Theories of Corporate Personality

CHAPTER - 1 INTRODUCTION Personality is a very vague and wide term and it has a variety of meanings. It is derived from the Greek word “ Persona” which  Persona” which means the actor’s mask through which his voice must be sounded. In philosophical sense personality means ‘the rational substratum of a human being’. In law it means a ‘right and duty bearing unit’. Generally there are two types of persons which law recognizes namely the  Natural  Person and  Person  and Artificial  Artificial Person. he Person. he natural is confined merely to human beings and the artificial person is generally referring to any being other than human which the law recognizes as capable of having rights and duties. !cholars all over have constantly e"plored the issue on the recognition of corporation as a “legal person# or “legal entity#. he $ouse of %ords in case Salomon v A Salomon & Co Ltd. held ‘the principle of separate legal entity of the corporation distinct from the members.’ & 'uristic person is sometimes called a legal person( artificial person or legal entity. <hough the concept of a 'uristic person is more central to western law as well as common law and civil law countries( it is also found in virtually every legal system. he idea of legal personality i.e.( artificial person can be traced in )oman and ancient $indu law. he he ancient )oman society societ y was undeveloped and its organization was not very comple"( therefore the problem of legal personality did not bother them much. he family was the unit of the society. hough family consisted of a number of individuals all the powers were centered in ‘pater familias’. $e represented the whole family* therefore there was no theoretical difficulty about his position. & 'uristic person is an artificial entity through which the law allows a group of natural  person to act as if it were a single composite individual for certain purposes. +nlike a  partnership firm( which has no e"istence apart from its members( a company is a distinct legal or 'uristic person independent of its members. %egal persons are real or imaginary  beings to whom personality is attributed by law by way of fiction where it does not e"ist in fact. ,uristic persons are also defined as those things( mass of property( group of human

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 beings or an institution upon whom the law has conferred a legal status and who are in the eye of law capable of having rights and duties as natural persons.

CHAPTER - 2 HISTORY In the common law tradition( only a person could sue or be sued. his was not a  problem in the era before the Industrial )evolution( when the typical business venture was either a !ole Proprietorship or Partnership. here( the owners were simply liable for the debts of the business. & feature of the corporation( however( is that the owners-shareholders en'oyed limited liability. he owners were not liable for the debts of the company. hus( when a corporation breached a contract or broke a law( there was no remedy( because limited liability protected the owners and the corporation wasn’t a legal person sub'ect to the law. here was no accountability for corporate wrong doing. o resolve the issue( legal s cholars  proposed a solution. & corporation could instead be considered a person( and could therefore  be recognized and held sub'ect to the law. his understanding was not only adopted by the courts but also by the legislatures. hus( legislatures intentionally used the word ‘person’ to include both natural persons and 'uristic persons. orporate Personality is the creation of law. %egal personality of corporation is recognized both in /nglish and Indian law. & corporation is an artificial person en'oying in law capacity to have rights and duties and holding property. & corporation is distinguished by reference to different kinds of things which the law selects for personification. he individuals forming the corpus of corporation are called its members. he 'uristic personality of corporations pre0supposes the e"istence of three conditions1 2. here must be a group or body of human beings associated for a certain purpose. 3. here must be organs through which the corporation functions( and 4. he orporation is attributed will by legal fiction. & corporation is distinct from its individual members. It has the legal personality of its own and it can sue and can be sued in its own name. It does not come to end with the death of  its individual members and therefore( has a perpetual e"istence. $owever( unlike natural  persons( a corporation can act only through its agents. %aw provides procedure for winding up of a corporate body. 5esides( corporations the banks( railways( universities( colleges(

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church( temple( hospitals etc. are also conferred legal personality. +nion of India and !tates are also recognized as legal or 'uristic persons.

CHAPTER - 3 TYPES OF CORPORATIONS 1. Corporate Aggregate:

his kind of corporation is an association of human beings united for the purpose of forwarding their certain interest. & limited ompany is one of the best e"amples. !uch a company is formed by a number of persons who are shareholders of the company and contribute or promise to contribute to the capital of the company for the furtherance of a common ob'ect. heir liability is limited to the e"tent of their share0holding in the company. & limited liability company is thus formed by the personification of the shareholders. he  property is not that of the shareholders but its own property and its assets and liabilities are different from that of its members. he shareholders have a right to receive dividends from the profits of the company but not the property of the company. he principle of corporate  personality of a company was recognized in the case of Saloman v. Saloman & Co. 1 2. Corporation Soe:

his kind of corporation is an incorporated series of successive persons. It consists of  a single person who is personified and regarded by law as a legal person. In other words( a single person( who is in e"ercise of some office or function( deals in legal capacity and has legal rights and duties. & corporation sole is perpetual. Post 6aster( Public rustee( omptroller and &uditor General of India( the rown in /ngland etc. are some e"amples of a corporation sole. Generally( corporation sole are the holders of a public office which are recognized by law as a corporation. he chief characteristic of a corporation sole is its “continuous entity endowed with a capacity for endless duration#. & corporation sole is an illustration of double capacity. he ob'ect of a corporation sole is similar to that of a corporation aggregate. In it a single person holding a public office holds the office in a series

1 1897 A.C. 22

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of succession( meaning thereby that with his death( his property( right and liabilities etc.( do not e"tinguish but they are vested in the person who succeeds him. hus on the death of a corporation sole( his natural personality is destroyed( but legal personality continues to be represented by the successive person.

CHAPTER - !

THEORIES OF CORPORATE PERSONA"ITY

In ,urisprudence( discussion on the nature of corporate personality has always become one of the ma'or focuses. /ven though there are many theories which attempt to e"plain the nature of corporate personality( none of them is said to be dominant. It is contented that while each theory contains elements of truth( none can by itself sufficiently interpret the  phenomenon of a 'uristic person. he acceptance of the corporate personality of a company basically means that another non0human entity is recognized to assume a legal entity. <hough this theory has  been accepted as a well0established principle it is actually essentially a metaphorical usage of  language( clothing the formal group with a single separate legal entity by analogy with a natural person. 6a'ority of the principal 'urisprudence theories on corporate personality contented that the legal entity of the corporation is artificial. he separate legal personality of  corporation is based upon theories which are concentrated upon the philosophical e"planation of the e"istence of personality in beings other than human individuals. here are various theories of corporate personality which have attempted to theorize the nature and authority of  it. his might make one to gather that theoretically all the legal problems regarding persons have been fully e"plored but this is not true. here is a great divergence between theory and  practice. &ny one theory alone is not capable of solving the problems fully. herefore( the courts have not followed any one theory consistently. he reason of  gap between theory and practice is that the theorists have kept themselves more occupied with either a philosophical e"plaination of legal personality( or in making it to fit in some  political ideology than with the practical problems. /ven though there are many theories

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which attempted to e"plain the nature of corporate personality none of them is said to be dominant. It is claimed that each theory contains elements of truth* none can by itself  sufficiently interpret the phenomenon of 'uristic person. he following are the principal theories of corporate personality1 2. 7iction heory 3. )ealist heory 4. oncession heory 8. 5racket heory or !ymbolist heory 9. Purpose heory T#e Fi$tion T#eor%

his theory is firstly promulgated by Pope Innocent I: ;238402398n the other hand from the realist point of view the entity of the corporation as a legal person is not artificial or fictitious but real and natural. he realist also contended that the law merely has the power to recognize a legal entity or refuse to recognize it but the law has no power to create an entity. he personality of the corporation is different from that of its members. It is observed therefore that there is double fiction in the case of a corporation. 5y one fiction the corporation is given a legal entity. 5y the second fiction( the corporation is clothed with the will of an individual person. $ence the fictitious personality of the corporation comes to have a will of its own which is different from that of its members. It is also observed that fiction theory provide the most acceptable reasoning in  'ustifying the circumstances whereby court lifted the corporate veil of corporation. If the entity of the corporation is real then the court would not have the right to decide the circumstances whereby the separate legal entity of the corporation should be set aside. ?o human being has the right to decide circumstances whereby the entity of another human  being should be set aside. >nly law has such privilege. here are many other theories of  corporate personality( but it is not possible here to discuss them in detail. $owever( a few words may be said regarding each of them. $ohfeld’s theory which is closely related to bracket theory. $e says that only human  beings have rights and duties and “a corporate personality is merely a procedural form( which

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is used to work out in a convenient way for immediate purpose( a comple" class of 'ural relation.# @elsen’s theory which makes an analytical and formal approach to the concept of   personality. $e says for legal purposes there is no contrast between natural and 'uristic  persons. &ccording to him personality is always a matter of law i.e.( totality of rights and duties.

CHAPTER - 

PARTNERSHIP  UNINCORPORATED ASSOCIATIONS

5efore concluding the discussion on corporation as a legal personality( it would be desirable to contrast it with unincorporated associations and partnership. he fiction theory has a reasonable reasoning to 'ustify the position of unincorporated associations and  partnerships. +nder the fiction theory to e"ist as a legal person it depends upon impediment of the law. herefore( unincorporated associations and partnerships can also be treated as legal persons if the law granted to them such status. In !cotland and ontinental /uropean countries( as the law granted partnership a legal entity( then it e"ists as a legal person but the position is not so in /ngland and also in India( even though its partnership have similar attributes to partnership in !cotland and ontinental /uropean countries( it is not an entity because the law of /ngland and of India refused to grant such status to partnership. oday the development of partnership laws has proved that the status of legal person can also be embraced by partnerships. he limited liability partnership ;%%P< structure is an e"ample of partnerships which are treated by law as legal persons. >ther than having separate legal personality from the partners limited liability partnerships also en'oy main attributes of  corporation namely limited liabilit y.

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 &pplying the fiction theory again this is 'ustifiable as the attributes of corporation are not naturally generated by corporation by it but e"ists because they are granted by the law to corporations( then once the law granted the entity as legal person and attributes of corporation to limited liability partnership( it can act similar to corporations. & corporation is in law Auite different and distinct and also separate from the members who compose it. Its rights and liabilities are different for those of the members. he real position of a company can be understood only if we make a comparison of it with an unincorporated firm. In an unincorporated firm( there is not much difference between the rights and obligations of the firm and its partners. /ven the separate property of the partners is liable for  the debts of the firm.

CHAPTER - / CONC"USION 7rom the foregoing analysis it may be concluded that incorporation has great importance because it attributes legal personality to non0living entities such as companies( institutions and group of individuals which helps in determining their rights and duties. lothed with legal personality these non0living entities can own( use( dispose of property and can sue and be sued in their own names. +nincorporated institutions are denied this advantage because their e"istence is not different from the members. hus the e"istence of corporation reAuires a special legal framework and body of law that specifically grants the corporation legal personality( and typically views a corporation as a fictional person or a legal person. &s such corporate statutes typically give corporations the ability to own property( sign binding contracts( pay ta"es in a capacity that is separate from that of its shareholders. 7inally e"pressing these views about the two important theories of legal personality( it can be observed that the e"istence of corporation is neither wholly fictitious nor wholly real( instead it is partly fictitious and partly.

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$owever this assertion hardly serves any useful purpose in the determination of rights and duties of corporate entities. >n each theory the duties imposed by the !tate are the same and the persons on whose actual wills those duties are enforced are same( hence it would not  be incorrect if contended that the difference between the fiction theory and the realist theory is merely verbal.

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'I'"IO0RAPHY 'oo(&

2. 3. 4. 8.

Salmond ( “,urisprudence#( 8th /dn. 5utterworth’s Publications( ?ew =elhi. V.D. Mahajan( “%egal heory and ,ustice#( >rient %ongman Pub.( ?ew =elhi ;2BB2