Corporate Legal Personality: Development of the Concept

In this blog, the author has discussed the theory of corporate legal personality. The author has discussed in depth the origin and development of the theory along with the different approaches taken to the theory. Read on to know in details.


INTRODUCTION: WHAT IS LEGAL PERSONALITY

The word ‘person’ is derived from a Latin word ‘persona’ which is used in the sense of living being who is capable of having rights and duties. The law recognizes two types of person, called natural and artificial. Natural person refers to human beings and the artificial person refers to those things other than human beings which are recognized by law as having duties and rights. A legal person is defined as an entity to which rights and duties can be attributed. Any being to whom the law considers as capable of holding rights or duties.

Legal personality is a medium through which certain units can be created in whom rights can be vested. Legal personality is a fiction of law. Treating certain non – living things and inanimate objects as ‘persons’, is an example of creation by fiction of law. Fiction of law is something false which law accepts as true.


LEGAL PERSONALITY OF A CORPORATION

Corporate personality is also a creation of law. It is an artificial person who is recognized by law as having rights and duties. It is a fictitious person which is created by the personification of a group of individuals. The individuals forming the corpus of the corporation are called its members.

The three conditions for the existence of corporation are:

  • Group of human beings formed for certain purposes.

  • Organs through which the group acts or works.

  • Will (animus) is attributed by legal fiction to the corporation.

Corporations are of two types;

  1. CORPORATION AGGREGATE: It is an association or group of human beings formed with the objective of forwarding their certain interests.

  2. CORPORATION SOLE: It consists of a single person who is personified and considered as a legal person. It ensures continuity of an office so that the occupant of office can get the property for benefiting his successors or may contract to bind or benefit them. It is perpetual.


DEVELOPMENT OF THIS CONCEPT

The initial concept of corporate legal personality originated from the roman culture, England and Hindu law.

  1. Roman Culture – The concept of ‘hereditas jacens’ which means unclaimed estate was responsible for development of the concept of corporate legal personality. Whether Hereditas Jacens was a legal personality or not has been a debatable question. But, in had some rights such as right to protection, etc which resemble with the rights of a corporate legal person.

  2. Hindu law – The concept of corporate personality in India has its origin from the Hindu law. For example, position of Karta in a Hindu coparcenary is an illustration on the point. The Karta is the overall head of the family who has the responsibility of managing the property. He can sue and be sued on behalf of whole family. In legal terms, he is a corporation sole. The Hindu idols have also been recognised as corporate bodies under the Indian law.

  3. England – The concept of corporate personality in England developed as two different concepts – 1. Corporation Aggregate and 2. Corporation Sole.

Corporation Aggregate – The principle of corporate legal personality was established in the case of Saloman v. Saloman & Co[1]. Saloman had a business of boot and shoe manufacturing. He incorporated a company named ‘Saloman and Co. Ltd’ with seven subscribers including himself, his wife, his four sons and a daughter. The company went into liquidation because of general trade depression within a year. The unsecured creditors contended that though incorporated under the concerned Act, the company never had an independent existence, it was in fact Salomon under another name; he was the managing director, and the cloak of the company was a mere sham and fraud. It was held that Salomon & Co Ltd was a real company fulfilling all the legal requirements. Therefore, Saloman was preferentially entitled to the assets of the company as a secured creditor. A corporation has its own existence and distinct from its members.


Corporation Sole – This has its origin from a problem faced by the people of England related to the devolution of land of the Church and the related rights in the ecclesiastical office. Later on, this concept was applied to many other offices such as The King. The king of England performs the functions of the Crown. As regards the British Crown, it is generally said, “The king is dead, long live the king”. This means that even after death of the king, his legal capacity as a Crown remains in existence as a corporate sole.


ADVANTAGES

The advantages of conferring legal personality on corporations can be summarized as;

  1. SIMPLIFICATION OF LEGAL PROCEDURE – It has enabled persons to sue a single corporate body rather than numerous individuals. The benefit which the corporation has received is that it can also sue others as a legal entity.

  2. INDEPENDENT EXISTENCE - The death or withdrawal of the members does not affect the existence of corporation. Corporation continues perpetually forever, the members may come and go.

  3. LIMITED LIABILITY – The financial liability of shareholders is limited and is only up to the amount of their investment, their share - holding and not beyond it.

  4. LEGAL RIGHTS – It has the legal personality of its own and it can sue and be sued in its own name. These corporations can use, dispose, and own property in their own names.

  5. OWNERSHIP TRANSFERS – It is easy for a shareholder to sell shares in a corporation.


DIFFERENT THEORIES OF CORPORATE PERSONALITY

Different jurists have different views regarding corporate personality. These views are expressed through different theories of corporate personality. There are many theories of corporate legal personality. It is said that every theory contains some significant points but none of them sufficiently explains and interpret the nature of corporate personality. Some of these theories are discussed below:


  1. FICTION THEORY – Many jurists have given their opinion on fiction theory but mainly it is propounded by Savigny, Salmond, Holland, Coke and Blackstone. According to this theory, a corporation has a fictitious personality. The personality of corporation is different from its members. It is an exclusive creation of law. It is separate from its members and it is capable of surviving even after all its members cease to exist. Due to this, change in membership does not affect the existence of the corporation. In case of corporation, there exists double fiction. One fiction gives it a legal personality, and the other clothes the animus (will) of an individual with the corporation.

  2. REALIST THEORY – This theory was founded by a German jurist, Johannes Althusius and it was propounded by Gierke. This theory believes that a corporation has a real existence, whether recognised by state or not. The corporate will of the corporation is expressed through its directors and employees. It is psychological reality and not physical reality. Moreover, law has no right to create an entity; it has the right to recognise an entity.

  3. BRACKET THEORY –This theory was developed by a well – known German jurist, Rudolph K. Ihering and propounded by Marquis De Vareilles – Sommieres. This theory believes that corporate personality is just a symbol and this symbolism helps to formulate the working of corporate bodies. Only the members of a corporation can be called as ‘persons’ in real sense. A bracket is put around its members so that their separate identities are given a unified form.

  4. CONCESSION THEORY - This theory says that corporate legal personality is a concession granted to the corporations by the State or by the law. It focuses on the discretionary power of the State to recognize the corporate personality of the corporations.

  5. PURPOSE THEORY – This theory was developed by a German jurist Brinz and by Barker. This theory believes that corporations are treated as ‘persons’ for certain purposes. The purpose is making them capable of having rights and duties.


CONCLUSION

In law, ‘personality’ means conferring rights and duties. The law finds it complicated to deal with issues related to collective ownership and actions efficiently. Hence, it prefers to deal with group of persons as single legal identity. The analysis of corporate legal personality makes it very clear that it is of great importance because it attributes legal personality to a corporation to determine its right and duties. The rights of corporations are numerous such as right of holding property, or disposing it off, right of entering into contracts, right to sue, etc. Conferring legal personality to a corporation has enabled other persons to sue a single corporate body rather than numerous individuals. The benefit which the corporation has received is that it can also sue others as a legal entity. This implies that conferring legal personality to a corporation has benefitted the corporation as well as other persons too.


Footnotes [1] (1887) AC 22


Submitted by,

Ishita Arora,

University Institute of Legal Studies, Panjab University.


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