A corporation is an artificial being created by a group of individuals with the aim to do business. Being an artificial person, it has been given life through the legal clauses and thus it has been deemed to have a corporate personality through law. This concept has been recognised both in English and Indian law. Thus, a corporation is an artificial person enjoying in law, having the capacity with rights and duties and holding property. The individuals forming the corpus of the corporation are called is Corporate Personality. Juristic personality of corporations must contain three essential conditions.
1. Firstly, there must be a group or body of human beings associated for a certain purpose;
2. Secondly, there must be organs through which the corporation functions, and
3. Thirdly, the corporation is attributed will/animus by legal fiction.
A corporation is distinct from its individual members. It has the legal-personality of its own and it can sue and be sued in its own name. It does not come to an end with the death of its individual members and, therefore, has a perpetual existence. Though it can sued on its own name, however, it doesn’t have a mind of its own and it acts through its designated agents. Apart from the general parlance meaning of corporations, entities such as banks, universities, colleges, hospitals, religious institutions etc. have also conferred legal personality. The Union of India and the State are also recognised as legal or juristic persons. In certain cases, the corpus of the legal person is some land or estate which is reserved for certain special uses. For example, a trust-estate or the estate of an insolvent, a charitable fund etc., are included within the term ‘legal personality’, However, English law requires that these estates or funds, to be recognised as legal persons, must be duly incorporated under the existing law. The law does not believe in personification of these estates or funds, but instead it allocates personality in corporate bodies which administer the estate or fund.
The theorists and jurists have often expressed conflicting views regarding the true nature of corporate personality of corporations. These views find expression through different theories of corporate personality which they have propounded from time to time. Even though these are solely theories which attempt to explain the nature of corporate personality, none of them can be said to be dominant. It is claimed that while each theory contains elements of truth but none by itself sufficiently interpret, the phenomenon on juristic personality. There are five theories of corporate personality.
The fiction theory was pronounced by Savigny[i] and further expounded by Salmond, Coke, Blackstone and Holland.
According to the fiction theory, a personality is attached to corporations, institutions, and funds by a pure legal fiction. The personality attributed to the corporation is different from that of its members. In fact there exists a double fiction in the case of a corporation. By the first fiction, the corporation is given a legal entity and through the second fiction, the corporation is bestowed with the will of an individual person. Through this double fiction, the personality of the corporation arises which is different from its members. Savigny regarded corporation as an exclusive creation of law having no existence apart from its individual members who form the corporate group and whose acts by fiction, are attributed to the corporate entity.
The word fictitious implies something which is not real, which is exactly what the theory implies an imaginary creation of law. It presupposes that incorporation is a made-up extension of personality resorted to for ensuring smooth functioning of government and facilitating dealings with property.
Thus, according to Savigny, the right of all corporations does not exist in the individual members or the members taken collectively and a change in an individual member or, even of all the members, does not affect the essence and unity of a corporation.
Salmond also supports the view that a corporation has a fictitious existence. Sir John Salmond is of the view that a corporation is distinct from its members that it is capable of surviving even the last member of them as company. It being incorporated by an Act of Parliament can only be dissolved only as provided therein or by another Act of Parliament. The fact that all the members of the company have ceased to exist does not affect the existence of the company. What survives is only a fictitious creature of law.
Professor Gray has advocated the fiction theory as the main object of incorporation is to protect the interests of persons having common objectives[ii].
However, this theory has been subject to criticism as it fails to answer satisfactorily the civil and criminal liability of corporations. If it is assumed that the will of the corporation is attributed to it by the fiction of law, then it leads one to infer that it must always be lawful as the will conferred by law can never be used for unlawful or illegal ends. It therefore, follows that the corporation would always do intra vires acts and never indulge in acts which are ultra vires[iii]. Frederick Pollock also has levied a heavy hand of criticism on this theory as he maintains that the common law of England does not recognize the fiction theory of corporate personality. In English Law neither collective liabilities nor collective powers can be incurred by a body of individuals unless it can satisfy the requirements of incorporation. Unincorporated bodies are not treated as legal persons in English Law. Before a body of persons can have rights and duties in their corporate character, they have to be incorporated according to law. For Example: An ordinary social club has no recognition as a legal person in its collective capacity. The club can neither sue nor be sued in its own name unless it has formally submitted to an act of incorporation according to law. Thus, corporate personality is a mere creature of law and depends entirely upon the law of the State and the same is not universal.
This theory was propounded by Gierke, the great German jurist. Further, this theory has been substantiated by Maitland, Beseler, Lasson, Bluntschli, Zitelmann, Miraglia, Sir Frederick Pollock, Geldat Pollock, Jethrow Brown, etc[iv].
According to Gierke, every group has real mind, a real will and a real power of action. The existence of a group goes beyond the aggregate of the individualities of persons forming the group. According to this theory, every group has a personality of its own despite being a social one or a political one. This group has a will of its own which is different and distinct from the individual wills of the members. This can be explained through the example of a family. The parents may have a different will from their children.
A corporation, also has a real existence independent of the fact whether it is recognised the State or not[v]. The will of the corporation is expressed through the acts of its servants and agents. Being a juristic person is also subject to certain rights and liabilities. According to this theory, a corporation is a social organism whereas man is a physical organism. It contends that corporation uses men agents to carry on their functions. The will of the corporation finds expression through the acts of its directors, employees or agents. The existence of a corporation is actually in fact and not based on any fiction unlike the previous theory. It is a psychological reality rather than a physical reality. Thus, though the corporation is not an actual person but it is in fact a representation of psychical realities that exist independently of the law of the State and are recognized rather than created by it.
It may be stated that Realist theory is closely connected with Institutional theory which marks a shift of emphasis from an individualist to a collectivist outlook[vi]. According to this theory, an individual is integrated into the institution and becomes part of it. They believed in the existence of many independent institutions within State which is the supreme institution.
The fascists gave a twist to this theory so as to make the State as the only institution, which integrates all the other institutions and allows none to survive as an autonomous body, making it supremely autonomous.
Professor Gray denies the reality of collective will[vii]. According to him, the corporate will is a figment. A corporation is not a fictitious or juristic person; it is simply a series of natural persons some of whom have rights which are different and devolve in a different way from of natural persons in general.
The theory is linked with the philosophy of sovereign state According to this theory, the only realities are the sovereign and the individual. They are treated as persons merely by a concession on the part of the sovereign. Legal personality is conferred only by law. It pre-supposes that corporation as a legal person has great importance because it is recognised by the State or the law[viii].
According to this theory, juristic personality is a concession granted to corporations by the State. It is entirely at the discretion and disposal of the State to recognise or not to recognise a corporation as a juristic person. The theory closely resembles the fiction theory as it also believes that there is no juristic personality of its members. Thus, the advocates of fiction theory also accept the view of concession theorists.. Thus, Savigny, Salmond and Dicey have also advocated this theory. This theory differs from the fiction theory inasmuch as s emphasises on the discretionary power of the State in the matter of recognising the personality of the corporation.
This theory is often termed as dangerous due to its over-emphasis on State discretion in the matter of recognising corporation which are non-living entities. This may lead to dictatorship and arbitrary restrictions on corporate bodies, particularly the political entities.
The main exponent of this theory is a German jurist called Brinz. In England, this theory was, supported by E.I. Bekker, Aloys andDemilius. The theory is based on the fundamental principle that corporations can be treated as persons for certain specific purposes. It runs on the assumption that only living persons can be the subject-matter of rights and duties, and since corporations are non-living entities, they do not have any rights and duties. To tackle this, the theory believes that it became necessary to attribute personality to corporation for the purpose of being capable of having rights and duties.
The origin of purpose theory is to be traced back to Stiftung of German Law[ix], i.e. the foundations or the edifice upon which the structure of the juristic person can be built. Another noted jurist called Duguit interpreted purpose theory in a different way. In his opinion, the endeavour of law in its widest sense is to achieve social solidarity. If a given group is pursuing a purpose which conforms to social solidarity, then all its activities falling within the purpose need to the protected by law by conferring it legal personality[x].
The Bracket theory, also called as Symbolist theory, is associated with the well-known German jurist Ihring. According to this theory legal personality is a symbol to facilitate the working of the corporate bodies. According to this theory, the members of a corporation have certain rights and duties which are given to the corporation for the sake of carrying business transaction in a smooth manner. It is not always practicable or convenient to refer to all the innumerable members of a corporation.[xi] A bracket is placed around them to which a name is given. That bracket is the corporation. Only the members of the corporation i.e. human beings are persons in real sense and thus a bracket is put around them to indicate that they are to be treated as one single unit when they form themselves into a corporation.
For example, like a synonymous word is put within brackets to give an equivalent meaning, a collective form of a group of different individuals is expressed through a corporation and their separate identities are given a unified form. Thus incorporation is done merely for the sake of convenience[xii].
The American jurist Hohfeld has advocated this theory in a different form. In his view, corporate personality is the creation of arbitrary legal rules designed to facilitate proceedings by and against an incorporated body in law court. Hohfeld has supported this theory on the ground that only human beings are persons and juristic personality is mere creation of arbitrary rules of procedure.[xiii] The corporate person is only a procedural form of a large number of individuals which is recognised to determine legal relations among them. According to Hohfeld, corporate personality is only a means of taking account of mass individual relationships.[xiv]He implied that unity of a corporation is a convenient way of deciding cases by the courts of law.
There is an inherent weakness in this theory. It does not indicate when can the bracket be removed and lifted for the purpose of taking note of the members constituting the corporation.
Political Significance of Theories:
Many jurists on close examination of the different corporate personality theories have concluded that there is an inherent political significance and their role is quite important in the society. The fiction theory of juristic personality is founded on psychology of man which is inevitable part of human nature. In its purest form, this completely free from any political influences but the concession theory which is derived from fiction theory necessarily has a political inkling which aims at strengthening the power of the State, thus enabling it to keep the collective groups fully control. The concession theory was extensively used to take over the property during the French Revolution. Likewise, the realist theory is also predominantly political rather than legal in its objectives. It is based on organic theory of the State which was supported by fascists to uphold supremacy of the State. Though jurists like Gierke and Jellinek tried to reconcile the sovereign power of the State with the rights of independent collective groups or associations by self-imposed limitations on the State, but their efforts failed to achieve the desired results.
In summation, there has been no theory which encompasses all the aspects of the problem of juristic personality. The theories that have been propounded are philosophical, political or analytical. But it must be borne in mind that functional basis of the law cannot be ignored. Thus, common law has not committed to any one single theory of corporate personality. In India, following the common law principles, these theories have not gained immense foothold in practical corporate governance, rather they have a strong theoretical position.
Frequently Asked Questions
What is Corporate Personality?
Corporate Personality is a creation of law. A corporation is an artificial person however, it is capable of holding certain rights and duties. This personality attributed to the company makes it district from the members who constitute it. Thus, a corporation can be sued and can sue on its own name, hold property, it has perpetual existence and independent legal existence from directors and shareholders.
Why have Corporations been attributed with Personality?
Corporations have been attributed with personality to ensure that it has a separate existence from the people who constitute it. In Solomon v. Solomon, the court has held that company has a distinct legal existence from its shareholders and therefore a shareholder cannot be responsible for the acts of company. This is further strengthened by the limited liability principle as the shareholder would be liable only to the extent of his investment.
How is Fiction Theory and Realist Theory different?
The main difference lies in the fact that the fiction theory denies that corporate personality has any existence beyond what the state chooses to give it, however, the realist theory holds that corporation is a representation of physical realities which the law recognises.
What is the value of theories of corporate personality in Corporate Governance?
In general corporate governance, the theories of corporate personality do not hold a strong presence. The theories that have been propounded are philosophical, political or analytical. None of them have fully included the functional basis of the law. Further, the common law does not commit to any one single theory of corporate personality. In India, following the common law principles, these theories have not gained immense foothold in practical corporate governance, rather they have a strong theoretical position.
Edited by Shikhar Shrivastava
Approved & Published – Sakshi Raje
[i] Savigny: Sytems of Modern Roman Law (Translated by Ratingon)
[ii] Gray: Nature and Sources of Law
[iii] Fitzgerald P.J: Salmond on Jurisprudence
[iv]The Realist Theory also called Organic Theory
[v] Miraglia: Comparitive Legal Philosophy
[vi] Dias R.M.W: Jurisprudence 5th Edition
[viii] Dicey A.V: Law of the Constitution 8th E
[x] Barker(Gierk’ Translation) Natural Law and Theory of Society
[xi] Friedman: Legal Theory
[xii]Dr Sethna: The legal personality of a corporate body Is quasi fictitious and quasi real
[xiii] Dr Sethna: Jurisprudence
[xiv] Dr Winfield’s: Textbook on Jurisprudence