United Kingdom Employment Appeal Tribunal

BAILII case number: [1995] UKEAT 125_95_0707

Appeal No. EAT/125/95

EMPOLYMENT APPEAL TRIBUNAL

58 VICTORIA EMBANKMENT, LONDON EC4Y 0DS

At the Tribunal

On 7th July 1995

Before

THE HONOURABLE MR JUSTICE MUMMERY (P)

MR P M SMITH

MISS D WHITTINGHAM

---

MR R S RAJAH          APPELLANT

THE SECRETARY OF STATE FOR EMPLOYMENT          RESPONDENTS

---

Transcript of Proceedings

JUDGMENT

PRELIMINARY HEARING

Revised


 


---

APPEARANCES

THE APPELLANT IN PERSON


 


MR JUSTICE MUMMERY (PRESIDENT): This is the preliminary hearing of an appeal by Mr Rajah against the decision of the Industrial Tribunal held at London (North) on 15th May 1994.

The Tribunal decided an application by Mr Rajah against the Secretary of State for Employment under Section 124 of Employment Protection (Consolidation) Act 1978, that he was entitled to payments under the provisions of Section 122 on the insolvency of a company called STEM Equipment Ltd.

The Tribunal unanimously decided, for reasons sent to the parties on 5th July 1994, that Mr Rajah was not entitled to the declaration that he claimed. The conclusion of the Tribunal was that he was not an employee of the insolvent company.

Mr Rajah appealed against that decision. The Notice of Appeal was dated 16th August 1994. The attached grounds set out in detail the various points in criticism of the reasoning of the Tribunal's decision. Those grounds were supplemented by a later document sent in by Mr Rajah. That is dated 22nd August 1994.

At the hearing today, Mr Rajah has presented his own case. (And if we may so, has done so, clearly and helpfully). The question is this: Is there a reasonably arguable case that the decision of the Tribunal was legally incorrect? As we explained to Mr Rajah at the outset, appeals can only be brought on legal points. It is not open for us to re-examine the facts on a re-hearing. If there is an error of law in this decision, what is it?

On this point, Mr Rajah said that the error consisted of reaching the wrong conclusion as to his status in the company. If the Tribunal had had regard to all the factors which it should have taken into account, and applied the relevant legal authorities, the conclusion would have been that he was employed and therefore entitled to a declaration.

In order to test the arguments, it is necessary to refer first to the facts found by the Tribunal. STEM Ltd was a company formed by Mr Rajah in 1980. It was intended to be a trading company. At the time it was formed there was an issue share capital 100 £1 shares, Mr Rajah has 60% of them and a partner, who later died in March 1983, had 40%. In 1983 Mr Rajah was joined by Mr Webb, 10% of the shares were issued to him. The remainder of the deceased partners' shares were divided between Mr Rajah and his then wife. So the shareholding position in 1983, after the partner's death, was that Mr Rajah held 75% of the shares, Mr Webb 10% and Mr Markando another 10% and Mrs Rajah 5%.

The next event of importance was in 1988, when it was necessary to introduce additional capital. The share capital was increased to 100,000 £1 shares. A Mrs Dennison introduced capital. She was an outside investor. Of the allocations of shares, which amounted to 65,500,

Mr Rajah held in excess of 70%.

The next important event was that Mr Rajah entered into a written service agreement with the company. That replaced all the previous agreements and arrangements, written or oral, which had existed between him and the company. That is dated 28th January 1988. In the agreement Mr Rajah is described as an employee. The effect of the agreement is to confirm him as a director, who will serve the company in that capacity. His obligation was to use his best endeavours to promote the interests of the company. It provided in clause 3:

"The Employee shall perform such duties and exercise such powers, authorities and discretions as the Board shall from time to time delegate to him on such terms and conditions and subject to such restrictions as the Board may from time to time impose. Without prejudice to the generality of the foregoing the Employee shall at all times abide by the Code of Discipline of the Company a copy of which has been handed to him."

Clause 4 provides for the payment of his salary, an annual salary of £12,000. Then there is provision for payment of travelling, entertainment and other expenses and paid holiday of five weeks a year.

The company was doing well at that point. There were five employees, including the two directors. But then there were financial difficulties. In March 1990 staff were dismissed by reason of redundancy. Mr Rajah and Mr Webb were left, but in November 1990 Mr Webb left, though he retained his shareholding, and discharged his duties as director on a part-time basis. He ceased to be an employee. The Tribunal found as a fact that from the end of 1990 onwards Mr Rajah was the sole person operating the company. By that time he had divorced and remarried. His second wife assisted him, but she was not employed in the company.

Trading conditions continued to be difficult. Mr Rajah tried various means of saving the business. One of those was that from August 1992 he was not paid his salary (Mr Rajah pointed out that the Tribunal had incorrectly stated 1991). The payments to Mr Rajah after that date were not salary. They were withdrawals by him of sums which stood to his credit in the loan account. The company could not afford to pay him salary. The result was that the payments he received as repayment of the loan account were not subject to PAYE and National Insurance contributions in the same way that the payment of salary had been.

The company stopped trading. It petitioned for an order for winding up in the High Court in June 1993. Following the insolvency of the company Mr Rajah sought payment from the Secretary of State under Section 122 of the Employment Protection (Consolidation) Act 1978. He sought pay, redundancy entitlement, holiday pay and notice pay.

The Secretary of State's response to the application was that it was admitted that STEM Equipment Ltd was insolvent, but did not admit that Mr Rajah was an employee of the company within the meaning of Section 153 of the 1978 Act. He was put to proof of that.

The issue for the Tribunal was therefore whether Mr Rajah was an employee. The Tribunal correctly followed authority and balanced all the factors which tended to point one way or the other on the issue of employment.

The discussion with Mr Rajah on this appeal has concentrated on paragraph 8 of the decision. The various factors pointing in each direction were considered and the conclusion was stated. The Tribunal stated this:

"8 On the one hand Mr Rajah can point to the existence of a service agreement between himself and the company. He was treated as an employee for tax purposes paying tax under the PAYE system and his National Insurance contributions were appropriate to an employee. Until August 1992 [I have corrected that from 1991] he drew a regular wage and he was entitled to take a holiday. Those factors tend to point towards the existence of a contract of service. [Contract of Service is the expression which is mentioned in the definition of an employee in Section 153] On the other hand he was the majority shareholder and the person who was in effective control of the company. He could not be disciplined nor could he be dismissed. He had set up the company and, in reality, he was a business man who had chosen to adopt corporate status in order to carry out his business activities. He alone could decide the terms of his remuneration and he alone could decide the way in which the company chose to conduct its activities. When the company encountered difficulties he was able to decide that he should not receive a wage but instead should receive a repayment of his loan account. We have asked ourselves whether in any proper sense Mr Rajah could be considered the servant of the board of directors and we conclude that he could not. On balance we consider that Mr Rajah was the embodiment of the company and was not its servant. For these reasons and on balance we conclude that Mr Rajah was not an employee of the company and accordingly he is not entitled to the declarations sought."

Mr Rajah's criticisms of that paragraph start first with two legal propositions which are undoubtedly correct. The first is by reference to the case of Lee v Lee's Air Farming Ltd [1961] AC 12, to the effect that the same person may occupy a dual capacity, both as a director and employee. Secondly, by reference to the famous case of Salomon v Salomon [1897] AC22, from the date of incorporation a limited company becomes a legal person with the rights and duties distinct from those of the members and shareholders.

With those legal propositions we now turn to the particular grounds of appeal. Mr Rajah's submission was that he had a written service agreement which confirmed his status as an employee. He says that, since the existence of the service contract was accepted by the Tribunal the initial basis on which the Secretary of State had rejected his claim, (that there was no written service agreement) was no longer valid. He pointed out, and we agree, that a director may be an employee as well as an office holder. He said that the fact that he did not draw salary for the last eight months before his employment ended could not be construed as cesser of employment on his part. Owing to the dire financial state of the company and at the request of the board of directors, the agreement was that he would defer the drawing of salary for eight months. If he had not acceded to that request the company would have been made insolvent and wound up earlier. The deferment of salary payment was a compromise which he accepted in the hope that the company could survive. There was no agreement on his part that his employment should cease.

He referred to the provision in his service contract that he could be disciplined as well as dismissed. He had set up the company. He had not done so at the beginning as a sole proprietor, in total effective control. It had started as a partnership arrangement. Even after the death of the partner there had been other shareholders in the company, and other directors on the board. He emphasised the point that the limited nature of the company meant that it was a separate legal entity from him as a director and employee. He was accountable, as an employee, to the board and ultimately to the shareholders, even though he was the majority shareholder and the others were minority shareholders. He said it was established in law that a majority shareholder/director and other shareholder/directors would be held responsible for irregularities in the company's business activities. By the same token, if the company was realising a profit, the majority shareholder/director could not regard himself as the embodiment of the company, and, at his own discretion, draw substantive sums from the company. He was dependent on the approval of the board of directors.

For all those reasons it was submitted by Mr Rajah that this decision was incorrect.

We should say at the outset that we have sympathy for Mr Rajah, with the financial difficulty in which his company found itself, and the steps he took to deal with that. The question, however, where there is a legal error in this decision? In our view, there is not. The Tribunal applied the correct legal test, to look at all the factors which indicate unemployment status, then look at all the factors which indicate the status of self-employment, and then make a judgment on that exercise.

There may well have been a change, during the life of the company, in Mr Rajah's relationship with it. The company started as a partnership company. Originally, there were other shareholders. There were other directors. What we have to look at, however, and what the Industrial Tribunal had to look at, was the position at the relevant date. The relevant date for the purposes of deciding whether the Secretary of State is liable to make payments out of the National Insurance Fund to employees of an insolvent company, is the date at which the company became insolvent, not the position as it was two years, five years or ten years previously. The position at the date of the insolvency of the company in June 1993 was that, on the findings of fact made by the Tribunal, Mr Rajah was the sole person operating the company. For eight months or so he had not been receiving salary and there had been no payment of tax and National Insurance contributions. The position was that, unlike an ordinary employee, the payments which he received were not salary but out of the loan account standing to his credit. In our view, it is difficult, in those circumstances, to question the decision the Tribunal that Mr Rajah was not an employee at the date when the company became in insolvent in June 1993. At that date he was operating the company on his own. He was not receiving a salary and had not been for some time. Those are two important factors which would entitle the Tribunal to reach the conclusion that he had not satisfied them that he was an employee.

In our view, there is no legal error in paragraph 8 of the extended reasons or in any other part of this decision. We must dismiss this appeal.