Synopsis

• Introduction
• Origin

1. In Rome
2. In England
3. Corporate Sole
4. Corporate Aggregate

• Other
• How it is created
• Position in India
• Theories
• Advantages
• Problems
• Liabilities

1. Under contract
2. Under tort
3. For criminal acts

• Conclusion

 

1)             Introduction

Corporate personality is a legal fiction created only by the effect of law. It is a form of legal person which is recognised by law and rights and duties are imposed on it as an effect of its legal personality imposed on it by law.

2)             Origin

To understand the concept of corporate legal personality it is first necessary to look after the origin of the concept and how the need for this concept arose.

The initial concept of corporate legal personality has been found in Roman culture and under Hindu law.

a)             In Rome

The concept of hereditas jacens which means an unclaimed estate though did not exactly include the concept of corporate personality but it was the reason why this concept developed in later times[i].

Whether it was legal person or not is a debatable question amongst the jurists but it held some rights like right to protection which resemble with the concept of legal person.

b)             In England

In England the concept of corporate personality developed in form of two different concepts i.e. corporate sole and corporate aggregate.

i.                Corporate Sole

Corporate sole can be described in short as a concept where multiple personalities or persons unite to form a sole known as corporate sole. This concept had its origin in a problem faced by people in England regarding the devolution of land of the Church and the related rights in the ecclesiastical office.

Later on this concept was applied on many other offices one of the most common example of which is the King. The office of King is an example of corporate sole which exists in successively. ‘The king is dead, long live the King’ is an expression that shows the corporate sole nature.

The crown does not represent any individual person but it is a unity of many personalities which is the concept of corporate sole.

ii.              Corporate Aggregate

Corporation aggregate is when many persons come together to form a single unit which is regarded the legal personality by force of law.

Some examples of corporations that could have been found in earlier societies of England are boroughs or merchant guilds. Even though these did not possess legal personality but they possessed corporate characteristics.

The concept of legal personality did not exist and develop in its true forms as today until sixteenth century. Coke while describing on corporate personality once stated that corporation is not formed on its own. There must be an act or authority creating it.

Hence corporate at that time was formed either by common law, by Royal charter, by statute or by prescription. At present corporation is mostly cerated by getting registered under the Companies Act.

iii.           Other

Other than corporate sole and corporate aggregate, legal personality is also sometimes conferred upon objects or things like idols, trust, charitable fund etc. as well.

3)             Position in India

The corporate personality in India has its origin from ancient times as in Rome. Though it did not exist in the form as it is today but it had its seeds in ancient times itself.

For example coparcenary under Hindu Law has look and feel of a corporate where karta is the head and works in a representative capacity and is successive in nature. But still it cannot be said a corporate according to definitions prevalent in present times.

However there are certain other institutions which have bear the legal personality though they are not natural persons, for example idol in temple, state, mosque, Guru Granth Sahib etc.

The most common and prevalent corporate personalities in India are companies, associations and other groups like trust which have been registered according to the relevant laws regulating them.

Corporations have an entity that is separate from the entity of people holding or forming it and they can sue and be sued in their own names.

A company incorporated under the Companies Act is a separate legal entity which comes into existence on the date of registration of the company with the registrar and continues to remain in existence till it is wound up according to the procedure laid down therein.

A company or a corporate enjoys its existence as a legal person which is endowed with all the rights and liabilities as that of a person by the effect of fiction created by law. It can hold property, can transact in its own name, can make profits and suffer losses. It can sue anyone in its own name and can be sued by anyone similarly.

The existence and identity of the company is separate from the identity of its members and therefore any property held by it is its own property and not of its members. Any profit or loss made by such entity is profit or loss of itself and not of its members.

So if any order is made where a payment or losses or damages are to be paid by the company it will be done from the property held by the corporate itself and shall not be borne by any of its members. This is called limited liability of its members.

Similarly, even if all members of a corporate entity are citizens of India, merely this fact does not confer the Indian citizenship on that entity. So the members of a corporate do not pool their identities to form a company, it is an entity altogether different from entity of its members.

4)             Theories[ii]

There are various theories of corporate personality but any one of these theories is not sufficient to clearly describe its nature and ambit. The courts have constantly used one theory or the other in discussing the concept of corporate personality. The reason behind this is that all jurists have tried to discuss the concept in theoretical perspective but have ignored the practical problems faced by it.

The theories regarding concept of corporate personality are as follows:

1. Fiction Theory

The main proponents of this theory, Savigny, Salmond and Dicey state that person in true sense can only be a natural person. Legal person is created only for some specific person by law through a fiction created in this regard and therefore it cannot commit any crime.

This theory is mostly prevalent in English law where courts have not emphasised more on recognising a legal person.

1. ii) Concession Theory

The same jurists as that of Fiction Theory also say that corporate is someone on which legal entity has been endowed as a legal fiction for particular purpose by State.

It is more or less same as Fiction Theory but the only difference lies in the fact that Fiction Theory recognises law along with state that confers legal personality on corporates while this theory recognises that only State can do so.

iii) Realist Theory

Also known as organic theory, the main proponents of this theory are Gierka and Maitland who state that a corporate is as much a person as a natural person. It is not a legal fiction and does not owe its existence on state. It exists in reality.

This attribution of legal personality of corporate would lead to an absurdity if practically applied.

Similar to this is Institutional Theory of a French jurist Hauriou who states that Corporate is formed of the integration of individuals forming it. This is also not true in practical sense.

1. iv) Bracket Theory or Symbolist Theory

According to this theory corporate or a group is created by its members and it is members only who represent it. The law only puts a bracket on them to be considered as a unit for th convenience purposes.

This theory is true up to a limit but it is wrong in saying that the corporate personality is not separate from its members. However, court has followed this theory in certain cases when a need is felt to lift the corporate veil.

1. v) Other theories

There are many other theories like Purpose theory, Hohfeld’s theory and Kelson’s theory which are more or less similar to all above stated theories so they are also not very practical in sense of their implementation of this concept.

5)             Advantages

Advantages of corporate personality are as follows:

1. It has an entity different from its members.
2. It enjoys perpetual succession.
3. It can sue and be sued in its own name.
4. It helps in reducing cost and in simplifying legal proceeding.
5. Members enjoy limited liability in case of losses.
6. It helps in smooth functioning of the corporation.
7. It helps in development of commerce and industry.

6)             Problems

Even though incorporating a company has its benefits that cannot be denied but there are certain disadvantages of incorporation as well. These are-

1. Incorporating a company is a very expensive and tiring procedure.
2. In certain cases the corporate veil can be lifted to extend the liabilities incurred on the company on the member or on the real person who is acting from behind the corporate veil and is actually responsible for bearing the expenses[iii].
3. A company is not conferred upon citizenship merely on the fact that all its members are citizens of India.

7)             Liabilities

The liabilities of a corporate in cases mentioned below are as follows:

a)             Under contract

A company can sign a contract in its own name. Seal of the company is considered to be its signature. It can enter into contract with an individual or with other company as well. However, the capacity of a corporate to enter into a contract can sometimes be regulated by statutes.

b)             Under tort

A corporate is a legal person and can therefore not commit tort against anyone by itself. It can only be made liable vicariously for the act of its agents done within the course of employment.

c)              For criminal acts

Earlier it was considered that a company cannot commit a crime so should not be made liable for punishment. But later it was realised that there can be some crimes that can be committed by company as well and therefore it should be made liable for it.

 

However it was clarified that it can be made liable only for crimes punishment for which is fine.

8)             Cases

·       Salomen v. Salomen and Co.

This is a leading case in which the court had identified the separate entity of a company from its members or shareholders. In this case Mr. Salomen had incorporated a company in which all shareholders are his family members. At the time of winding up Mr. Salomen along with some other unsecured creditors had to be paid back. It was claimed that unsecured creditors must be paid in priority but court denied such plea stating that company held entity separate from Mr. Salomen.

·       Lee v. Lee’s Air Farming Corporation

In this case also the court allowed Mrs. Lee to claim compensation from the company for death of Mr. Lee even though he was the person who acted on behalf of company.

·       Daimler v. Continental Tyre and Rubber Co

This was the case when the court had for the first time lifted the corporate veil to identify the real person acting from behind the corporate cloak.

9)             Conclusion

Hence, corporate personality is a kind of legal person which is composed by many persons but is considered as separate from its members and enjoys all rights and liabilities like that of a real person.