Theories of Corporate personality

Theories of corporate personality :

 

Fiction theory :

This theory was put forward by Von Savigny, Salmond, Coke, Blackstone, and Holland etc. According to this theory, the personality of a corporation is different from that of its members. Savigny regarded corporation as an exclusive creation of law having no existence apart from its individual members who form the corporate group and whose acts are attributed to the corporate entity. He sais, “ The essential quality of all corporations consists  in this, that the subject of the right does not exist in the individual members thereof ( not even in all the members collectively) but in the ideal whole : a particular, but specially important result whereof is, that by the change of an individual member, indeed, even of all the members, the essence and unity of a corporation is not affected.”[1]

As a result of this, any change in the membership does not affect the existence of the corporation.

 

It is essential to recognize clearly the element of legal fiction involved in this process. A company is in law something different from its shareholders or members. The property of the company is not in law the property of the shareholders. The company may become insolvent, while its members remain rich.

 

Gray supported this theory by saying that it is only human beings that are capable of thinking, therefore it is by way of fiction that we attribute ‘will’ to non-human beings through human beings who are capable of thinking and assign them legal personality. He says, “ By fiction an abstract entity called the corporation is created and by a second fiction the wills of individuals are attributed to it.”[2]

A group of persons who have common interests secure by the act of incorporation the power of protecting their interests through an organisation known as corporation which is set in motion by the will of certain individuals as provided for in the instrument of corporation.

 

Wolf said that there are three advantages of this theory. It is analytical, more elastic and it makes easier to disregard juristic personality where it is desirable.

 

Group Personality Theory or Realist Theory:

 

This theory was propounded by Johannes Althusius and carried forward by Otto Van Gierke. This group of theorists 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.

 

Gierke believed that the existence of a corporation is real and not based on any fiction.  It is a psychological reality and not a physical reality. He further said that law has no power to create an entity but merely has the right to recognize or not to recognize an entity.

 

As Dicey observed: “ When a body of twenty, or two thousand or two hundred thousand men bind themselves together to act in a particular way for some common purpose, they create a bond which by no fiction of law, but the very nature of things, differs from the individuals of whom it is constituted.” If individual consciousness and individual will invests an individual personality, group consciousness and group will invest the group with a personality as real is the corresponding personality of the individual. Miraglia observes: “ The corporation is in a certain aspect more real than the individuals, because it possesses greater complexity of parts and represents a higher form of evolution.”[3]

 

A corporation from the realist perspective is a social organism while a human is regarded as a physical organism. This theory was favoured more by the sociologists rather than by the lawyers. While discussing the realism of the corporate personality, most of the realist jurists claimed that the fiction theory failed to identify the relationship of law with the society in general. The main defect of the fiction theory according to the realist jurists was the ignorance of sociological facts that evolved around the law making process.

 

Horace Gray, however, denied the existence of collective will.  He called it a figment.  He said, “ to get rid of the fiction of an attributed, by saying that corporation has a real general will, is to derive out one fiction by another”.

Even English law is now tending in the direction of according recognition to collective persons as real persons. In Willmott v. London Road Car Company[4]

A lessee covenanted not to assign or underlet without the consent of the lessor, which was not to be withheld in respect of “a respectable and responsible person”. It was held that the word “person” in the covenant included corporation.

 

The summary of the case:

 

Willmott owned a livery stable which he leased to a man named Porter. Porter agreed not to sub-let or to allow any part of the premises to go into the possession of another without the consent of Willmott, but Willmott agreed not to withhold his consent whenever Porter wished to turn the lease over to any ” respectable or responsible person”. Porter applied for Willmott’s consent to an assignment of the lease to the defendant, which was a corporation that had an omnibus line in London. Wilmott refused to consent, and Porter completed the assignment without his permission. Willmott sued the company, to have it dispossessed and its lease held void, but the company contended that the assignment was good without the consent, because Willmott had agreed in advance not to object to a “respectable or responsible person.” The plaintiff claimed that a corporation was not capable of being a person, particularly not a ” respectable or responsible person.”

It was pointed out that in very many legal writings, the word “person” had been denned to include two classes, natural persons and artificial persons, meaning men and corporations. In statutes applying to “persons” the word had always been held to include corporations. Therefore, whenever it required a legal definition, even in an ordinary writing like a lease, the word “person” should be held to include a corporation. However, if there were clear evidence in the passage which showed an intention to limit the meaning to natural persons, a corporation could rightly be said to be excluded. The court considered whether the words “respectable or responsible” here indicated such an intention. The corporation could easily be responsible, in the sense that it was financially sound and could meet its obligations, but “respectable” carries some implications of a human personality, a capacity for moral or immoral conduct. But even that word is in ordinary language applied to a corporation; we speak of a respectable bank, or a respectable insurance company, referring to the mode in which the company conducts its business. Corporations have even been allowed to protect their reputations for good character and respectability by actions for slander and libel. It was therefore held that the words “respectable or responsible person” did not necessarily refer to a human person, but that a corporation could be included. The London Road Car Company, Limited, was a respectable and responsible person, and Willmott was bound to consent to the transfer of the lease to it. He, therefore, could not succeed in this action to dispossess the company.

Judgment was given for the defendant, The London Road Car Company.

 

Concession Theory:

 

This theory is concerned with the Sovereignty of a State. It pre-supposes that corporation as a legal person has great importance because it is recognized by the State or the law. According to this theory, a juristic person is merely a concession or creation of the state.

 

Concession Theory is often regarded an offspring of the Fiction Theory as both the theories assert that the corporation within the state have no legal personality except as 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 to the question of the reality of a corporation in as much as it focuses only on the source (State) from which the legal power of the corporation is derived.

 

At the present day there are many Constitutions which have recognised a fundamental right of freedom to form associations. In such a case the discretionary power of the State is necessarily curtailed. This factor has not been taken into account in the Concession theory. Further, this theory may be made the basis for State dictatorship and arbitrary ban of corporate entities such as political parties.

 

The Bracket Theory or the Symbolist Theory:

 

This theory was propounded by Rudolph Ritter von Jhering .  According to Ihering, the conception of corporate personality is essential and is merely an economic device by which we can simplify the task of coordinating legal relations. A corporate personality is the creation of arbitrary legal rules designed to facilitate proceedings by and against a corporation in a court. The jural relations actually decided by the courts are those which relate to the members of the corporation and they alone are the real persons. Hence, when necessary, it is emphasized that the law should look behind the entity to discover the real state of affairs. This is also similar to the concept of lifting of the corporate veil.

 

This group believed that the juristic personality is only a symbol to facilitate the working of the corporate bodies.  Only the members of the corporation are ‘persons’ in real sense of the term and a bracket is put around them to indicate that they are to be treated as one single unit when they form themselves into a corporation.

 

The weakness of this theory lies in the fact that it is unable to indicate when the bracket may be removed and the mask lifted for the purpose of taking note of the members constituting the corporation.

 

Purpose Theory :

 

The advocates of this theory are Ernst Immanuel Bekker and Alois von Brinz. This theory is also quite similar to the fiction theory. It declared that only human beings can be a person and have rights. This theory also said that a juristic person is no person at all but merely a “subjectless” property destined for a particular purpose. There is ownership but no owner. Thus a juristic person is not constructed round a group of persons but based on an object and purpose.

 

In Germany, foundations (STIFTUNG) are treated as juristic persons. A foundation is no more than a trust for a specific charitable purpose. Eg: the maintenance of an educational institution. Such trusts or foundations are not treated as persons in English law, to explain the peculiar position of the STIFTUNG in German law, Brinz postulated that the juristic person in such a case was merely the property set apart for the foundation personified for facilitating legal transactions.

 

The assumption that only living persons can be the subject-matter of rights and duties would have deprived imposition of rights and duties on corporations which are non-living entities.  It therefore, became necessary to attribute ‘personality’ to corporations for the purpose of being capable of having rights and duties.

 

 

Hohfeld’s Theory:

 

He said that juristic persons are creations of arbitrary rules of procedure. According to him, human beings alone are capable of having rights and duties and any group to which the law ascribes juristic personality is merely a procedure for working out the legal rights and jural relations and making them as human beings.

 

 

Kelsen’s Theory of Legal Personality:

 

He said that there is no difference between legal personality of a company and that of an individual. Personality in the legal sense is only a technical personification of a complex of norms and assigning complexes of rights and duties.

 

 

[1] Savigny: Systems of Modern Law, p.181

[2] Gray: Nature and Sources of the Law,p.55

[3] Miraglia: Comparative Legal Philoso[hy, p.371

[4] (1910) 2 Ch. 525

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