This article is written by Bhagyashree Mali during her internship with Le Droit India.
Keywords: Legal person, Corporate Personality, Lifting the Corporate Veil corporate personality, statutory provision, common law, contract liable
Abstract:
One of the most important topics in corporate law is the idea of corporate personality, which basically deals with a corporation’s identity and legal standing. The idea that a corporation is a separate legal entity from its members is known as corporate personality. The various theories that explain corporate personality, with an emphasis on the aggregate theory, reality theory, and fiction theory. In the legal parlance, a company is an association of both natural and artificial person and is incorporated under the existing law of the country. A company is a “Legal Person” or “Legal Entity” under common law, distinct from its members and able to endure beyond their deaths. It has its own rights and obligations and is endowed with the potential for perpetual succession. The word “company” has been used in a variety of ways because a corporate body is a legal construct rather than a human being. It is a legal entity that was created and dissolved by the law. A company is a legal entity that has the authority to own a business, property, rights, and responsibilities independently of the individuals who oversee or fund the business’s operations in accordance with legal requirements and the authority granted to it by its Memorandum of Association [MOA], Article of Association [AOA], and company act Therefore, since it is intangible, invisible, and only exists in the mind of the law, independent corporate personality is one of the qualities that make a business a legal or artificial person.
Introduction:
This theory developed in response to a demand in the commercial and legal sectors. While giving stakeholders a reasonable level of security, corporate personality guarantees that a firm will be held accountable for its actions and commitments. Similarly, the business cannot be held responsible for any private actions taken by its shareholders or members that are not related to the business. Perpetual succession, proprietary interest, debts, and the procedure of suing and being sued are among the corporate personality principles that are involved (Foss v. Harbottle). The primary examples of lifting the corporate veil—such as the quantity of members, dishonest trade, avoiding legal responsibilities, owning a subsidiary business, and name publication—are included at the end. The idea that a firm has a unique identity apart from the people who own or manage it is known as corporate personality. It serves as the foundation for basic concerns including accountability, rights, duties, and corporate law. With significant practical and legal ramifications, theories of corporate personality have tried to explain this divergence. A company is considered an artificial person under the law. It is capable of exercising its rights, carrying out its obligations, and owning property under its own name. As a result, corporate personality is a unique legal construct. The corporate personality of a business under the Companies Act of 2013 is the best illustration of this. According to the legislation, such a corporation has a distinct legal identity. Members and agents of such a corporation act as its representatives.
What is Corporate Personality:
A business can enter into contracts, possess property, file lawsuits, and be sued in its own name. Despite not being a human being, it is regarded as a “person” under the law. In most cases, the company’s owners, or shareholders, are not held personally responsible for the debts or liabilities of the business. Their liability is capped to the amount of money they have contributed to the business. Even if management or ownership changes, the business can still survive. The existence of the business is unaffected by the passing away of directors or stockholders. The company can use its powers to enter into contracts, borrow money, and possess property. It also has responsibilities, such paying taxes and according to the law. The legal idea of corporate personality enables corporations to be regarded as legal persons or entities with certain rights and obligations. Put differently, businesses have the same rights as individuals to own property, enter into contracts, and file or defend lawsuits.
History of Corporate Personality:
The underlying idea of this philosophy is present in ancient Roman and Hindu law, albeit it is not fully developed and flushed out. It is also discussed in the Old Testament in Christian theology, where the ties between individuals and the organizations they belonged to are explained. English Common Law is largely responsible for the development of corporate personality in its current form. The recognition of corporations as separate legal entities from their individuals began in the 17th century. The case that confirmed the notion of independent legal personality in company law is the case of Salomon v. Salomon & Co. Ltd. In this case, the House of the Lords, the highest court in the United Kingdom at the time, held that a corporation is a separate legal entity from its stockholders, even if one individual or a family possesses all or most of the shares. The firm becomes a separate legal entity with its own rights and obligations after it is established, the court ruled. The foundation for the development of the corporate responsibility concept was established by this ruling. In addition to the UK, this authority has significant influence in a number of other countries.
Theories of Corporate Personality
- Fiction Theory
One of the oldest and most conventional theories of corporate personality is the fabrication theory. This idea holds that a company is a legal entity that was established by the law and has no autonomous existence other than that of its members. According to the argument, the corporation is just a “fiction” or “artificial person” that the government established in order to facilitate economic operations and hold property. The existence of the company, according to this theory, is the result of legal creativity. Its legal personality is a product of the law, basically a tool for its members, and it does not exist in the same sense as natural persons. The idea of the state’s sovereignty and authority over corporate entities forms the basis of the philosophy. This argument first appeared in the early years of English corporate law, when corporations were established by royal charter. According to this perspective, companies were granted limited rights and advantages by the state, which had ultimate authority over them. For instance, a corporation could not be held accountable for the actions of its officials or members under the fiction theory since it was viewed as a transient legal structure created to fulfill specific economic objectives rather than as a “real” entity.
- Reality Theory
By claiming that a business has a real, independent life apart from its members, the reality theory adopts the stance that the fiction theory does. According to this theory, a company is an actual entity with rights and obligations of its own, not merely a legal fiction. This point of view holds that a company has autonomous legal personality and is a “real person” in the perspective of the law, existing apart from its directors, stockholders, and employees. With the growth of big businesses and multinational firms in the 19th and 20th centuries, the reality hypothesis gained popularity.
- Aggregate Theory
The “group theory,” sometimes referred to as the aggregate theory, offers a more complex perspective on corporate personality. This theory holds that a company is neither a fictional entity nor an autonomous entity with its own legal identity. Rather, it is a sum or assemblage of its constituent parts. According to the aggregate theory, a corporation is just a collection of people who band together to work toward shared objectives. According to the aggregate theory, companies are a legal fiction that serves to enable the aggregation of individual interests rather than being distinct “real” entities. It emphasizes on the rights and responsibilities of the people who make up the corporation. According to this idea, the corporation is made up of the rights and obligations of its directors, shareholders, and employees.
- Concession Theory
This is comparable to the fiction theory, but it asserts that the state’s operations have granted the legal entity corporate personality or a legal existence. According to this theory, the law cannot grant legal individuals; only the state can. According to the concession hypothesis, a firm is a product of the state through legislation or a charter rather than a natural or private entity. The privilege of forming a business is granted by the state as a concession, and the state has the authority to restrict or eliminate this privilege. A corporation functions under governmental oversight and control since it is a concession provided by the state.
- Bracket Theory
One of the most well-known and practical ideas of corporate personality is this one. According to the bracket theory, also referred to as the symbolist theory, a company is only formed by its members and agents; therefore, the individuals who represent the corporation constitute the corporation. A legal theory known as the Bracket Theory of Corporate Personality aims to clarify how a company’s legal personality relates to the obligations and rights of its shareholders. According to the notion, the company is really a “collection” or “aggregation” of people, and its rights, obligations, and powers are merely an extension of what its members do. A compromise between the Realist and Fictional theories of corporate personality is the Bracket Theory. It implies that a company’s existence and acts are inextricably related to its shareholders, directors, or members, who constitute a “bracket” of individuals within the business, even though the corporation is a separate legal entity with its own identity.
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- The Ownership Theory
This is an additional corporate personality theory. This hypothesis was conceived and expanded by Brinz and Bekker. According to this theory, people, not businesses, are entitled to legal protections. Additionally, it states that a business or legal entity is not a person in any sense. These are subject-less property, which is a legal construct, and the sole purpose of this fake personality is to share property. Personalities like these are merely a type of ownership. The fundamental tenet of company law’s ownership theory is that the business is fundamentally an extension of its owners, or shareholders, and that the corporation primarily acts in their best interests. Other corporate governance models, including the Stakeholder Theory, which contends that a business should take into account the interests of multiple parties (such as consumers, employees, and the community) rather than just shareholders, are contrasted with the Ownership Theory.
- Purpose theory:
Brinz, a German jurist, is the main proponent of this approach. This view holds that a corporation should only be acknowledged as a legal entity if it contributes to a legitimate social or economic process. It suggests that a corporation should be given legal identity in accordance with its capacity to advance economic progress, advance public welfare, and meet the needs of diverse stakeholders. This viewpoint also challenges the idea that corporate personality is a distinct attribute that is granted for a good reason. The philosophy of purpose The main proponent of this approach is the German jurist Brinz. E.I. Bekker in England supported this idea. The idea is based on the idea that, for specific reasons, businesses can be recognized much like people. It is predicated on the idea that as non-living entities, corporations have no rights or obligations to make, deliver, or pursue any other justifiable goal as specified by its founders. Only living humans may be subject to such rights and responsibilities.
- The organism theory
According to this view, a corporation has limbs in the form of members, a head (the top authorities), and other organs, just like an organism. Additionally, a person has a head, a body, and legs, all of which help them fulfil their needs and fulfil their desires. According to the view, a business has its own body and will in addition to its own legal rights and obligations. Instead of seeing the company as a legal construct or a collection of contractual agreements, the Organism Theory in company law considers the corporation as a living entity or organism. According to this view, a firm has a life, identity, and purpose of its own that goes beyond the personal interests of its members, directors, or shareholders. This perspective holds that the business develops, changes, and adapts on its own, much like a biological entity, with its own set of requirements, objectives, and methods of operation.
Case laws
- Salomon v. Salomon & Co. Ltd. (1897) AC 22
Principle: This is the most fundamental case regarding the concept of separate legal personality and limited liability in company law.
Facts: Mr. Aron Salomon was a leather merchant who formed a company, Salomon & Co. Ltd., in which he was the majority shareholder, but the company also had other nominal shareholders. The company ran into financial trouble and went into liquidation. The creditors sought to hold Mr. Salomon personally liable for the company’s debts.
Decision: The House of Lords ruled that the company was a separate legal entity distinct from its owner, Mr. Salomon, even though he was the major shareholder. The company’s debts were not his personal debts, and he was not personally liable for them beyond his shareholding.
Impact: This case established the principle that a company is a separate legal person with its own rights, duties, and liabilities, independent of the shareholders or directors. The ruling also reinforced the concept of limited liability, meaning shareholders’ liabilities are limited to the amount unpaid on their shares.
- Macaura v. Northern Assurance Co. Ltd. (1925) AC 619
Principle: This case further clarified the doctrine of separate legal personality and the distinction between a company and its shareholders.
Facts: Macaura was the sole shareholder and director of a company. The company owned timber, and Macaura took out an insurance policy on the timber in the company’s name. The timber was destroyed by fire, and Macaura, being the owner of the insurance policy, attempted to claim the insurance proceeds personally.
Decision: The House of Lords held that the company, not Macaura personally, owned the timber. Therefore, Macaura had no insurable interest in the timber and could not claim the insurance proceeds.
Impact: This case reinforced the principle of separate legal personality, emphasizing that a shareholder does not have rights to the company’s assets or property unless they are in their capacity as the company itself. The court clarified that the company, as a separate entity, is the sole owner of its property.
Conclusion:
Different viewpoints on the characteristics of corporations as legal entities are provided by the theories of corporate personality, including aggregation theory, reality theory, and fiction theory. Although it was prominent in the past, the fiction theory—which views businesses as artificial constructs—is now viewed as insufficient to explain the function that corporations play in the modern world. Although it has taken centre stage in modern corporate law, the reality theory, which views businesses as separate legal entities, calls into question the actual boundaries between corporations and their members. Despite providing a more individualized viewpoint, the aggregate theory finds it difficult to take into consideration companies’ complete legal and financial clout. Every one of these theories advances our knowledge of corporate personality and its effects on the legal and financial domains. Given how corporate law is still evolving, it is likely that the discussion surrounding corporate personality will also continue to evolve, especially as businesses become more significant and powerful and encounter new difficulties in an increasingly globalized market. These ideas will continue to influence corporate governance and accountability in the future and ultimately provide the framework for comprehending how businesses engage with people, governments, and society. The theory of corporate personality is fundamental to how contemporary corporations operate and offers a number of benefits, including limited liability, continuity, and capital raising capabilities. It is, nevertheless, also heavily criticized, especially in relation to the concentration of power, the possibility of misuse, and the moral dilemmas raised by corporate accountability and influence. One of the fundamental challenges in contemporary corporate governance is juggling the advantages of corporate personality with its ethical and social ramifications.
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