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Is Corporate Personality A Real Personality? Important Case Laws And Theories

The legal system creates corporate personality. Under both English and Indian law, corporations have legal personality. A corporation is a legal person with rights and duties, as well as the ability to possess property.

A corporation is distinguished by reference to a variety of elements selected by the law for personification. Members are the individuals who make up the corpus of a corporation.

Three criteria need the existence of a corporation's legal personality:

  1. A group or body of human beings must be affiliated for a certain goal.
  2. The corporation must have operating organs, and
  3. legal fiction bestows will on the company. A corporation is distinct from its parts.

It has its own legal identity and the ability to sue and be sued in its own right. Its existence does not end with the death of its individual members and hence possesses an endless existence. In contrast to natural beings, a company can only act through its agents. The method for dissolving a business organisation is outlined in the legislation. Corporations with legal personality include banks, railways, universities, colleges, churches, temples, and hospitals. The Union of India, as well as its component states, are recognised as legal or juristic persons.

In other cases, the corpus of the legal person will be a fund or estate established for specific reasons. A trust - estate or an insolvent estate, for example, a charitable fund, and so on are all included in the notion of 'legal personality.'

What Is A Corporate Personality?

The concept of corporate personhood is a legal fiction. A business, according to the law, is an artificial person formed by personifying a collection of people. A business, according to the concept of corporate personality, has a legal character apart from its members. Both English and Indian legislation adhere to the concept of corporate personhood.

Creditors of the firm may only sue the company for money; they cannot sue individual members. Similarly, the company is not liable for the individual commitments of its shareholders/members, and the firm's property is used solely for its advantage.

It has certain rights and duties, such as the ability to possess property, enter into contracts, and sue and be sued in the name of the business. The rights and duties of members differ from those of the company.

In essence, corporate/legal personality provides the business with legal personality and autonomous standing upon incorporation.

This concept was recognised for the first time in the 1867 case of Oakes v. Turquand and Harding. However, it was authorised and strongly established in the seminal decision of Salomon vs. Salomon, which determined that a business had its own personality apart from people's personalities.

Important Case Laws:
Salomon v. A Salomon & Co Ltd [1897]:
  • Mr.Aron Salomon was a wealthy businessman who specialised in leather footwear manufacture. After a few years, he established Salomon and Co. Ltd., a limited company.
  • He needed at least seven members/shareholders to create a firm, so he made his family members his business partners by giving each of them one share.
  • He sold his company to a limited corporation for $39,000, with $100,000 outstanding to him. At the time, he was the company's principal investor and creditor.
  • After one year, the company declared bankruptcy. The assets realised were $6000, while the liabilities were $10000 in Salomon's debentures and $7000 in unsecured creditor.
  • Unsecured creditors challenged Salomon's claim to preferential treatment over unsecured creditors as a debenture holder.

Issue:
  • Was Salomon's corporation founded on a plot to defraud creditors?

Held:
According to the court, once the company was incorporated, it became an independent legal entity and no longer acted as Salomon's agent. Salomon had payment preference over the unsecured creditor as a debenture holder of the corporation.

Importance Of This Judgment:
The decision in this case established the concept of a company's autonomous legal personality, allowing investors to continue trading with little risk of personal insolvency in the event of a failure.

In the Salomon case, two concepts are established:
A corporation is an artificial person created by the law. It is artificial in the sense that it lacks a regular human's body/soul. The formation of a business is required by law and needs the fulfilment of certain legal steps.

Members' liability is limited to the face value of the shares when the corporation is restricted by shares. If the firm is wound up, the shareholder is held liable for the amount of unpaid capital on his shares, but his personal assets are untouched.

Lee v. Lee's Air Farming Ltd. (1961) AC 12:
This case calls into doubt the corporate veil and autonomous legal identity. L owned 2999 of the 3000 shares in Lee's Air Farming Ltd in this circumstance. He designated himself as Managing Director and paid himself to be the company's primary pilot.

He perished in an aeroplane crash while working for the company. His widow filed a compensation claim after he died on the job. She asked for £2,430 in compensation for herself and her four infant children, as well as money to cover funeral fees.

The respondent firm contested that the deceased was a "worker" of the company, claiming that the deceased was the respondent company's controlling shareholder and governing director at the time of the accident.

Issue:
Was there a separate legal entity? Is Mrs. Lee entitled for restitution?

Held:
In the Lee Air Farming case, the Salomon principle was affirmed. Mrs. Lee's claim was allowed by the Privy Council, which said that while Lee was the company's controller in practice, they were two distinct persons in law, and the concept of independent legal entity was clarified. As a result, Mr. Lee may sign a contract with the business and be considered an employee. As a consequence, his wife was eligible for workers' compensation benefits.

The Judicial Committee of the Privy Council further held that while a business is a different legal entity, a director may nevertheless be under a contract of employment with the firm that he alone controlled.

Legal Philosophies Behind 'Is Corporate Personality A Real Personality?

The legal definition of "person" has given rise to a multitude of theories that is likely second to none in volume. A 'person' in law is both the recognition of an entity and the acknowledgement of that entity's rights and interests. As a result, the award of 'personhood' states permits an entity to engage in legal acts and relationships.

In the legal realm, the term "person" is only an abstraction – a representation of specific characteristics in the form of a real or artificial entity. These features combine in the law to form what is known as 'personality.'

There are only two kinds of individuals in the eyes of the law: real/natural and artificial. Because humans are persons ipso facto, they are referred to as "real" or "natural" individuals. The artificial person, on the other hand, is a legal fiction with limited legal authority. It is now necessary to define the term "capacity" in legal terms.

The basic feature of personality is capacity, which denotes the ability to do acts and engage into legal relationships. Capacity is what provides a person "standing" in law, whether it is the ability to claim-possess-exercise rights, property, enter into contracts, sue and be sued, do legal harm, or be the victim of legal harm. In other words, capacity is the mechanism through which personality manifests itself in law.

As previously indicated, when the law recognises artificial persons, it grants them limited legal capacity. The restriction emerges because artificial persons lack full-fledged personalities. Their ability to engage in legally discernible actions is restricted to the amount authorised by law. A corporate body, such as a joint stock company, is undeniably a "person," but it cannot be compared to a human person in the same way that an apple cannot be compared to an orange.

While natural persons are capable of performing every act and relation possible in fact, artificial persons are only capable of performing those acts and relations permitted by law; the doctrine of ultra vires with respect to joint stock companies prevents such artificial persons from performing acts/undertaking relations that are outside their scope of activities as specified in the Memorandum and Articles of Association.

The well-known theoretical classification of artificial persons works similarly
  • One-man business (Sole Proprietorship)
  • Corporations as a whole (Aggregate Corporations)

However, both of the above are restricted in that they analyse only one aspect of artificial personality, namely the body corporate. It should be noted that the law recognises several sorts of artificial personalities, such as the idol. Indeed, Salmond stated in his jurisprudence book that "legal entities, being the arbitrary creations of the law, may be of as many types as the law pleases." However, for the purposes of this research, contemplating the concept of a "body corporate" will suffice to help understand the nature of artificial personhood.

The company sole is only a tool used to ensure the continuance of an office. By implication, each legal office creates a legal personality for the person who occupies it in perpetuity, unless the law itself extinguishes it. The Corporation Sole is the name given to this legal organisation.

Examples may be found largely in State Offices fulfilling sovereign functions, which are always legal constructions. The English Crown is the archetypal Corporation Sole. The Corporation Sole, on the other hand, presents itself in a number of different settings, including the posts of President, Prime Minister, Chief Justice of India, and Attorney-General of India, all of which are creations of the Indian Constitution.

Similarly, even in circumstances where a permanent Office is necessary, the presence of a Corporation Sole is implied: for example, the Vice-Chancellor of a University and the Postmaster General are both statutorily established Offices.

The researcher said in the previous paragraphs that humans are ipso facto people with all of the criteria of legal personhood. According to the law, each human being is therefore endowed with a distinct personality. However, if the same notion is used as a general rule, coordinated and unified human activity has no place in law for the simple reason that such action can only be recognised as a series of acts by a group of people as opposed to a single act by a group of people. The former viewpoint would result in a lot of issues, including the unlimited liability of such a vast number of persons to third parties.

As a result, while a partnership is a group of persons working together, each of those people is jointly and severally liable for the activities of any partner. This technique also has the unintended consequence of disproportionately allocating guilt, since an insolvent partner cannot be pursued, but a solvent partner must satisfy the complete obligation or debt that exists between the partnership and the third party.

To avoid this quandary, the law recognises some organisations of multiple individuals as a 'body corporate,' and so considers the numerous activities of such a large number of people to be legally traceable to a single person. The Act also establishes an incorporation veil between the forming members and the legal identity of the newly formed body: the company. The incorporation veil implies that the corporation has a separate identity from its members.

In a joint stock company, the veil of incorporation separates the business's actions from those of its shareholders, as well as the individual acts of its shareholders from those of the firm. Because of this system, the shareholders (group members) have limited liability, which means they are only answerable for the amount of their ownership in the group or business.

According to the above description of a corporation's aggregate, any form of concerted activity of willing individuals aimed at a specific end would logically result in their acts becoming known through the glass of incorporation, which realises their combined operations as a single act performed by a single personality.

However, it is in this setting that we may observe the fundamental limits of manufactured individuality. Only certain types of concerted action are recognised by the law as eligible for incorporation; thus, while joint stock companies are recognised as incorporated bodies, associations such as partnerships, trade unions, and other organisations are not recognised as incorporated bodies for a variety of reasons.

These organisations have been dubbed "unincorporated associations." However, the impact of such thinking has been mitigated in part by legislative provisions and judicial interpretation, which have allowed such groups to take on some of the characteristics of a single legal person. As a result, in some cases, unincorporated organisations might be regarded to have the attributes of a legal person. The five basic theories used to explain corporate personality are the fiction theory, realism theory, purpose theory, bracket theory, and concession theory.

Pope Innocent IV is credited with popularising the fictitious concept of corporations (1243-1254). This viewpoint is shared by several eminent jurists, including Von Savigny, Coke, Blackstone, and Salmond. According to this theory, the legal personhood of entities other than people is the result of a fiction. The well-known case of Salomon v A Salomon Co Ltd indicates that the fabrication theory is accepted by English courts. In this instance, Lord Halsbury observed that the essential question to be resolved was whether an artificial innovation of the legislature had been lawfully constituted.

Under the concession theory, the state is thought to be on the same level as the human individual, and as such, it can give or withdraw legal persons from other organisations and groups inside its boundaries as part of its sovereignty. As a result, a legal person is only a governmental concession or invention. Concession theory is frequently seen as the offspring of fiction theory since it asserts the same thing: firms within the state have no legal status unless it is granted by the state.

This notion is supported by fiction theory proponents such as Savigny, Dicey, and Salmond. Nonetheless, whereas the fiction theory is essentially a philosophical notion that a corporation is nothing more than a name and a creation of the intellect, the concession theory is agnostic regarding the reality of a company in that it concentrates on the sources of legal authority.

Following that is the aim hypothesis (also known as the theory of Zweckvermogen). Some of the proponents of this idea are E.I Bekker, Aloys Brinz, and Demilius. It asserts, in the same way that the fiction and concession theories do, that only human beings may be people with rights.

According to this viewpoint, a juristic person is nothing more than a "subjectless" property constructed for a certain purpose, with ownership but no owner. Rather than a group of individuals, the juristic person is created around an item and a function. Although it may be committed and legally bound by certain purposes, the juristic person's property does not belong to anybody.

The Symbolist idea is also known as the "bracket" theory. Jhering created it, and the Marquis de Vareilles-Sommiéres enlarged it. This theory is fundamentally similar to the fiction theory in that it recognises that only humans have legal interests and rights. 38 According to Jhering, corporate identity is both required and fundamentally an economic ruse to facilitate the process of coordinating legal relationships. As a result, if necessary, it is suggested that the law examine behind the entity to discover the genuine state of affairs.

This clearly fits with the idea of uncovering the corporate curtain. Otto von Gierke was a notable proponent of the realism doctrine, which was created by German jurist Johannes Althusius. A legal person, according to this idea, is a genuine personality in both the extra-juridical and pre-juridical senses of the term. It also implies that the subjects of rights do not have to belong just to humans, but to any entity with a will and an existence of its own. As a result of being a legal person and being as 'alive' as a human being, a company is likewise subject to rights.

According to the realist viewpoint, a firm exists as an objectively real entity, and the law simply recognizes and gives effect to its reality. The realist jurist also believed that the law had no authority to create entities, just the right to recognize or reject them. A company, according to realists, is a social organism, whereas a human is a physical organism. A company, according to realists, is a social organism, whereas a human is a physical organism.

The fundamental arguments in the subject of corporate personhood jurisprudence ideas are considered to be between the fiction and realism theories. According to the fiction hypothesis, the firm entity as a legal person is fundamentally fictitious and exists solely for legal purposes. However, from a realist perspective, the entity of the firm as a legal person is true and natural, rather than manufactured or phoney.

Dual personality differs from dual capacity in that, while a person may be said to have dual capacity, the law only recognises one person performing several activities. All of these functions may be legally traced back to a single person. However, in the situation of dual personality, the law recognises these functions as being the result of different personalities. A simple example can emphasise the difference: a person with dual capacity cannot contract with or sue herself; a person with dual personality can. The House of Lords decision in Salomon v. Salomon & Co. can be studied to show how the aforementioned concepts work.

The decision of the House of Lords in the aforementioned case has had a long-term influence on corporate law. It is often credited with inventing the concept of the corporation as a separate legal entity independent from its members. Though there is little doubt that the Salomon case influenced corporation law, the court's decision in this case was far from the foundation of the separate legal entity concept.

Prior to the Salomon case in 1897, the legal existence of entities other than people had long been recognised. Jurisprudence ideas on juristic people have been produced from the early Roman law to justify the presence of legal beings other than humans. The State, ecclesiastical bodies, and educational institutions have long been thought to have a legal existence independent from their members.

Mr. Salomon owned a shoe firm that he sold to Salomon & Company, Ltd, who paid him with 21,000 shares and a secured loan. Mr. Salomon acquired six shares as well, one for each of his five children and one for his wife. Throughout its activities, the company accrued a number of commitments in the form of unsecured credit from third parties. It was eventually liquidated, and the creditors of Salomon & Co. flocked to collect their obligations.

Insolvency legislation required that the assets of the insolvent (in this case, Salomon & Co.) be distributed in accordance with the creditors' pre-insolvency rights. The holder of the debenture with the charge was first in line, which meant that Mr. Salomon, who owned the secured debenture offered by himself as agent of Salomon & Co. to himself, had precedence over all other creditors. Mr. Salomon was not compelled to divide the revenues with the other creditors of Salomon & Co. who did not have a charge on the assets since unsecured creditors are not the same as secured creditors.

Though the Trial Court and Court of Appeal concluded that Mr. Salomon was personally liable to creditors since the corporation (Salomon & Co.) was just Salomon's agent, the House of Lords disagreed. According to the Court, Mr. Salomon obtained two legal identities with the founding of the firm: one as a shareholder of Salomon & Co. and the other as a secured creditor of the company.

Mr. Salomon was not liable for any of the firm's commitments since there existed a veil of incorporation between the company (Salomon & Co.) and its shareholder in the eyes of the law (Mr. Salomon). Similarly, Mr. Salomon, as a secured creditor of Salomon & Co., had a unique identity from Mr. Salomon, as a shareholder, due to the incorporation veil.

Another case in point is Lee v Lee's Air Farming:
In this case, Mr Lee established Lee's Air Farming Limited in August 1954 and owned 100 percent of the stock. For the remainder of his life, Mr Lee was the only 'Governing Director.' As a result, he was effectively a lone trader who now operated via a business, much like Mr Salomon. Mr Lee also served as the company's chief pilot. In March 1956, Mr Lee was working when the company jet he was piloting stalled and crashed. Mr Lee was killed in the crash, leaving behind a widow and four infant children. The corporation had purchased insurance to cover Workers' Compensation Act claims as part of its statutory obligations.

She claimed she was entitled to compensation under the Act because she was the widow of a "worker." The case was first considered by the New Zealand Court of Appeal, which decided that he was not a "worker" under the Act and hence no compensation was payable.

The matter was appealed to the Privy Council, which determined that the widow was entitled to compensation for the following reasons:
  • That the corporation and Mr. Lee were different legal entities capable of contracting with one another.
  • As a consequence, they had reached an arrangement for him to be employed as the company's primary pilot.
  • As a result, Mr. Lee, as Governing Director, could give orders to himself as chief pilot. As a result, it was a master-servant relationship, and he fit the description of "worker" under the Act.
  • In both cases, the concept of dual personality operates in such a manner that a single person (Mr.Salomon; Mr.Lee) can do acts that are seen as acts by different legal individuals, allowing them to enter into contracts with themselves.

Due to the application of the corporate veil idea in the instances of Salomon and Lee, the device of dual personality resulted in the law recognising the activities of one person as done by separate legal individuals. However, due to the misuse of this principle by people aiming to evade liability (as in Salomon), modern company law recognises certain situations (similar to those in Salomon) as warranting the removal of the corporate veil.

Deceptions, such as the one in Salomon, are recognised as grounds for dissolving the veil, which eliminates the wall that separates the legal identity of the company's stockholders from the legal personality of the company itself. As a result, any dual or many personalities sought by the shareholder (as in Salomon) are annihilated.

Dual capacity and dual personality are legal constructions designed to ease problems generated by the overly strict application of common law standards. Their principal purpose is to simplify the application of the law in everyday settings. "The idea of uniqueness beyond the class of human beings is one of the most noteworthy accomplishments of the legal imagination," according to Salmond's work on jurisprudence.

Because corporate personality is only a metaphor or analogy, it is not completely arbitrary and must thus adapt to the corporation's organisational reality as well as comply with the legal treatment of organizations. As a result, the vision of a company should be analytical, ideological, descriptive, and prescriptive.

Many of the corporation's traditional and modern corporate attributes, such as perpetual succession, the ability to own property, the right to bring its own legal proceedings, the ability to create floating charges, limited liability, and compliance with Companies Act formalities, can be described using the metaphor of personality. Placing these traits under the umbrella of a separate legal body has resulted in the selection of a few important attributes of the concept of the existence of a fictional person.

Nonetheless, the metaphor is utilized to portray rather than manage the organization's reality. Bryant Smith said, "It is not within the province of legal personhood to impose judgments." To insist that just because a corporation has been determined to be 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 based on irrelevant considerations without considering their merits.

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