Corporate personality

The legal use of the word ‘person' has attracted an assortment of theories which is probably second to none in volume. ‘Person' in law, is both the recognition of an entity as well as the acknowledgement of such an entity's rights and interests. Granting of ‘personhood' states then enables an entity to undertake acts and relations that are recognized in the law. In the realm of law, the term ‘person' is nothing more than an abstraction - a representation through the form of an entity either real or artificial, of certain attributes. These attributes come to form what is known as ‘personality' in the law.

The effort in this paper has been to provide a description of this conception of corporate personality. In doing so, at first the researcher has attempted to introduce the subject by speaking of personality in the widest possible terms and locating its existence even outside the boundaries of law. The researcher has then outlined the concept of legal personality, its nature, types and implications and while doing so, summarily dealt with the notion of the corporation sole and the corporation aggregate. Next, the researcher has dealt with part of the subject-matter itself by elaborating on the meaning and theoretical underpinnings of the concept of dual personality and the attributes of corporate personality along with a jurisprudential understanding of the same.

Persons in law are seen to be of only two kinds: real/natural and artificial. Human beings are considered ‘real' or ‘natural' persons because they are ipso facto persons. The other kind of person is the artificial person, which is a fiction of law invested with limited legal capacity. At this juncture, it is necessary to clarify the meaning of the term ‘capacity' in law. Capacity is the primary attribute of personality and denotes the ability to commit acts and undertake relations that are recognised in the law. Capacity is what enables a person to have a ‘standing' in law, be it in the person's ability to claim-possess-exercise rights, property, enter into contracts, sue and be sued, commit legal injury or be the victim thereof. In other words, capacity in law is the medium through which personality expresses itself.

As mentioned earlier, the law in recognising artificial persons infuses such entities with limited legal capacity. The limitation exists in the sense that artificial persons do not possess personalities in the fullest sense of the term. Their ability to commit legally recognizable acts is limited to the extent that law allows for, nothing more. To provide an example, a body corporate such as a joint stock company is undoubtedly a ‘person' but cannot be likened to a human person anymore than an apple can be compared to an orange. While human beings as natural persons are capable of every act and relation possible in fact, an artificial person is only capable of those acts and relations allowed in law; the doctrine of ultra vires with respect to joint stock companies prevents such artificial persons from committing acts/undertaking relations that are outside their scope of activities as specified in the Memorandum and Articles of Association.

The familiar theoretical classification of artificial persons follows likewise -

  1. Corporation Sole.

  2. Corporation Aggregate.

Both of the above are however narrow in the sense that they contemplate only one segment of artificial personality i.e. the body corporate. It may be pertinent to note that the law also recognises other forms of artificial personality such as the idol. Indeed Salmond in his work on jurisprudence has chanced to observe on this aspect, “legal persons, being the arbitrary creations of the law, may be of as many kinds as the law pleases.” However, for our present purposes, a discussion on the concept of a ‘body corporate' will suffice in helping understanding the nature of artificial personality.

The corporation sole is nothing more than a tool meant to ensure continuity of an office. Any office that is created in law also by implication, creates a legal personality to such office which occupies it in perpetuity till the law itself extinguishes it. This legal personality is the Corporation Sole. Examples of it are predominantly found in Offices of the State discharging sovereign functions, which are always creations of the law. The proverbial example of the Corporation Sole is the English Crown. However, the Corporation Sole is also manifest in various other instances such as the Offices of the President, Prime Minister, Chief Justice of India, Attorney-General of India all of which are creations of the Indian Constitution. Likewise, even localised examples where there is a need for permanent Office implies the existence of a Corporation Sole: e.g. the Vice-Chancellor of a University, the Postmaster General, both of which are statutorily created Offices.

The researcher has pointed out in the preceding paragraphs that human beings, ipso facto are persons enjoying all the attributes of legal personality. Each human being then is vested with an independent personality in the law. However, if the same notion were to be applied as a general rule, concerted and unified human action can have no place in law for the simple reason that such action can only be recognised as several acts of several persons as opposed to a single act of a group of several persons. The former perception would lead to many difficulties including unlimited liability of such several persons towards third parties. It is for this reason that a partnership, though an association of persons acting in concert, renders each of those persons jointly and severally liable for acts of any partner. This approach also has the effect of apportioning liability disproportionately in the sense a partner who is insolvent cannot be proceeded against while a solvent partner is satisfy the entire liability or debt that subsists between the partnership and the third party. It is to obviate this difficulty, the law recognises certain groups of several persons as a ‘body corporate' and thus holds the several acts of such several persons in fact, attributable to a single person in law. In doing so what the law also does is create a veil of incorporation as between the constituting members and the legal personality of the constituted body: the corporation. The veil of incorporation implies the existence of a personality in the corporation as distinct from its members. In the joint stock company, the veil of incorporation is what separates the acts of the company from those of its shareholders and the individual acts of its shareholders from that of the company. The result of adopting this approach is also that there is limited liability of the shareholders (members of the group) which renders them liable only to the extent of their holding in the group or company.

Going by the above description of corporations aggregate, it would logically follow that every form of concerted activity of willing individuals aimed at a particular end, would lead to their acts coming to known through the glass of incorporation which realises their combined operations as one single act, performed by a single personality. However, it is in this regard that the real limits of artificial personality are discernible. The law deems only certain forms of concerted action as eligible for recognition through incorporation; thus while joint stock companies are recognised as incorporated bodies, associations such as partnerships, trade unions and other organizations are not recognised as incorporated bodies for various reasons. These groups have come to assume the term ‘unincorporated associations'. However the effect of such thinking has been somewhat mitigated by statutory devices and judicial interpretation which in certain respects have enabled such associations to assume characteristics of a single legal person. Thus it may be said that even unincorporated associations in certain contexts, assume the character of a legal person.

There are five principal theories, which are used to explain corporate personality, namely, the fiction theory, realist theory, the purpose theory, the bracket theory and the concession theory.

The fiction theory of corporation is said to be promulgated by Pope Innocent IV (1243-1254). This theory is supported by many famous jurists, particularly, Von Savigny, Coke, Blackstone and Salmond. According to this theory, the legal personality of entities other than human beings is the result of a fiction. The famous case of Salomon v A Salomon Co Ltd is a proof of the English court adoption of the fiction theory. In this case, Lord Halsbury stated that the important question to decide was whether in truth an artificial creation of the legislature had been validly constituted. It was held that as the company had fulfilled requirements of the Companies Act, the company becomes a person at law, independent and distinct from its members.

Under the concession 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 jurisdictions as an attribute of its sovereignty. Hence, a juristic person is merely a concession or creation of the state. Concession 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. Exponents of the fiction theory, for example, Savigny, Dicey and Salmond are found to support this theory. Nonetheless, it is obvious that while the fiction theory is ultimately a philosophical theory that a corporation is merely a name and a thing of the intellect, the concession theory is indifferent as regards to the question of the reality of a corporation in that it focus on the sources of which the legal power is derived.

Next, is the purpose theory (also known as the theory of Zweckvermogen) . The advocates who are associated with this theory are E.I Bekker, Aloys Brinz and Demilius. Similar to the fiction and concession theories, it declares that only human beings can be a person and have rights. Under 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. The juristic person is not constructed round a group of person but based on the object and purpose. The property of the juristic person does not belong to anybody but it may be dedicated and legally bound by certain objects.

The Symbolist theory is also known as the “bracket” theory. It was set up by Jhering and later developed particularly by Marquis de Vareilles-Sommiéres. Basically, this theory is similar to the fiction theory in that it recognizes that only human beings have interests and rights of a legal person.38 According to Jhering, 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 behind the entity to discover the real state of affairs. This is clearly in line with the principle of lifting of the corporate veil.

The realist theory, founded by German jurist, Johannes Althusius has been most prominently advocated by Otto von Gierke. According to this theory, a legal person is a real personality in an extra juridical and pre-juridical sense of the word. It also 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 the realist theory, a corporation exists as an objectively real entity and the law merely recognizes and gives effect to its existence. The realist jurist 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. A corporation from the realist perspective is a social organism while a human is regarded as a physical organism. A corporation from the realist perspective is a social organism while a human is regarded as a physical organism.

From the discussion on jurisprudence theories of corporate personality, it is observed that main arguments lie between the fiction and realist theories. The fiction theory claimed that the entity of corporation as a legal person is merely fictitious and only exist 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.

Dual personality is different from dual capacity in the sense that whenever a person is said to possess dual capacity, the law only recognises one person performing more than one function. In the eyes of the law, all these functions are attributable to a single person. However, with dual personality, the law recognises these functions as attributable to different personalities. The difference between the two can be amplified by a simple illustration: a person possessing double capacity cannot contract with himself or sue himself; a person possessing dual personality can. To illustrate the working of the above-stated principles, the decision of the House of Lords in Salomon v. Salomon & Co. may be perused.

The decision of House of Lords in the abovementioned case has had a lasting influence in corporate law. It is often credited with the principle of separate legal entity of the corporation distinct from the members. Though there is no doubt that the Salomon case had play a significant role in company law, the court's decision in this case was hardly the origin of the separate legal entity principle. The legal entity of beings other than the human has long been recognized prior to 1897, in which the Salomon case was decided. The jurisprudence theories on juristic person had been established since the early Roman law to justify the existence of legal person other than the human. The State, ecclesiastical bodies and education institutions had long been recognized as having legal entity distinct from the members

Mr. Salomon ran a boot-shoe business and sold the business to Salomon and Company, Ltd which paid him through 21,000 shares and a secured debenture. Six shares were also sold to Mr. Salomon's family, one to each of five his children and one to his wife. The company during its course of business acquired many liabilities in the form of unsecured credit from third parties. It subsequently went into liquidation on which all the creditors of Salomon & Co. lined up to collect their dues. As a principle of insolvency law, the rule was that the assets of the insolvent (in this case, Salomon & Co.) are distributed according to the pre-insolvency entitlement of the creditors. At the top of the queue then was the debenture-holder with the charge which meant that Mr. Salomon holding the secured debenture sold by himself as agent of Salomon & Co. to himself would acquire precedence over all other creditors. Since unsecured creditors do not belong to the same class as secured creditors, Mr. Salomon was again under no requirement to share the proceeds with the other creditors of Salomon & Co. who did not hold charge over the assets. Though the Trial Court and the Court of Appeal held that Mr. Salomon was personally liable to the creditors on the basis that the corporation (Salomon & Co.) was just an agent of Salomon, the House of Lords held otherwise. According to the Court, with the incorporation of the company, Mr. Salomon achieved dual personalities in the law - one as the shareholder of Salomon & Co., two, as the secured creditor to the company. Since in the eyes of the law there existed a veil of incorporation between the company (Salomon & Co.) and its shareholder (Mr. Salomon), he was not liable for any of the company's debts. Similarly, because of the veil of incorporation, Mr. Salomon as the secured creditor of Salomon & Co. enjoyed a different personality from Mr. Salomon as the shareholder.

To provide another illustration, reference may be made to Lee v Lee's Air Farming.

In this case, Mr Lee incorporated a company, Lee's Air Farming Limited, in August 1954 in which he owned all the shares. Mr Lee was also the sole ‘Governing Director' for life. Thus, as with Mr Salomon, he was in essence a sole trader who now operated through a corporation. Mr Lee was also employed as chief pilot of the company. In March, 1956, while Mr Lee was working, the company plane he was flying stalled and crashed. Mr Lee was killed in the crash leaving a widow and four infant children. The company as part of its statutory obligations had been paying an insurance policy to cover claims brought under the Workers' Compensation Act. The widow claimed she was entitled to compensation under the Act as the widow of a ‘worker'. The issue went first to the New Zealand Court of Appeal who found that he was not a ‘worker' within the meaning of the Act and so no compensation was payable. The case was appealed to the Privy Council which held that the widow was entitled to compensation on the basis that: 

  • That the company and Mr Lee were distinct legal entities and therefore capable of entering into legal relations with one another.

  • As such they had entered into a contractual relationship for him to be employed as the chief pilot of the company.

  • Therefore Mr. Lee could in his role of Governing Director give himself orders as chief pilot. It was therefore a master and servant relationship and as such he fitted the definition of ‘worker' under the Act.

In both cases it may be noticed that the doctrine of dual personality operates so as to enable a single person (Mr.Salomon; Mr.Lee) to perform acts that are construed as acts by different legal persons thus enabling them in effect, to enter into contracts with themselves.

In the examples of Salomon and Lee it has been shown how the device of dual personality has resulted in the law recognising the acts of one person as committed by distinct legal personalities due to the application of the principle of the corporate veil. However, because of the misuse of this doctrine by individuals seeking to escape liability (as was the case in Salomon), modern company law recognises certain situations (similar to the circumstances in Salomon) as warranting the lifting of the corporate veil. Instances of fraud as was the case in Salomon are recognised as ground for lifting the veil whereby the wall that separates the legal personality of the shareholder of the company from the legal personality of the company itself is done away with. The resulting situation is the extinguishment of whatever dual or plural personality that the shareholder (like in Salomon) attempts to assume.

Dual capacity and dual personality are inventions of the law meant to remove difficulties arising from pedantic applications of the rules of common law. Their purpose is to predominantly facilitate everyday application of the law. Salmond in his work on jurisprudence has chanced to observe, “the conception of personality beyond the class of human beings is one of the most noteworthy feats of the legal imagination.”

Being merely a metaphor or an analogy, corporate personality is not entirely arbitrary and therefore must respond to the organizational realities of the corporation as well as conform with the treatment of organization as legal actors. As such, conception of a corporation should be analytical and ideological, descriptive and prescriptive. The metaphor of personality is indeed useful in describing many of the corporation's traditional and modern corporate attributes, namely, perpetual succession, ability to own property, rights to take its own legal proceedings, ability to create floating charge, limited liability and compliance with the formalities of the Companies Act. Placing these attributes under the head of separate legal entity has resulted to selection of these few salient feature existence of the concept of a fictitious person.

Nevertheless, the use of the metaphor is mainly to describe and not to dictate the reality of corporation. As Bryant Smith pointed out:

“It is not the part of legal personality to dictate conclusions. To insists that because it has been decided that a corporation is a legal person for some purposes it must therefore be a legal person for all purposes… is to make of…corporate personality…a master rather than a servant, and to decide legal questions on irrelevant considerations without inquiring into their merits. Issues do not properly turn on a name.”

Bibliography

Indian Partnerships Act, 1932

Trade Unions Act, 1926

Companies Act 1956

A.K.Majumdar et al., Company Law and Practice, 14th ed., Taxmann Publications Pvt. Ltd., 2009, New Delhi

R.W.M. Dias, Jurisprudence,1994

Salmond, Jurisprudence, P.J. Fitzgerald ed., 12th ed., Universal Law Publishing Co. Pvt. Ltd., 2006, Delhi

Halsbury's Law of England, 4th ed., Vol. IX,

Zuhairah Ariff Abd Ghadas, Real or Artificial? Jurisprudential Theories on Corporate Personality, US-China Law Review, Vol. 4, No. 5, May 2007 available at http://www.jurist.org.cn/doc/uclaw200705/uclaw20070502.pdf (last visited on 02.04.2010).

Bryant Smith, Legal personality, Yale Law Journal, Vol. 37, No.3, p. 283

Katsuhito Iwai, Persons, Things and Corporations: The Corporate Personality Controversy and Comparative Corporate Governance, University of Tokyo, July 1997 as available at http://74.125.153.132/search?q=cache:w6tuJi4vErQJ:www.e.u-tokyo.ac.jp/cirje/research/dp/97/f24/dp.pdf+martin+wolff+law+quarterly+review+nature+of+legal+persons&cd=10&hl=en&ct=clnk&gl=in (last visited on 02.04.2010)

Clement Chigbo, Corporate Personality and Limited Liability, The Bahama Journal, March 3rd 2006 available at http://www.jonesbahamas.com/?c=135&a=7866 (last visited on 02.04.2010)



Request the removal of this law essay