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
- A group or body of human beings must be affiliated for a certain goal.
- The corporation must have operating organs, and
- 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
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 :
- 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
- 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
- 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.
- Was Salomon's corporation founded on a plot to defraud creditors?
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
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
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
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.
Was there a separate legal entity? Is Mrs. Lee entitled for restitution?
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
- 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
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
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
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
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)
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,
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.