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.
A.
THE
FICTION THEORY:-
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]
B.
THE
REALISTIC THEORY:-
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]
C. THE CONCESSION THEORY:-
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]
D.THE BRACKET THEORY:-
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]
E. THE ORGANISM THEORY:-
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]
F.
THE OWNERSHIP THEORY:-
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]
G. THE
PURPOSE THEORY:-
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.”
H.
THE KELSEN’S THEORY:-
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]
I.
CONCLUSION:-
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.
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