances which are indistinguishable from those which pre-
vailed here. Sansom's case is inconsistent with the view taken
by the Court of Appeal here; that case was the correct view of
the position between a company and its sole director.
Martin Jukes Q.C. and J. H. C. Goldie for the respondents.
The present problem has been considered as early as 1937 in New
South Wales, and from that time onwards has been answered
by the New South Wales and the New Zealand courts always in
the same way. A number of those cases were referred to in the
Okiwi case.20 The test to apply is that of control; if there is
no control over his work, then he is not a servant. The test

is [1938] A.C. 57, 64, 73-74; 53 « Sup.Ct. of N.Z., June 16, 1960.
T.L.E. 944; [1937] 3 All E.E. 628, " [1897] A.C. 22.
H.L. i<» [1921] 2 K.B. 492, 497, 509, 515.
i« The Times, March 29, 1956. 20 [1957] N . Z . L . B . 1073.
22 HOUSE OP LORDS [1961]

J- C. to determine whether a managing, a governing or an ordinary

j^ggO director is a " worker " is whether he is under a contract of
service, not for services. The trend of authority seems to show
LEE
„ that that is a question of fact to be determined on the evidence:
LEE'S AIR Hanson v. Hansons Ltd.21—the test applied was that of actual
LTD> control. In the present case one has to consider the relationship
of one man to himself. If the appellant's case here is correct,
the Supreme Court of New South Wales went wrong in Ross v.
Ross & Bowman Pty. Ltd.22 I t was said for the appellant that
Lee was the agent of the company, that in exercising control he
exercised it on behalf of the company, and therefore the com-
pany's control remained. If that is the way it is put, it could
equally apply to the director in the Ross case.22 In Kemp v.
Northern Roof Tiles Pty. Ltd.23 the same judge held that Kemp
was a worker of the company—applying the test of control he
came to the opposite conclusion from the previous case. See also
Blennerhassett v. Blennerhassett's Institute of Accountancy 21
and Dugan v. Wagga Publications Pty. Ltd.,25 which, though not
so strong as the present case, was one where substantial control
passed over to the man who ran the business; it was there said
that there was no likelihood that the deceased would be dismissed,
and there again the present case is very close.
The business was carried on in an informal manner here; Lee
was not only employed as a pilot but also as a general worker;
his wages were allocated in part to his work as a pilot and in
part to his general work. Allen v. Minister of Pensions and
National Insurance 26 is the nearest case to this and is the correct
approach; Havers J. rightly applied the test of control as it has
been applied in Australia and New Zealand. The difficulty here
is to find out what is the contract; Lee, as governing director,
had power to make a contract with himself; it is a very difficult
concept how he could have that dual capacity at one and the
same time—how could he give himself orders? He cannot exer-
cise control over himself; can he dismiss himself for misconduct?
Can a person be a servant when he himself is in control? I t is
submitted that as a practical matter he cannot. Control means
a real living person to control another real living person. I t was
said in Gould v. Minister of National Insurance 21 that " the real
" question is one of the degree of control exercised." John Shaw

" [1937] W.C.B.(N.S.W.) 165. " [1955] W.C.B.(N.S.W.) 219.

22 [1942] W.C.E.(N.S.W.) 37. 26 T h e T i m e s , M a r c h 29, 1956.
23 [1949] W.C.E.(N.S.W.) 76. " [1951] 1 K . B . 731, 7 3 4 ; [1951]
2* [1954] W.C.E.(N.S.W.) 50. 1 T . L . E . 3 4 1 ; [1951] 1 All B . E . 368.
A.C. AND PRIVY COUNCIL. 23

& Sons (Salford) Ltd. v. Shaw 28 does not carry the matter any J- C.
further. For the working out of the tests, see Simmons v. Heath igg0
Laundry Co."; and see Humberstone v. Northern Timber Mills 30
for the view expressed by Dixon J. on the test to be applied 0-
LBB S AIB
under the Workers' Compensation Act, 1928-1946, of Victoria; he '
thought that the classical tests enumerated by Lord Thankerton LTD'
in Short v. J. & W. Henderson Ltd.31 applied to that case, those
tests being: (a) the master's power of selection of his servant;
(b) the payment of wages or other remuneration; (c) the master's
right to control the method of doing the work; and (d) the
master's right of suspension or dismissal. Applying those four
tests to this case, one finds as a fact that there is no contract of
service; if he controls himself, that is not control. Lastly, Lord
Shaw's short judgment in Smith v. General Motor Cab Co. Ltd."2
shows how the matter has to be looked at. The 'true view here
is that the relationship of the company and Lee was not that
of master and servant and he was not a worker within the
meaning of the Act.
Goldie following. Lord Thankerton in Short's case,33 after
stating his four tests, went on to say that " the principal require-
" ment of a contract of service is the right of the master in
" some reasonable sense to control the method of doing the
" w o r k " ; but where, as here, one gets the controller and the
controlled person residing in the same person there is no control
in any " reasonable sense "—it is wholly illusory. The Court
of Appeal of New Zealand answered the problem correctly on the
facts of this particular case and applied the right test.
Perry in reply. I t is said in Swabey v. Port Darwin Gold
Mining Co.34 that " T h e articles do not themselves constitute a
" contract, they are merely the regulations by which provision is
" made for the way the business of the company is to be carried
" on." Under the articles in this case Lee as a servant was to
be employed as a pilot and the master and servant relationship
was to apply. Havers J. in Allen's case 35 relied on Gould's
case,36 but the latter did not fully set out what Lord Thankerton
had said in Slwrt's case 3 7 ; he qualified the tests and was
obviously not prepared to accept more. [Eeference was also
33
28 [1935] 2 K.B. 113, C.A. 1946 S.C.(H.L.) 24, 34.
34
2» [1910] 1 K.B. 543, 549, 552; 26 (1889) 1 Megone's ' Company
T.L.B. 326, C.A. Cases 385, 386-387, C.A.
3S
3° (1949) 79 C.L.E. 389, 404. The Times, March 29, 1956.
36
ai 1946 S.C.(H.L.) 24, 33. [1951] 1 K.B. 731.
" [1911] A.C. 188, 192; 27 T.L.B. " 1946 S.C.(H.L.) 24, 33-34.
370, H . L .
24
HOUSE OP LORDS [1961]

J. C. made to Kilboy v. South Eastern Fire Area Joint Committee.3S]

1960 Control was in the company here; it can be shown by change of
circumstances—if a liquidator were appointed or there was a
„_ change of shareholding the contract between the company and its
LBB'S AIB servants would not be affected. Lee was never anything else
LTD than the agent for the company. This was a contract of service.
[Anderson's case 39 and the E.B.M. Co.'s case 40 were referred
to.]

Oct. 11. The judgment of their Lordships was delivered by

LOED MORRIS OF BORTH-Y-GEST, who stated the facts set out
above and continued: 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 company he could
not also be a servant of the company. After referring in his
judgment to the delegation to the deceased of substantially all the
powers of the company, North J. said 1 : "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 con-
" tract 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,2
" 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 " w o r k e r " within the
meaning of the Workers' Compensation Act, 1922, and its amend-
ments. 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 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
38 1
1952 S.L.T. 332, 335. [1959] N.Z.L.E. 393, 399.
39 2
1941 S.C. 203, 218. p.914] 3 K.B. 252; 30 T.L.E.
« [1937] 3 All B.E. 555, P.O. 529.
A.C. AND PRIVY COUNCIL. 25

which belonged to the company and when he was carrying out J. C.

the operation of top-dressing farm lands from the air. He was -jogg
paid wages for so doing. The company kept a wages book in
which these were recorded. The work that was being done was v
being done at the request of farmers whose contractual rights and LEE'S AIK
obligations were with the company alone. It cannot be suggested j^m
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 company. That relationship
came about because the deceased as one legal person was willing
to work for and to make a contract with the 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 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 impedi-
ment 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 com-
pany and the deceased. In this connection reference may be
made to a passage in the speech of Lord Halsbury L.C. in
Salomon v. Salomon & Co.3: " M y 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.
" I f it was a real thing; if it had a legal existence, and if conse-
" quently 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 4 :
'' 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 incor-
" porated, although the requirements of the Act of 1862 may have

3 [1897] A.C. 22, 33; 13 T.L.E. * [1897] A.C. 22, 53.

46, H . L .
26 HOUSE OP LORDS [1961]

J. C. " been complied with, it is inaccurate and misleading: if it merely

1960 " m e a n s that there is a predominant partner possessing an over-
" whelming influence and entitled practically to the whole of the
„ " profits, there is nothing in that that I can see contrary to the
LEE'S AIR " true intention of the Act of 1862, or against public policy, or
LTD. " 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 company. Always assuming that the company
was not a sham then the capacity of the company to make a
contract with the deceased could not be impugned merely because
the deceased was the agent of the company in its negotiation.
The deceased might have made a firm contract to serve the com-
pany 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 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 company, and that it was none
the less a valid appointment because it was the deceased himself
who acted as the agent of the company in arranging it. In their
Lordships' view it is a logical consequence of the decision in
Salomon's case 4 that one person may function in dual capacities.
There is no reason, therefore, to deny the possibility of a con-
tractual relationship being created as between the deceased and
the 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 company could negotiate a contract for services as
between the company and himself there is no reason why a con-
tract 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 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

« [1897] A.C. 22.

A.C. AND PRIVY COUNCIL. 27

to exercise it. The fact that so long as the deceased continued J- C.

to be governing director, with amplitude of powers, it would be for ^ggQ
him. to act as the agent of the company to give the orders does
not alter the fact that the company and the deceased were two „
separate and distinct legal persons. If the deceased had a contract LBB'S AIR
of service with the company then the company had a right of ilTD_
control. The manner of its exercise would not affect or diminish
the right to its exercise. B u t the existence of a right to control
cannot be denied if once the reality of the legal existence of the
company is recognised. J u s t as 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.
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 the case of Inland Revenue
Commissioners v. Sansom." Sansom sold his business as a going
concern to a private company, John Sansom L t d . H e became
the sole governing director of the company, and the whole direc-
tion, 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. H e 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 share
to someone who had previously been employed by him. B y 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 super-tax on the
loans; he was so assessed on the basis that the amounts 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 upon 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 super-tax. On
appeal by the Crown on a case stated the judge made .an order
remitting the case to the commissioners to find whether in point

s [1921] 2 K.B. 492, C.A.

28 HOUSE OF LORDS [1961]

J. C. of truth and in fact the company did carry on the business or

1960 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
LEE'S AIR principal standing outside the company: whether the company
LTD 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 was discharged.
In his judgment Younger L.J. said 6 : " I t 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
" i n 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 7 : " 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 Go. Ltd." In
that case the plaintiff was appointed managing director of the
defendant company (which was not a so-called " one man com-
" pany ") 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 eompulsorily 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

« [1921] 2 K.B. 492, 516, C.A. s [1930] 2 K.B. 1, C.A.

? Ibid.
A.C. AND PRIVY COUNCIL. 29

there was no implied term in his agreement that he should lose J. C.

his right to recover damages for breach of his agreement if the 19gQ
company went into voluntary liquidation with his assent or
approval. Scrutton L . J . s a i d 9 : " S u c h a complicated term „_
" cannot be implied for this reason: the two positions of the LEE'S AIR
" plaintiff (1) as managing director, who claims damages for ^m
" 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."
I n the present case their Lordships see no reason to doubt
that a valid contractual relationship could be created between t h e
respondent company and the deceased even though the deceased
would act as the agent of the 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 relation-
ship. 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, recited above, 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 the company. All the facts and
all the evidence as to what was actually done point to t h e conclu-
sion that what purported to be a contract of service was entered
into and was operated. Unless this was a n impossibility in law,
then the deceased was a worker within the statutory definition
as referred to above. I t is said t h a t the deceased could not both
give orders and obey them and t h a t no power of control over
the deceased was in existence. I t is true t h a t an inquiry as to
whether a person is or is not employed upon the terms that he
will, within the scope of his employment, obey his master's orders
m a y 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: see Simmons v . Heath Laundry.Co.10
11
and Short v . J. & W. Henderson Ltd. B u t in the present case
their Lordships can find nothing to support the contention that
there was or m a y have been a contract for services b u t not a
contract of service.
E x facie there was a contract of service. Their Lordships
conclude, therefore, that the real issue in the case is whether t h e

° [1930] 2 K.B. 1, 6. " 1946 S.C.(H.L.) 24.

io [1910] 1 K.B. 543; 26 T.L.E.
326, C.A.
A.C. 1961. 3
30
HOUSE OP LOEDS [1961]

J- C. position of the deceased as sole governing director made it impos-

1950 sible for him to be the servant of the company in the capacity
of chief pilot of the company. In their Lordships' view, for the
„_ reasons which have been indicated, there was no such impossi-
LEB'S AIR bility.
J
There appears to be no 6greater difficulty in holding
8
that
FARMING ,. . ., . •, , /. ,. • ,,
LTD. 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. Any profits earned
would belong to the company and not to the deceased. If the
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 company
to decide what orders to give. The right to control existed in
the company, and an application of the principles of Salomon's
case 12 demonstrates that the 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 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.
Their Lordships find it unnecessary, as did the Court of
Appeal, to review the judgment of the Compensation Court in
Brown v. Okiwi Farms Ltd.,13 though they agree with the Court
of Appeal that the 'phrase " incorporated partnership " is not a
happy one. That case must be regarded as turning upon its own
facts.
Their Lordships were referred to and have considered certain
reported decisions of cases in the Workers' Compensation Com-
mission of New South Wales in which, under comparable legis-
lative provisions, questions have arisen and with varying results
have been decided as to whether persons were employed under
contracts of service. As these cases have not been under review,
and as they so largely depend upon a consideration of their own
particular facts and circumstances, their Lordships do not include
an analysis of them in this judgment.

" [1897] A.C. 22. " [1957] N.Z.L.E. 1073.

A.C. AND PRIVY COUNCIL. 31

Their Lordships will humbly advise H e r Majesty t h a t t h e J. C.

appeal should be allowed and t h a t the question in the case stated 1960
should be answered in t h e affirmative. T h e respondent company
m u s t pay t h e costs before their Lordships' Board and in t h e ™
Court of Appeal and t h e Compensation Court. LEB'S AIR
FARMING
LTD.
Solicitors: Blyth, Dutton, Wright & Bennett; Goldingham,
Wellington & Co.
C. C.

[HOUSE OF LORDS.]

WHITWOETH PAEK COAL CO. L T D . ( I N H. L. (B.)»

LIQUIDATION) APPELLANT; 1959

AND July 15, 16,

2
INLAND E E V E N U E COMMISSIONEES . EESPONDENTS. %^'_ f '

E A M S H A W COAL CO. L T D . ( I N LIQUIDATION) . APPELLANT;

AND
INLAND E E V E N U E COMMISSIONEES . EESPONDENTS.

B E A N C E P E T H COAL CO. L T D . ( I N LIQUIDA-

TION) APPELLANT;
AND
INLAND E E V E N U E COMMISSIONEES . EESPONDENTS.

[CONSOLIDATED A P P E A L S . ]

Revenue — Income tax — Basis of assessment — Case III — Case VI —

Whether payments assessable in respect of year in which received
or year in respect of which they were paid—Meaning of '' income
" arising "—Income Tax Act, 1918 (8 & 9 Geo. 5, c. 40), Sch. D,
Case III, r. 2, Case VI, r. 2—Income Tax Act, 1952 (15 & 16 Geo. 6
& 1 Eliz. 2, c. 10), ss. 131 (1), (2), 128 (1), 135.
Revenue—Income tax—Crown—Payments by—Whether Case III can
apply—Crown immunity—Income Tax Act, 1918, rr. 19, 21 of

* Present: VISCOUNT SIMONDS, LOED RADCLIFFE and LOED KEITH

OF AVONHOLM.
Note.—LOED REID and LOED TTJCKEB were present at the hearing of
the appeals but were not present on the consideration of the report of
the Appellate Committee for the reasons stated by VISCOUNT SIMONDS
in his opinion.