THEORIES OF CORPORATE PERSONALITY
Jayendra A Kasture
LL.M (Business Laws)-Gold Medalist RTM Nagpur University, Nagpur Maharashtra, India
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Generally there are two types of persons which law recognizes namely the natural and artificial person. The 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.
Scholars all over have constantly explored the issue on the recognition of corporation as a “legal person” or “legal entity”. The House of Lords in Salomon v A Salomon & Co ltd is often credited with the principle of separate legal entity of the corporation distinct from the members.
In the common law tradition, only a person could sue or be sued. This was not a problem in the era before the Industrial Revolution, when the typical business venture was either a Sole Proprietorship or Partnership- here the owners were simply liable for the debts of the business. A feature of the corporation, however, is that the owners / shareholders enjoyed limited liability. The owners were not liable for the debts of the company. Thus, 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 subject to the law. There was no accountability for corporate wrong doing.
To resolve the issue, legal scholars proposed a solution. A corporation could instead be considered a person, and could therefore be recognized and held subject to the law. This understanding was not only adopted by the courts but also by the legislatures. Thus, legislatures intentionally used the word ‘person’ to include both natural persons and juristic persons.
ARTIFICIAL / JURISTIC / LEGAL PERSON: CORPORATE PERSONHOOD
A juristic 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. Unlike a partnership firm, which has no existence apart from its members, a company is a distinct legal or juristic person independent of its members. Legal persons are real or imaginary beings to whom personality is attributed by law by way of fiction where it does not exist in fact. Juristic persons are also defined as those things, mass of property, group of human 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.
This legal fiction does not mean these entities are human beings, but rather means that the law recognizes them and allows them to act as natural persons for some purposes most commonly for lawsuits, property, ownership and contracts. In England, US and also in India the use of this terminology (juristic person) does not mean that artificial legal entities are considered human beings. Its simply a “technical legal meaning” where a person is any subject of legal rights and duties. To distinguish them from natural persons, we call them juristic persons…eg cooperatives, corporations, municipalities etc.
A juristic person is sometimes called a legal person, artificial person or legal entity. Although the concept of a juristic 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.
JURISPRUDENTIAL THEORIES: CORPORATE PERSONALITY
The separate legal personality of corporation is based upon theories which are concentrated upon the philosophical explanation of the existence of personality in beings other than human individuals.
In jurisprudence, discussion on the nature of corporate personality has always become one of the major focuses. Even though there are many theories which attempt to explain 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 juristic person. This paper highlights two principal theories which are generally applied to explain corporate personality and confer the justification for recognition of corporation as a legal personality.
The acceptance of the corporate personality of a company basically means that another non-human entity is recognized to assume a legal entity. Although this theory has been accepted as a well-established 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.
Majority of the principal jurisprudence theories on corporate personality contented that the legal entity of the corporation is artificial. The fiction, concession, symbolist and purpose theories supported the contention that existence of corporation as a legal person is not real. It only exists because the law of the state recognized it as legal person and it is recognized either for certain purpose or objective. The fiction theory for example clearly stated that the existence of corporation as a legal person is purely fiction and that the rights attached to it totally depend on how much the law imputes upon it by fiction.
Even though there are many theories which attempted to explain 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 juristic person. Nonetheless the paper highlights two principal theories which are used more amongst others to explain corporate personality, namely the fiction theory and the realist theory.
FICTION THEORY: Promulgated by Pope Innocent IV (1243-1254).
According to this theory the legal personality of entities other than human beings is the result of a fiction. Hence not being a human being corporation cannot be a real person and cannot have any personality of its own. Under this theory rights and duties attached to corporation as artificial person totally depend on how much the law imputes to it by fiction. The juristic personality of the corporation is a fiction and the author is the state. The personality the corporation enjoys is not inherent in it but as conceded by the state. Due to the close connection made in this theory as regards to relation of legal personality and the power of the state, fiction theory was claimed to be similar to the theory of sovereignty of state which is also known as the concession theory.
This theory is supported by many famous jurists, particularly, Von Savigny, Coke, Blackstone and Salmond. Sir John Salmond is of the view that a corporation is so far distinct from its members that it is capable of surviving even the last of them. One of the distinguished followers of fiction theory is Coke, who took the view that corporations are invisible, immortal and resting only in intendment and consideration of law. Salmond the principal English fiction theory advocate made it clear that a human being is the only natural person whilst legal person govern any subject matter other than a human being to which the law attributes personality. States, corporations and institutions cannot have rights of a person but they are treated as if they are persons.
Under the fiction theory, to exist as a legal person it depends upon impediment of law. The fiction theory has a reasonable reasoning to justify the position of unincorporated associations and partnerships. Therefore, partnerships and unincorporated associations can also be treated as a legal person if the law granted to them such status. In Scotland and Continental European countries, as the law granted partnership a legal entity, then it exists as a legal person but the position is not so in England and also in India, even though its partnership have similar attributes to partnership in Scotland and Continental European countries, it is not an entity because the law of England and of India refused to grant such status to partnership.
The fiction theory reasoning is able to justify that the existence of a legal person does not solely belong to corporations. Hence it is possible for other organizations to be treated as an entity provided that the law granted it such recognition.
This finding is vital to justify that the concept of separate legal entity in corporation is not an exclusive right of corporations. The corporate personality of corporation which granted it the right to be treated as legal person is actually a mere metaphor and not real. To be a legal person, it does not actually depend upon incorporation but on the recognition of law of the land.
THE REALIST THEORY: JOHANNES ALTHUSIUS
According to this theory, a legal person is a real person. The theory assumes that the subjects of rights need not belong merely to human beings but to every being which possesses a will and life of its own. As such being a juristic person and as alive as the human being, a corporation is also subjected to rights. Under this a corporation exists as an objectively real entity and the law merely recognizes and gives effect to its existence. The realist jurists also contended that the law has no power to create an entity but merely having the right to recognize or not to recognize an entity.
Gierke the great German jurist was the main propounder of this theory. He believed that every collective group has a real mind, a real will and a real power of action. A corporation therefore has a real existence irrespective of the fact whether it is recognized by the State or not. The corporate will of the corporation finds expression through the acts of its Directors, employees or agents. The existence of a corporation is real and not based on any fiction. It is a psychological reality and not a physical reality.
Apart from these two important theories we have the Concession, Symbolist and Purpose theories which supported the contention that existence of corporation as a legal person is not real.
The Concession theory: Theory of Sovereignty of State
According to this theory, the only realities are the sovereign and the individual. The other groups cannot claim recognition as persons. They are treated as persons merely by a concession on the part of the sovereign. The theory is often regarded as the offspring of the fiction theory as it has similar assertion that the corporations within the state have no legal personality except as it is conceded by the State. Due to the close connection made in this theory as regards to relation of legal personality and the power of the State the Concession theory is also known as the theory of sovereignty of State.
Therefore concession theory is basically linked with the philosophy of the sovereign national State. Under this theory the State is considered to be in the same level as the human being and as such it can bestow on or withdraw legal personality from other groups and associations within its jurisdiction as an attribute of its sovereignty. Hence a juristic person is merely a concession or creation of the State.
The Symbolist theory: the Bracket theory--Ihering
According to this theory the members of a corporation are the bearers of the rights and duties which are given to the corporation for the sake of convenience. The theory is similar to the fiction theory in that it recognizes that only human beings have interests and rights of a legal person. It is not always practicable or convenient to refer to all the innumerable members of a corporation. A bracket is placed around them to which a name is given. That bracket is the corporation.
According to Ihering, the propounder of this theory, the conception of corporate personality is indispensable and merely an economic device by which simplify the task of coordinating legal relations. Hence when it is necessary it is emphasized that the law should look beyond the entity to discover the real state of affairs. This is clearly in line with the principle of lifting of the corporate veil.
The Purpose theory: Brinz
According to this theory juristic person is no person at all but merely as a subjectless property destined for a particular purpose and that there is ownership but no owner. Entities other than human is regarded as an artificial person and merely functions as a legal device for protecting or giving effect to some real purpose.
Brinz the German jurist has propounded this theory which is similar to the fiction and concession theory as it declares that only human beings can be persons and have rights. The theory rationalized the existence of many charitable corporations or organizations such as trade unions which have been recognized as legal persons for certain purposes.
APPLICABILITY OF THEORIES:
From the discussion on the two important jurisprudence theories and the other theories, on corporate personality, it is observed that the main argument is that, the fiction theory claimed that the entity of corporation as a legal person is merely fictitious and only exists with the intendment of the law. On 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. The 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.
The 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. By one fiction the corporation is given a legal entity. By the second fiction, the corporation is clothed with the will of an individual person. Hence 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 justifying 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. No human being has the right to decide circumstances whereby the entity of another human being should be set aside. Only law has such privilege.
PARTNERSHIP & UNINCORPORATED ASSOCIATIONS:
Before concluding the discussion on incorporation, it would be desirable to contrast it with unincorporated associations and partnership. The fiction theory has a reasonable reasoning to justify the position of unincorporated associations and partnerships. Under the fiction theory to exist as a legal person it depends upon impediment of the law. Therefore, unincorporated associations and partnerships can also be treated as legal persons if the law granted to them such status. In Scotland and Continental European countries, as the law granted partnership a legal entity, then it exists as a legal person but the position is not so in England and also in India, even though its partnership have similar attributes to partnership in Scotland and Continental European countries, it is not an entity because the law of England and of India refused to grant such status to partnership.
Today the development of partnership laws has proved that the status of legal person can also be embraced by partnerships. The limited liability partnership (LLP) structure is an example of partnerships which are treated by law as legal persons. Other than having separate legal personality from the partners limited liability partnerships also enjoy main attributes of corporation namely limited liability. Applying the fiction theory again this is justifiable as the attributes of corporation are not naturally generated by corporation by it but exists 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.
From the foregoing analysis it may be concluded that incorporation has great importance because it attributes legal personality to non-living entities such as companies, institutions and group of individuals which helps in determining their rights and duties. Clothed with legal personality these non-living entities can own, use, dispose of property and can sue and be sued in their own names. Unincorporated institutions are denied this advantage because their existence is not different from the members.
Thus the existence of corporation requires 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. As such corporate statutes typically give corporations the ability to own property, sign binding contracts, pay taxes in a capacity that is separate from that of its shareholders.
Finally expressing these views about the two important theories of legal personality, it can be observed that the existence of corporation is neither wholly fictitious nor wholly real, instead it is partly fictitious and partly real. However this assertion hardly serves any useful purpose in the determination of rights and duties of corporate entities. On each theory the duties imposed by the State 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.