THEORIES OF CORPORATE

PERSONALITY
COMPANY LAW
CONTENTS

1. Introduction…………………………………………………………. 2

2. Corporate Aggregate and Corporate Sole…………………………… 3

3. Theories of Corporate Personality…………………………………... 4

4. Position of Corporate Personality in India………………………...... 10

5. Conclusion…………………………………………………………... 11

6. Bibliography………………………………………………………… 11

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INTRODUCTION

Legal personality is an artificial creation of law. A natural person is a human being whereas legal
persons are artificial persons, such as a corporation, created by law and given certain legal rights
and duties of a human being. Person is derived from a Latin word persona that means a mask
worn by actors playing various roles in the drama. The word persona was used to denote the part
played by a man in life.1 Since then it began to be used in the sense of a living being capable of
having rights and duties. In many cases persons are the ones who were capable of having rights
and duties only. For instance, slaves were not treated in the eye of law. 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 are completely lost.2
There are two types of persons which the law recognizes: Natural and Artificial. Natural is
merely confined to human beings. Artificial person is generally referring to any being other than
human which law recognizes as capable of having rights and duties.
Salmond defines a person as “any being to whom the law regards as capable of having rights and
duties. Any being that is so capable, is a person, whether human being or not and nothing that is
not so capable is a person even though he be a man”.3 A human being is not a juristic person. It
might be any other subject matter; either a thing or mass of property or an institution upon which
law confers legal status and who in the eye of law possesses rights and duties as a natural
person.4 Corporations are undoubtedly legal persons5 and trade unions and friendly societies are
also legal persons even though not registered as corporations.

1
http://shodhganga.inflibnet.ac.in/bitstream/10603/9793/10/10_chapter%203.pdf
2
Dr. Paranjape N.V. on Studies in Jurisprudence, legal theory 4rth Ed.(Reprint 2006) Page 314.
3
Fitzerald P.J.; Salmond on Jurisprudence 1988 (12th Ed.) page 299
4
Supra Note 206, Page 315
5
State Trading Corporation of India V Commercial Tax Officer, AIR 1963 SC 1811

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CORPORATE AGGREGATE AND CORPORATION SOLE
Corporation Aggregate
A corporation aggregate is a group of co-existing persons. “It is a collection of individuals united
into one body under a special denomination, having perpetual succession under an artificial
form, and vested by the policy of the law with the capacity of acting in several respects as an
individual, particularly of taking and granting property, of contracting obligations and of suing
and being sued, of enjoying privileges and immunities in common, and of expressing a variety of
political rights, more or less extensive, according to the design of its institution, or the powers
conferred upon it, either at the time of its creation or at any subsequent period of its existence.”
A joint stock company, a municipal corporation, a railway corporation, a chartered university,
etc., are examples of a corporation aggregate.
Corporation Sole
A corporation sole is a series of successive persons. It is a body politic having perpetual
succession, constituted in a single person, who, in right of some office or function, has capacity
to take, purchase, hold and demise land and hereditaments and now also to lake and hold
personal property, to him and his successors in such office for ever, the succession being
perpetual, but not always uninterruptedly continuous; that is, there may be, and mostly are,
periods in the duration of a corporation sole, occurring irregularly, in which there is a vacancy,
or no one in existence in whom the corporation resides and is visibly represented. Ecclesiastical
corporations, (Bishops), Crown, the Post-Master General, the Minister of Health, the Minister of
Agriculture, etc., are corporations sole.
Salomon v. Salomon & Co. Ltd6
This case played a significant role in Company law. This case explored the issue on the
recognition of corporation as a “legal person” or “legal entity. It was held that the acceptance of
corporate personality of a company basically means that another non-human entity is recognized
to assume a legal entity. This can be seen from the many theories of jurisprudence on corporate
personality.
Salomon conducted his business as a sole trader. He sold it to a company incorporated for the
purpose called A Salomon and Co Ltd. The only members were Mr Salomon, his wife, and their
five children. Each member took one £1 share each. The company bought the business for

6
Salomon v A Salomon and Co Ltd [1897] AC 22

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£39,000. Mr Salomon subscribed for 20,000 further shares. However, £10,000 was not paid by
the company, which instead issued Salomon with series of debentures and gave him a floating
charge on its assets. When the company failed the company's liquidator contended that the
floating charge should not be honored, and Salomon should be made responsible for the
company's debts.

Lord Halsbury LC stated (at 30-31):

“… it seems to me impossible to dispute that once the company is legally incorporated it must be
treated like any other independent person with its rights and liabilities appropriate to itself, and
that the motives of those who took part in the promotion of the company are absolutely irrelevant
in discussing what those rights and liabilities are.”7

From this case comes the fundamental concept that a company has a legal personality or identity
separate from its members. A company is thus a legal ‘person'.

THEORIES OF CORPORATE PERSONALITY

Corporate aggregate and corporate sole is treated by law as persons. Different theories have
been advanced on the basis of the nature of their personality. The separate legal personality of
corporation is based upon theories which are concentrated upon philosophical explanation of the
existence of personality in beings other than human individuals. None of the theories that attempt
to explain the nature of corporate personality is said to be dominant. While each theory contains
elements of truth, majority of the principal jurisprudence theories on corporate personality
contended that the legal entity of the corporation is artificial. The court has not consistently
followed any particular theory in dealing with various problems relating to corporation and is
mainly guided by practical consideration. These theories are not a mere existence in intellectual
acrobatism but lead to important legal and practical consequences.8
The various theories of corporate personality are discussed below:

7
www.manupatra.com
8
Paton, G.W. A Text Book of jurisprudence 1972 4rth Ed (Oxford University) page 410 Cited from Supra Note 210
Page 189

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1. FICTION THEORY: Promulgated by Pope Innocent IV(1243-1254)
According to this theory, a corporation has a fictitious personality. In Roman law there exists the
concept of ‘persona ficta’. Savigny developed this concept. He called fictitious persons by the
term ‘juridical persons’. Juridical persons are those who exist only for judicial purposes. In the
case of natural persons, he is born with a personality, which the law merely recognizes. But in
case of an artificial person, the personality is created by law.9
Criticism of the theory
One of the main critics of this theory is Michoud.10 He raised several objections to this theory.
One of the main arguments is that from the point of view of ownership, fiction theory takes us
nowhere. If a corporation is only an imaginary person in the eye of law, how can that imaginary
person hold property?
Another argument is that its upholders mistake its part played by the legislator. The legislator
only gives effect to what is good for the society. It makes nothing by itself. Therefore it is idle to
suggest that legislature creates the personality of a corporation.11 But undoubtedly, the legislature
like the judge can create something new and something worthy.
The next argument is that corporation has rights and only real persons can have rights. Therefore
a corporation must be real and not imaginary.

Against these arguments it can be counter argued 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.
2. THE REALIST THEORY: JOHANNES ALTHUSIUS
According to this theory, a corporation has a real and not a fictitious personality. This theory
maintains that a corporation has a real psychic personality recognized, and not created by the
law. Gierke was the main propounder of this theory. The realist theory is also known as the
sociological theory of the group personality of the corporation. The upholders of the realist
theory hold that the will of many is different from the will of an individual and therefore a
corporation has a real psychic will. The realist theory can have significance only in the case of a

9
Sethna Jehangir M.J., on “jurisprudence” 3rd revised Ed.(1973) Page 593-595
10
Michoud; La theorie se la Personalite Morale, 3rd Ed. 1924 page 18
11
Ibid page 595-96

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corporation aggregate. It is from the point of view of convenience and a continuing existence
with a limited liability of its members and separate liability of incorporation the law has thought
to fit to give corporations separate fictitious personality.12 The realist theory asserts that group
personality has the same feature as a human personality. The groups have a real mind, a real will
and a real power of action.
However this theory has been criticized by J.C. Gray as he contended that collective will have no
reality, it is nothing more than mere fiction. Salmond also says that even it is assumed that that
the group will is reality, the reality of the unitary notional entity which may in law survive the
last of its members cannot be conceded to. Moreover he further contends that the realist theory
cannot be applied in case of a corporation sole because it is simply a series of natural persons
whose rights are different from those natural persons in general and in case of corporation
aggregate personality is nothing more than a metaphor and a fiction.13
3. THE BRACKET THEORY: JHERING
This theory 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. In order to understand the
real nature of the corporation and its state of affairs, the brackets have to be removed as the name
of the members is kept in brackets. The defect of this theory is that rights, duties and liabilities
are thought to be possessed by natural persons alone and not by corporations which are legal
entities. However, to understand the real nature of the corporation, we must remove the bracket
to find out the original position of the company.14 According to Jhering, conception of corporate
personality is indispensible and merely an economic device which simplifies the task of
coordinating legal relations. Hence, when necessary, the law should look behind the entity to
discover the real state of affairs. This is in line with the principle of lifting corporate veil.
Its weakness is that it is unable to indicate when the bracket is to be removed and the mask
lifted for the purpose of taking note of them constituting the corporation Ltd. Company is not
same as its members.

12
Ibid Page 594
13
V.N. Paranjape,”studies in jurisprudence legal theory”, central law agency.p 330
14
Soloman V Soloman Co. Ltd., (1897) AC 22

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4. THE OWNERSHIP THEORY
This theory is 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. Here the juristic person is not a person at all. It is subject-less property
which is destined for a particular purpose and according to Planiol, subject-less rights are legal
monsters. For him, fictitious persons are not an addition to the class of persons but only a process
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.”15 This theory has some
significance when used with reference to estate and funds which are corporation sole. Apart from
this it does not hold well, in so far as it denies the existence of the corporate personality as
such.16
5. THE PURPOSE THEORY
According to this theory personality is enjoyed only by human beings; they alone can be subjects
of rights and duties. Juristic persons are merely subject less properties designed for certain
purposes. Main implication of this theory is that law protects certain purpose and interests of
individual beings. The property supposed to be owned by juristic persons does not belong to
anything; but it belongs for a purpose and that is the essential fact about it. All the juristic or
artificial persons are merely legal devices for protecting or giving effect to some real purpose,
e.g., a trade union17 is the continuing fund concerned and the purposes for which it is established.

To Duguit, ‘purpose’ assumed a different meaning. The endeavor of law is the achievement of
social solidarity. If a given group is pursuing a purpose, which conforms to social solidarity, all
activities falling within that purpose deserve protection. He rejected the idea of collective will as

15
Cited by Dean Pound Roscoe in his Jurisprudence 1959 (By West Publishing Co) Vol. IV, p 255
16
Supra Note 242 Page 599-600
17
Bonser V Musicians Union, (1956) AC 104

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unproven, but there can be, he said, collective purpose.

6. THE KELSEN’S THEORY

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 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.18

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 Quasi Realist 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. There are a few criticisms leveled
against this theory. 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, Kelson’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.19

7. NEXUS OF CONTRACTS THEORY

This theory is put forth by Michael Jensen , William Meckling as well as Frank Easterbrook.
This theory asserts that corporations are nothing more than a collection of contracts between
different parties - primarily shareholders, directors, employees, suppliers, and customers.

18
Supra Note 242 Page 600
19
Ibid

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Proponents of this theory contend that all disputes about the obligations of a particular
corporation should be settled by resort to the methods used to interpret contracts, and
that courts should not imply the existence of fiduciary duties on behalf of corporate officers and
directors.20
The Company’s structure is founded on the basis of a nexus of contracts which governs the
rights and obligations of the parties’ contractual relations.

8. THE CONCESSION THEORY: THEORY OF SOVEREIGNTY OF STATE

According to this theory, the only realities is the sovereign and the individual. This theory pre
supposes that corporation is a legal person and has great importance because it is recognized by
the State or the law. The other groups cannot claim recognition as persons. They are treated as
persons merely by a concession on the part of the sovereign. The theory is often regarded as the
offspring of the fiction theory as it has similar assertion that the corporations within the state
have no legal personality except as it is conceded by the State. Therefore concession theory is
basically linked with the philosophy of the sovereign national State.
This theory deviates from the fiction theory in as much as it emphasis on the discretionary power
of the state in matter of recognizing the corporate personality of the corporation. Some critics
consider the theory dangerous because of its over emphasis on the discretionary power of the
state in regard to recognition of a corporation or not. In this view it may lead to dictatorship and
arbitrary restrictions on corporate bodies, particularly the political entities.

9. HOHFELD’S THEORY
He drew a distinction between human beings and juristic persons. Juristic persons are the
creation of arbitrary rules of procedure, which limit the extent of their responsibility. His theory
is closely related to bracket theory. He says only human beings have claims, duties, powers and
liabilities; transactions are conducted by them and it is they who ultimately become entitled and
responsible. The corporate person is merely a procedural form used to work out a complex mass
of jural relation. It is purely analytical and analyses a corporation out of existence.

10. THEORY OF ENTERPRISE ENTITY

The corporate entity is based on the reality of the underlying enterprise. Approval by law of the
20
www.academia.edu/.../Nexus_of_Contracts-Jensen_Meckling_Theory

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corporate form establishes a prima facie case that the assets, activities and responsibilities of the
corporation are part of the enterprise. Where there is no formal approval by law the assets
activities and responsibilities are determined by the underlying enterprise.

11. ORGANISM THEORY

This theory is closely associated with the Realist Theory. It asserts that groups are persons
because they are organisms and corresponds to human beings. They have a real life. They have a
group will, independent of the will of the competent members.

12. INSTITUTIONAL THEORY

This theory marks a shift from an individualist to a collective outlook. The individual is
integrated into the institution and becomes part of it.

POSITION OF CORPORATE PERSONALITY IN INDIA

The concept of corporate personality is well recognized in India. The position of Karta in a
Hindu coparcenary is an illustration on the point. In the coparcenary system all members of the
family have some right and duty, but the karta is the head of the family who manages the entire
family property. He has right to alienate the family property and all the family members are
under his control. He can sue or be sued on behalf of the joint family. In juristic terms he is a
corporation Sole Having Double Capacity i.e- As a natural person he is the eldest of the family
and as a legal person he is the karta of the family.

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CONCLUSION
None of the theories takes into account all aspects of the problem and thus criticism becomes
easy. The theories, that have been considered, are philosophical, political or analytical. They are
not so much concerned with finding solutions to practical problems as with trying to explain the
meaning of the word ‘person’. Courts, on the other hand faced with the solving of practical
problems, have proceeded according to policy, not logic. The objectives of the law are not
uniform.
There is no essence underlying the various uses of ‘person’. Its application to things other than
human beings is purely a matter of legal convenience.

BIBLIOGRAPHY
Dr. Paranjape N.V. on Studies in Jurisprudence, legal theory 4rth Ed.(Reprint 2006)
Sethna Jehangir M.J., on “Jurisprudence” 3rd revised Ed.(1973)
Fitzerald P.J.; Salmond on Jurisprudence 1988 (12th Ed.)
www.academia.edu/.../Nexus_of_Contracts-Jensen_Meckling_Theory

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