Introduction:
The company, an organization is a workplace where various people, connects, and have a common purpose to achieve. The organization is predicated on systems of law governing contract and exchange, property rights, and incorporation. Theory of corporate personality comes under corporate law. Let us learns about corporate law first.
What is Corporate Law or Company Law?
First of all company laws are applicable in India incorporated with it. According to the section (2) of company law act 2013, a company is an artificial person created by law having separate legal entity with perpetual succession and a common seal.
Why we refer to the word person because it is created by law to enter into an entity with its own name. As an artificial here is a non-natural person.
The terms like separate legal entity, perpetual succession and common seal defines:
Separate legal entity: In this company is distinct from its members/employees or employers. In this, members will be liable for their own work.
Perpetual succession: In this company will continue to exist as in company will not dissolve if any members die.
Common stamp seals: It is the official stamp or signature of the company. Company will definitely come into a contract, so to do its official signature. i.e. stamp.
Section 1 talks about the applicability of companies incorporated under company act 2013, banking companies which are registered under the same act like state bank of India ltd. , Karnataka bank ltd. Etc. , electricity companies like Bharat heavy electrical Ltd., NDPL, insurance companies like met life insurance Ltd.
Company is defined under section 2(20) of company Act 2013. Chief justice Marshal defines the company as a person, artificial, invisible, intangible and existing only in the eyes of law.
According to Haney, a company is an incorporated association, which is an artificial person created by law, having a separate entity with perpetual succession and a common seal.
Corporate Personality
Person is originated from the word “persona”, a Latin word, and it means a mast worn by an actor. Even till the sixth century, it was believed to denote a word to the part of life played by a man. Later on, it was believed and called a sense of living beings and to have rights and duties. Later, many writers restricted the use of the word as it was being used for living beings but then considered for legal and jurists personality.
Later, it was said the personalities were also considered to idols, angels, god. In Hindu law an ascetic (Sanyasi) who has renounced the world ceases to have any proprietary rights and his entire estate is passed on to his heirs and successors and his legal personality completely lost.
Separate Legal Entity
CASE: SALOMON V. SALOMON & CO. LTD. 1847
Salomon sold his business to Salomon & co. ltd., which consisted of Salomon himself, his wife and daughter and his four sons. One share of rs.1 each was subscribed by his wife, daughter and four sons and remaining were held by Salomon himself. He was also the managing director of the company.
After a year company become insolvent. On winding up the assets the worth of rs.6000 and liabilities of amount rs.17000 of which of rs.10000 were due to himself having a charge over all the assets of the company and rs.7000 to unsecured credits.
It was held that a company is distinct from its member and the company’s assets must be applied in payment of the debentures first in priority to unsecured creditors. As soon as the company was duly incorporated, it became a separate legal entity independent from Salomon and was not his agent. As the business belonged to the company and not to Salomon, he was not liable to indemnify the company for its debts.
Characteristics of a Company
1. Incorporated Association
It must be registered. It contains a joint-stock company. It is compulsory as the section 464of company act 2013, for all association or partnership of more than 20 members to register under company act.
2. Artificial Person
Is t is created by law and only law alone can dissolve it. It is invisible and intangible and exists only in the eyes of laws. It may purchase and sell a property. It can sue and be sued by others.
3. Separate Legal Entity
Company is distinct from its members. Case: Salomon vs. Salomon co. Ltd., Lee vs. Lee farming company
4. Perpetual Succession
It is the continuation of a corporation’s or other organization’s existence despite the death, bankruptcy, insanity, change in membership or an exit from the business of any owner or member, or any transfer of stock, etc.
5. Limited Liability
Limited liability is a legal status where a person’s financial liability is limited to a fixed amount of sum.
It is most commonly the value of a person’s investment in a company or partnership.
6. Transferability of Shares
Public Limited Corporation. In this shares can be freely transferable without seeking permission from the company or other members.
Theories of Corporate Personality
Corporate entities are controlled and treated as in a person by law. In this, we have different theories which are developed to different personalities.
There are six theories as follows:
- The fiction theory
- The realistic theory
- The concession theory
- The organism theory
- The ownership theory
- The symbolist theory or bracket theory
1. The Fiction Theory
Few jurists believe that corporate is an imagined personality. This fictitious personality is imputable to the necessity for making an individual organization existing by itself.
Savigny developed the concept of the persona ficta. He called imaginary persons by the word „juridical persons‟.
Juridical persons are one of those who exist for the purpose of only juridical. In reference to a natural person, it is considered that he was born with such a personality which law could hardly recognize. Now on other hands when it is about the natural person he actually born with a merely to recognize personality.
Several objections were raised against the fiction theory by Michoud. One of them was that the point of view towards the ownership and the theory took us nowhere. Rather the corporate personality be only a fictitious person which could only exist in the law’s eyes then how could a non-fictitious person hold property?
Further, after that, it was discussed and argued on the rights of a corporation. As rights could only be practiced by a real person; then the corporation must be a real and genuine not fictitious person.
“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”.
2. The Realistic Theory
The realistic theory is also called the “organic theory”. A believer believes that every group has a real mind, a real body, real will and real power of action. It was believed that corporate is not a figment of the imagination. As it is really reality but not really a reality in the sense of falling sick, run, feel, or marry.
It is not a fictitious creation and it has a separate independent existence. Corporate find expression though the acts of directors, employees or offers. It is considered to be a psychological reality and not a physical reality. We need to make it independent.
Implication and Application
Corporate will be distinguished from the totality of the wills of its members, it implies the action taken by the group.
Criticism
- The realistic theory says that the group has a real life. But it is not possible in reality or practically.
- Realistic theory pointing out that collective will have no reality.
- It says groups have group will which is independent of the will of its components members but it is not true.
3. The Concession Theory
The supporters of the concession theory were DICEY, SALMOND AND SAVIGNY. Savigny and Salmond considered or to say pre-supposer corporation as a legal person.
Concession theory was recognized by the statue or the law. In this concession was granted by the state. Concession means approval i.e. approval by the state. Then comes the desecration of the state to recognize or not. Concession theory resembles with the fiction law.
Purpose and Application
- Political purpose to strengthen the state.
- Nobody claims to be a person
- Recognition is a desecration of state.
Criticism about the theory
- Concession theory was mixed or confused with fiction theory.
- The personality in fiction theory was governed under law but in concession theory, it is governed by both law and state.
- Suppresses autonomous body for strengthening the state. It is a must.
4. 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.
5. The Purpose Theory
A corporation is treated as a person for certain specific purposes. Trust for a specific charitable purpose.
Implication and Application
- Protected certain purposes and the interest of the individual being.
- Property owned by a juristic person and does not belong to anybody but to the purpose.
- For example; trade union.
e.g., a trade union is the continuing fund concerned and the purposes for which it is established.”
As it is similar to the fiction and concession theories it declares only human beings can have rights and be persons. In this juristic person is no person at all but subjectless property destined for a particular purpose and there is ownership but no owner. The jurist person is not constructed around a group of person but based on the object and purpose.
6. The Bracket Theory
It is also known as symbolism theory. This is similar to the fiction theory. In the bracket theory, only the members of the corporation are “person” in real sense and bracket is put around them, and they should be treated as a single unit. To understand the value of a corporation we must need to understand the real value of corporation we must remove the bracket to find out the actual position.
Implication and Application
In this, the bracket can be removed anytime and looked into the real state of affairs.
Criticism
It does not indicate that own to open bracket.
The weakness of this theory lies in the fact that it is not able to indicate when the bracket may be removed and the mask lifted for the purpose of taking note of the members constituting the corporation. [2]
Conclusion
Why do people make a separate company to do business? Forming an organization/company gives us numerous rights to it. Members and company the two different things and their separation are only known as the corporate entity. The different laws and theories under these enable us to know more deeply about the laws and culture of corporate. All these help in modern-day corporate businesses to grow efficiently.
References:
[1] theories of corporate personality
http://www.legalserviceindia.com/legal/article-20-theories-of-corporate-personalities.html
[2] theories of corporate personality
https://www.srdlawnotes.com/2017/04/theories-of-corporate-personality.html
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