03 March, 2016


             Law treats a corporation aggregate and a corporation sole as persons. About the nature of their personality different theories have been advanced. These theories have either a political undertone in so far as they attempt to project the nature of relationship between the state and the groups existing within the state or provide a philosophical explanation about the existence of such persons created by law or try to meet the practical implications of the existence of such groups as legal persons. The courts have not, however, consistently followed any particular theory in dealing with various problems relating to corporation and have, by and large, being guided by practical considerations. These theories are not a mere existence in intellectual acrobatism but lead to important legal and practical consequences.[1]
Various theories of corporate personalities are discussed below.
            According to some jurists, a corporation has a fictitious personality. This fictitious personality is attributable to the necessity for forming an individual organization existing by itself and managing for its beneficiaries, that is to say, the members of it and its affairs. In Roman law, we know of the „persona ficta‟. Savigny developed the concept of the persona ficta. He called fictitious persons by the term „juridical persons‟. Juridical persons are those who exist only for juridical purposes. While in the case of a natural person, he is born with a personality which the law has merely to recognize, it is otherwise in the case of an artificial or juridical person whose personality is created by the law (there being no personality apart from this fictitious creation by the law).[2]
            Michoud has raised several objections to the fiction theory.[3] One of the arguments against the theory is that from the point of view of ownership, the fiction theory takes us nowhere. If a corporation aggregate be only an imaginary person which exists only in the eyes of the law, how can a non-existing (imaginary) person hold property?
            Next it has been argued that a corporation has rights. But rights can only be had by real persons; so a corporation must be real and not an imaginary person. Against these arguments it can be replied that property can be held and rights owned and exercised by a body of persons instead of by each member of such body, for it is that body which is recognized for the purposes of convenience and ownership of property and rights as a separate entity.[4]
            Another argument against the fiction theory is that its upholders “mistake the part played by the legislator”. “The legislator makes nothing by itself. He only considers social want, social good and social evil, and gives effect to what society generally considers as good or proper. It is idle, therefore, to suggest that the legislature creates the personality of the corporation”. But here again it may be said that this argument of the realists is fallacious. The legislation of the corporations creates it, in recognition of the economic necessity and business convenience, resulting from such recognition. Even the public opinion demands and is in real need of such recognition which the legislature satisfies. Undoubtedly the legislator, like the judge, can create something new, and something worthy, or give effect to what is a commercial convenience or an economic facility.[5]
            According to another theory regarding personality of the corporation, a corporation has a real and not a fictitious, personality. Its reality is psychic. Gierke is a leading exponent of realist Theory which refutes the fiction theory. The realistic theory maintains that a corporation has a real psychic personality recognized, and not created, by the law. The realist theory is also known as the sociological theory of the group personality of the corporation. The upholders of the realist theory are found not only over the continent but also in England. They hold that the collective will is, in psychology, different from the individual. An individual, all by himself may come to a particular decision; but in association with others he may come to a totally different decision. The will of the many is different from the will of an individual. So a corporation has a real psychic will, and is, therefore, not a fictitious creature of the law but a psychic personality recognized by the law.
            The realistic theory, however, is incapable of being applied to a corporation sole, because the theory of the „collective psychic will does not come in the case of a corporation sole where there is a single natural person whose will does not stand supported by the will of any one else‟ ( there being none else). Moreover, taking the case of an artificial person as a corporation sole, as for example, an universitates bonorum (like a public fund or estate), we may say that the question of the collective will cannot arise, because a public fund or estate has no collective will; there is the will of its administrator. The realist theory can have significance only in the case of a corporation aggregate. We may say that it is from the point of view of convenience and a continuing existence (despite demise and insolvency of its members), with a limited liability of its members and a separate liability of the incorporation, that the law has thought it fit to give corporations separate fictitious personality.[6] The realist theory asserts that group personality has the same features as a human personality. The groups have a real mind, a real will and a real power of action. [7]
            The concession theory of the personality of the corporation, which is akin to the fiction theory, but not identical with it, says that legal personality can follow from law alone. It is by grace or concession alone that the legal personality is granted, created or recognized. The grace of the state and its law prevails. This theory is, to an extent, correct; it is correct, in the sense only that all rights, whether human or corporate, flow from what the law gives, and where the law does not give anything, at least, its recognition is necessary to validate, maintain or perpetuate what already exists or is conferred by nature or what man has taken or created for himself. In all civilized societies, man can assume his rights, only through the force of the law at his help and to his recognition.[8]
            The bracket theory of the personality of the corporation maintains that the members of a corporation have their rights and liabilities referred to the corporation itself, simply from the point of view of convenience. To determine, however, the real nature of the corporation and its state of affairs, the brackets have to be removed, for the names of the members of the corporation are kept in brackets. If and when the brackets are removed, one would be able to see what the corporation is, what its true nature is, and how its members are revealed through the removal of brackets. The great defect, however, in the reasoning of the upholders of this theory of corporate personality is that rights, duties and liabilities are thought to be possessed by natural persons alone and not by corporations which are legal entities. The bracket theory is also known as Jhering‟s theory, as Jhering was its exponent. It was developed in France by Vareilles-Sommieres.[9] However, to understand the real nature of the corporation, we must remove the bracket to find out the actual position of the company.[10]
            The organism theory of the personality of the corporation is the one that expounds that the corporation, like an organism, has members (limbs), head and other organs. The individual also has a head, a body with limbs that satisfy inter-dependent functions. Corporations, such as the state, the university, the club, social and public utility organizations, have also limbs in them and wills of their own. A corporation, according to this theory, is a subject of legal rights and is liable to duties also. According to this theory, a subject of legal rights need not be a human being. Any being or body with a will of its own and a life of its own can have legal rights and can be subject to legal duties and liabilities. What is essential, according to this theory, is that such a being or body must have a will of its own.[11]
            According to the organism theory of the personality of the corporation, corporations are social organisms, while human beings are physical organisms. Corporations are different from those who are their members, and their wills are also different from the wills of their individual members, for it is not what individual members decide at meetings of the corporations while passing resolutions; it is what the corporation as a body decides. The will of each individual member of the corporation gets submerged into the will of the corporation. Individual A may not at all be in accord with the resolution finally passed by the corporation; individual B‟S views may now stand much modified by the final resolution; individual members enter into discussions at their meetings, and finally what is decided may be much different from the original views entertained by the individual corporator. The final resolution is therefore the will of the corporation.[12]
            Another theory of the personality of the corporation is the ownership theory. Developed by Brinz, Bekker, Demelius, and elaborated by Planiol, the ownership theory of the personality of the corporation asserts that legal rights can be had by human beings and not by corporations. According to this theory, the so-called juristic person that is the corporation is not a person at all. It is “subject less property” destined for a particular purpose, according to Planiol, subject less rights are “legal monsters”. He holds that fictitious personality is not an addition to the class of persons, but is only a matter of owning or possessing property in common. It is only a “form of ownership”. He adds “collective ownership is, so to speak, hidden from our eyes by the existence of fictitious beings to which we ascribe, at least in a certain measure, the attributes of personality, which are reputed owners, creditors or debtors, which make contracts, and sustain legal proceedings like true persons. All the collective ownerships are attributed to fictitious persons, of which each is reputed the single owner of a mass of goods, and the collective ownership appears as itself an individual ownership; a conception as false as useless. Consequently instead of teaching that we have two kinds of ownership, it is taught that there are two kinds of persons.”[13]
            The ownership theory has some significance when it is used with reference to estates and funds which are corporations sole. But apart from this it does not hold good, in so far as it denies the existence of the corporate personality as such.[14]
            According to this theory personality is only enjoyed by human beings, they alone can be the subjects of rights and duties. The so called juristic persons are not persona at all. Since they are distinct from their human substratum, if any, and since rights and duties can only vest in human beings, they are simply „subject less properties‟ designed for certain purposes. The main implication of this theory is that law protects certain purposes and the interest of individual beings. “The property supposed to be owned by juristic  persons does not belong to anything; but it does „belong for‟ a purpose and that is the essential fact about it. All juristic or artificial persons are merely legal devices for protecting or giving effect to some real purpose, e.g., a trade union[15] is the continuing fund concerned and the purposes for which it is established.”
            Another important theory worth noting is Kelsen‟s Theory of corporate personality. According to Kelsen, personality is “only a technical personification of a complex of norms, a focal point of imputation which gives unity to certain complexes of rights and duties”. Kelsen shows that there is no significant difference between the legal personality of an individual and that of corporation, for in the case of both what is known as legal personality is nothing but a complex of norms, that is to say, what is constituted by the bundle of rights and duties and liabilities centering round, and the norms which rule the behavior of individuals are also the norms that determine the rights and duties of corporations. For organizing rights and duties, a convenient legal device is that of legal personality.[16]
            The greatness of Kelsen‟s theory lies in the concept of personality as a complex of norms, giving unity to certain complexes of rights and duties. The acceptance of Kelsen‟s theory as a correct theory, like the acceptance of the QuasiRealist or Quasi-Fiction Theory of personality of corporation, opens out a new avenue in favor of corporations being entitled to enjoy fundamental rights under the constitution where such rights are guaranteed. If there be no difference between the „personality‟ of a natural being and that of a non-natural being like the corporation, why should fundamental rights be denied to the corporation and why should it be said that corporations are not „persons‟? Why should Acts, like the Citizenship Act in India, lay down that the term „person‟ does not include a corporation or any body of persons whether corporate or incorporate? Under the modern law, as it should be, relating to corporations, Kelsen‟s theory should be a welcome theory, as it would enable the recognition of the corporation as a person as much as a natural person, and would entitle it to greater rights as also subject it to greater duties than at present.[17]
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.

Courtesy:- Legal Point Foundation

[1] Paton, G.W. A Text Book of jurisprudence 1972 4rth Ed (Oxford University) page 410 Cited from Supra Note 210 Page 189
[2] Sethna Jehangir M.J., on “jurisprudence” 3rd revised Ed.(1973) Page 593-595
[3] Michoud; La theorie se la Personalite Morale, 3rd Ed. 1924 page 18
[4] Supra Note 2 Ibid.
[5] Ibid page 595-96.
[6] Ibid Page 594
[7] Maitland F.W, Introduction to Gierke‟s Political Theories of the Middle Age; F. Hallis Corporate Personality, 1st Ed. 1913 page 137; 146
[8] Supra Note 2, Page 597
[9] Ibid.
[10] Soloman V Soloman Co. Ltd., (1897) AC 22
[11] Supra Note 2 Page 598
[12] Ibid.
[13] Cited by Dean Pound Roscoe in his Jurisprudence 1959 (By West Publishing Co) Vol. IV, p 255
[14] Supra Note 2 Page 599-600
[15] Bonser V Musicians Union, (1956) AC 104
[16] Supra Note 2 Page 600
[17] Ibid.

No comments: