CONCEPT OF CORPORATE PERSONALITY

INTRODUCTION

A person is a human being who is capable of thought, expression, and the holding and exercise of rights and obligations. But is the term “person” limited to just natural persons? The response would be no. Even an artificial person falls under the notion of a person, which goes beyond a genuine person. “Any being to whom the law views competent of rights and obligations, any being that is so capable, is a person whether he or she is a human being or not,” writes Salmond. “And nothing that is not so capable is a person even though he or she is a man.”[1]. Therefore, while slaves and sanyasis are not considered individuals under the law, non-natural entities like temples, universities, governmental bodies, and businesses are. Even the Indian Penal Code’s Section 21 defines the term “person” as encompassing any business, organisation, or group of people, whether or not they are incorporated.

CORPORATION SOLE AND CORPORATION AGGREGATE

Indian law acknowledges the notion of corporate personality as corporate aggregate and corporate sole, as well as their separate rights, obligations, liabilities, immunities, and privileges as the situation may dictate, just like Roman and British law. In Corporation Aggregate, it is discussed how numerous people may work together to advance and realise their common goals. The Reserve Bank of India, Roadways Corporations, Co-operative Societies, Trade Unions, etc. are just a few examples of the corporate personalities that include all bodies or organisations that are incorporated under the laws of parliament and state legislatures, as well as those that are not. Corporation Sole, on the other hand, is a succession of incorporated people. It is a product of law that endures despite changes in human behaviour. such as the president, the prime minister, the postmaster general, etc. As a result, a single person can exercise both their rights as a human being and those of a Corporation Sole. Even though people change, a corporation still has a personality. This explains why we have had 14 different candidates for the same position of president, Bombay Dyeing has been in business since 1879, and Colgate has been there since 1806. Therefore, it is created by law and only ended by law.

LEGALITY OF CORPORATE PERSONALITY

They have a name, the ability to buy or sell property in their own name, the ability to sue or be sued, the ability to engage in a contract, and other legal rights. The employees of the corporation carry out all of these actions on its behalf and for its advantage, not in its own capacities. Thus, as held in Saloman v. Saloman Co[2], after incorporation, the company’s entity is institutionalised. This corporate personality and independent corporate existence fundamental to a firm were acknowledged. A corporate body can be separated from its constituents by its own personality. The “Limited Liability Principle” further attests to the validity. Only to the extent that they own their shares are the members liable. If a business loses money, the money will only be retrieved from the company’s assets. There are instances where a company fails, yet the owner or director is a wealthy person.

It is a benefit for corporate members. However, there are consequences when personal interests begin to outweigh corporate ones, as the idea of lifting the veil explains. In other words, a natural person ultimately runs every corporation, and when that person starts acting dishonestly, fraudulently, or for his or her own gain, the claim that all of the actions were taken for the corporation’s advantage is disregarded, and the person is held personally accountable. When the court doesn’t take the corporation into account and instead is preoccupied with the members or management, the corporate veil is said to be lifted. Therefore, in situations where it is necessary to ascertain a firm’s true character, avoid legal process misuse, and punish a person involved in quasi-criminal claims against a corporation or in cases of fraud or even tax evasion.

In P.N.B. Finance Ltd. v. Shital Prasad Jain[3]According to the court, “the fundamental principle of corporate personality itself may be dismissed having regard to the exigencies of the situation and for the ends of justice. The doctrine of piercing the corporate veil may be exercised whenever necessary by the court in the interest of justice, to avert the corporate entity from being used as an instrument of fraud. When corporations don’t carry out their responsibilities, they are held accountable. Contractual obligation follows. Even in criminal circumstances, responsibility can only be assessed by fines. Finally, under tortious liability, the business is held vicariously accountable for the actions taken by its workers while performing their jobs.

Theories of Corporate Personality

Fiction Theory: According to this theory, only humans have the right to use the term “people.” Some groups, individuals, and other entities are merely considered persons for legal purposes and lack true personalities. This notion is especially relevant to English law because there is no set rule that the courts have followed when recognising juristic persons. The theory is quite adaptable and can take into account the many choices regarding legal personality. Because it is not predicated on any metaphysical idea or argument, this theory is particularly well-liked. According to this idea, a juristic person cannot commit crimes because he only possesses a fictional will.

Concession Theory: This hypothesis and the fiction theory are related. According to this idea, corporate entities only have legal personality to the extent that it is permitted by law. State law is used here. In other words, the only authority or source that grants juristic individuality is the law. Although this theory expresses a truism, it allows space for mischief by leaving the development of juristic individuality entirely up to the state. Numerous instances of suppressing independent institutions have used this theory. It differs significantly from the fiction hypothesis in one key area.

Realist Theory:  According to this notion, a group has a real will, a real consciousness, and a real ability to take action. A company possesses all the traits that a human being does. As a result, legal entities are real in the same way that people are. Legal personality is real and independent of a state’s recognition. The theory’s emphasis on corporate life contains parts of realism (at least in the modern era), but when the business is given true volition and compared to a biological organism, the idea devolves into a farce.

Institutional theory: This theory has a collectivist worldview at its core. It claims that the person joins the institution and is absorbed into it. The theory has been given various interpretations, each of which has been applied to achieve a different goal. According to pluralist understanding, the institution of state might contain separate institutions (they consider the state only as a supreme institution). According to the fascist perspective, the state is the only institution and all other institutions inside it are a part of it, hence they must operate under the control of the state. They applied interpretation to the theory in order to stifle rival institutions.

Bracket Theory or Symbolist Theory: According to this theory, the corporation’s members are the only people with rights and obligations. The granting of juristic personhood entails enclosing the members in a bracket and treating them collectively. This is done for convenience’s sake. In other words, a juristic personality is just a symbol that aids in achieving the group’s goals or interests. The idea is very accurate when it states that groups exist solely to further the interests of their constituents, but it also has certain flaws.

Problems of Corporate Personality

Only via comparison to an unincorporated entity can the true position of a company be understood. There is little distinction between the rights and obligations of the firm and its partners in an unincorporated business. The debts of the company extend to even the partners’ separate possessions. Any one partner’s departure results in the firm’s reconstitution. The reason for the business’s unique status is that because a company is a legal entity, it is distinct and independent from its shareholders, unlike an unincorporated firm, which is not a legal entity and does not benefit from the advantages indicated above.

In Salomon v. Salomon and Co. Ltd, The House of Lords refused to relate the company’s stockholder to its business. According to the ruling, “to the injury of real creditors, he could claim the preferred rights of a bondholder against the corporation, which was in fact himself.”

Again, in Farrar v. Farrar Ltd[4], it was held that the concept is that the corporate body is separate from the individuals comprising it, hence a sale by a person to a company of which he is a member is not the same in form or substance as a sale by a person to himself. A sale made by a company’s member to the corporation is legally and morally lawful in every way.

Principle not consistently followed and lifting the veil:

The veil may be lifted in the following situations: when it is necessary to learn more about a corporation’s personality; when a corporation has been formed in order to avoid a legal obligation; when the corporate personality device is being used to commit fraud, such as by evading taxes; when it is being used to delay creditors; or when it is necessary to advance justice or prevent unfair outcomes.
Daimler Co. v. Continental Tyre Co.: In Daimler Co. v. Continental lyre Co[5] The House of Lords lifted a company’s legal personality veil because all of its shareholders and directors were adversaries (with one minor exception).

U.S. v. Lehigh Valley Road Co.: In the U.S.A. in 1.1.8. v. Lehigh Valley Rail Road Co.[6] When a railway company tried to circumvent a law that prohibited the person mining C081 from carrying it by purchasing all the shares of the coal firm whose coal it was hauling, the court pierced the veil of legal personhood.

A number of laws have been passed in England that disregarded business entities that were formed as a means of tax evasion. The fundamentals are convenience and policy. Thus, it is evident that courts have not consistently applied any theory and have instead presided mostly according to personality, practicality, and policy. They have frequently ignored legal personality where the law had granted it and occasionally given groups legal personality where the law had not so provided (statute).


[1] Dr N.V.Paranjape, Studies in Jurisprudence and Legal Theory, 8thEdition, Central Law Agency, Pg. 496.

[2] [1897] AC 22

[3] (1983) 53 Comp. Cas.66.

[4] (1889) 40 Ch. D. 395

[5] (1916) 2 A.C. 307)

[6] 220 N.S. 257

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