The Author, J K Mukhil Malar is a 1st Year, BA.LL.B. (Hons.), The National University of Advanced Legal Studies, Kochi. She is currently interning with LatestLaws.com.
Introduction:
Corporate personality is a legal fiction that is the cornerstone of company law. The law recognizes a company as a legal entity distinct from its members. This legal fiction allows a company to be treated as a “person” in the eyes of the law allowing it to enter into contracts, sue or be sued, and own property. Corporate personality is based on the Doctrine of Separate Personality, which is defined as “the complete separation of the company and its members" by L. C. B. Gower in his book.
This doctrine evolved out of a need in the legal and business world. Corporate personality ensures that a company is held liable for its action and obligations while providing reasonable protection to the stakeholders. In other words, creditors can sue the company in case it fails to perform an obligation, but not the individual members. Likewise, the company cannot be held liable for any personal action done outside the scope of the company by its individual members/shareholders. This article aims to understand the concept of Corporate Personality and analyze the various theories of Corporate Personality.
History of Corporate Personality:
Surprisingly, the origin of this legal doctrine goes back well into ancient times. The core principle behind this doctrine can be found in ancient Roman and Hindu Law, albeit not developed and flushed put full. This concept is also found mentioned in the Old Testament in Christian theology where the relationships between individuals and groups that they were part of are elucidated on.
The development of corporate personality in its present form can be attributed largely to English Common Law. Starting from the 17th century, corporations came to be recognized as distinct legal entities from their individuals. The case that solidified the principle of separate legal personality in corporate 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 that time, ruled that a company is a separate legal entity from its shareholders, even if one person or a family holds all or most of the shares. The court held that once the company is incorporated, it becomes a distinct legal person with its own rights and liabilities. This decision laid down the foundation on which the principle of corporate responsibility came to be built. This is a very influential authority not only in the UK but also in several jurisdictions around the world.
Theories of Corporate Personality:
This concept of Corporate Personality was widely discussed and studied by legal scholars. Several theories have been proposed to understand the concept and solidify it. Yet, none of them can be said concretely to prevail over others and that is mostly because jurors when met with an issue involving corporate personality, have been led by practical concerns more than anything else. There are five important theories that must be studied to develop a comprehensive understanding. They are the Fiction theory, the Realist theory, the Concession theory, the Purpose theory, and the Bracket theory.
Fiction Theory:
This hypothesis was given by Savigny, Salmond, Blackstone and Holland.
The fiction theory posits that corporations do not possess inherent characteristics of personhood but are granted legal personhood by the state for practical and legal convenience. In other words, the law treats a corporation as if it were a natural person, capable of owning property, entering into contracts, and being held responsible for its actions. It emphasizes that corporate personality is a legal fiction that an inherent attribute. It is purely a fiction of the law that has been formulated to facilitate business and protect stakeholder interest by the legal system,
This theory has been subjected to criticism as it only provides a framework to understand the concept of corporate personality and does not attempt to address the other complex socio-economical factors that arise out of giving personhood to a company.
The Realist theory:
This theory was proposed by the German Jurist Gierke, and backed by several jurists including Maitland, Beseler, Lasson, Bluntschli, Zitelmann, and Miraglia. According to this theory, every organization has a genuine consciousness, a real will, and a real ability to act. That is the presence of a group is more than just the sum of the individuals who form the group. The organization achieves a higher meaning than just the sum of the individuals. This challenges the Fiction theory and proposes that corporations possess a distinct existence and should be recognized as genuine entities in their own right.
It argues that corporations have a tangible impact on society and the economy as they contribute to economic growth, provide employment opportunities, and engage in various transactions and activities.
The realist theory recognizes that the legal framework surrounding corporate personality has been shaped by social and economic realities. It acknowledges that they have their own unique contribution to society and their recognition as separate necessities is necessary for accountability, governance, and economic activity.
The Concession theory:
This theory is propounded by Savigny, Salmond, and Dicey. Its context is the sovereign state ideology. This theory recognizes corporate personality as a concession or privilege granted by the state to corporations.
According to this theory, states, in exchange for the contribution of corporations to society like economic development, employment generation, and tax contributions, grants corporations special rights and privileges like limited liability to its individuals, the ability to own property and enter into contracts, etc.
This theory disputes the view that corporate personality is an inherent characteristic of corporations, but rather a grant or concession from the state, which can be revoked if the corporations sail to fulfill their societal obligations.
The Purpose theory:
The principal proposer of this theory is a German Jurist, Brinz. According to this theory, a corporation should be recognized as a legal entity only if it serves a valid social or economic process. It proposes that a legal personality should be granted to a corporation based on its ability to contribute to the public welfare, promote economic growth, and serve the interests of various stakeholders.
This theory also disputes the view that corporate personality is an inherent characteristic but something that is awarded because of a valid reason or purpose.
The Bracket theory:
This hypothesis was given by Ihering. As per this theory, legal individuality enables corporations to perform more efficiently. The members of a corporation have specific rights that are delegated to the company for commercial purposes. Hohfeld, an American jurist, has argued for this notion a little differently. He proposes that corporate personality is an arbitrary legal norm to assist legal procedures. Only human beings are individuals and legal personality is just an arbitrary procedural norm for accounting mass individual interaction.
Conclusion:
In conclusion, the concept of corporate personality encompasses various theories that offer different perspectives on the legal recognition of corporations. The fiction theory sees it as a legal construct, while the realist theory emphasizes the actual impact of corporations. The concession theory focuses on societal obligations, and the purpose theory emphasizes a corporation's mission. These theories shape the legal framework and governance of corporations, ensuring accountability and balancing economic growth with societal interests. Understanding these theories enables the refinement of corporate law to address evolving challenges. Overall, a nuanced understanding of corporate personality promotes responsible business practices and effective regulation.
Picture Source :
