The theories of corporate personality

A company can own land, sue, be sued and become insolvent while its members remain rich. Either there is something there which is a person, or the law is pretending. Every theory below is an answer to that single question, and an examiner asking about corporate personality is asking you to range the answers and choose.

The starting point is the necessity: the assumption that only living persons can be the subject-matter of rights and duties would have deprived corporations, which are non-living entities, of rights and duties. It therefore became necessary to attribute personality to corporations so that they should be capable of having rights and duties.

The definition to work from is Gray's: a person is an entity to which rights and duties may be attributed. The word itself comes from the Latin persona, meaning mask. Persons are of two kinds — the natural person, a human being capable of rights and duties, a person both in fact and in law; and the legal, artificial or juristic person, an artificial creation of law, an entity recognised by law as capable of being a party to a legal relationship, real or imaginary, which for the purpose of legal reasoning is treated more or less as a human being. All legal persons can sue and be sued.

1. Fiction theory

Advanced by Von Savigny, Salmond, Coke, Blackstone and Holland. The personality of a corporation is different from that of its members. Savigny regarded the corporation as an exclusive creation of law, having no existence apart from the individual members who form the corporate group and whose acts are attributed to the corporate entity. From this it follows that any change in the membership does not affect the existence of the corporation.

The element of legal fiction must be clearly recognised: a company is in law something different from its shareholders or members; the property of the company is not in law the property of the shareholders; and the company may become insolvent while its members remain rich.

Gray supported the theory: only human beings are capable of thinking, so it is by way of fiction that we attribute will to non-human beings, through human beings who are capable of thinking, and assign them legal personality.

Wolf's three advantages: the theory is analytical; it is more elastic; and it makes it easier to disregard juristic personality where that is desirable.

2. Concession theory

Concerned with the sovereignty of the State. It presupposes that a corporation as a legal person has great importance because it is recognised by the State or by the law; a juristic person is merely a concession or creation of the State.

The concession theory is often regarded as an offspring of the fiction theory, since both assert that corporations within the State have no legal personality except as conceded by the State, and the exponents of the fiction theory — Savigny, Dicey and Salmond — are found to support it. But the two are not the same, and saying why earns the mark: the fiction theory is ultimately a philosophical theory, that a corporation is merely a name and a thing of the intellect; the concession theory is indifferent to the question of the reality of a corporation, focusing only on the source from which the corporation's legal power is derived.

3. Group personality theory, or realist sociological theory

Propounded by Johannes Althusius and carried forward by Otto von Gierke. Every collective group has a real mind, a real will and a real power of action. A corporation therefore has a real existence, irrespective of whether it is recognised by the State or not.

Gierke believed the existence of a corporation is real and not based on fiction: it is a psychological reality and not a physical reality. Law has no power to create an entity but merely the right to recognise or not to recognise one. A corporation from the realist perspective is a social organism, as a human being is a physical organism.

The theory was favoured more by sociologists than by lawyers. The realists' main charge against the fiction theory is its ignorance of the sociological facts that evolved around the law-making process, and its failure to identify the relationship of law with society in general.

The answer to the realists comes from Horace Gray, who denied the existence of a collective will and called it a figment: to get rid of the fiction of an attributed will by saying that a corporation has a real general will is to drive out one fiction by another.

4. Bracket theory, or symbolist theory

Propounded by Rudolph Ritter von Jhering. The conception of corporate personality is merely an economic device by which the task of coordinating legal relations is simplified. Hence, when necessary, the law should look behind the entity to discover the real state of affairs — which is the theoretical form of the modern doctrine of lifting of the corporate veil.

Juristic personality is only a symbol to facilitate the working of corporate bodies. Only the members of the corporation are persons in the real sense of the term, and a bracket is put around them to indicate that they are to be treated as one single unit when they form themselves into a corporation.

5. Purpose theory, or the theory of Zweck Vermogen

Advocated by Ernst Immanuel Bekker and Alois von Brinz. Quite similar to the fiction theory. It declares that only human beings can be persons and have rights, and that a juristic person is no person at all but merely a subjectless property destined for a particular purpose. There is ownership but no owner. A juristic person on this view is not constructed round a group of persons but is based on an object and a purpose.

6. Hohfeld's theory

Juristic persons are creations of arbitrary rules of procedure. Human beings alone are capable of having rights and duties, and any group to which the law ascribes juristic personality is merely a procedure for working out legal rights and jural relations.

7. Kelsen's theory

There is no difference between the legal personality of a company and that of an individual. Personality in the legal sense is only a technical personification of a complex of norms, and the assigning of complexes of rights and duties. Notice that this is the most radical of the seven, because it dissolves the natural person as well as the corporate one: on Kelsen's account there is nothing more to my legal personality than to a company's.

| Theory | Is the corporation real? | Does it need the State? | |---|---|---| | Fiction | No — a creature of law | Yes | | Concession | The question is not addressed | Yes — this is the whole of the theory | | Group personality | Yes — a psychological reality | No | | Bracket | No — only the members are persons | Not the issue; the entity is a device | | Purpose | No — there is ownership but no owner | Not the issue | | Hohfeld | No — a procedural creation | Not the issue | | Kelsen | The question is misconceived for natural persons too | Not the issue |

The distinction is short and is regularly asked as a sub-question. Law recognises many capacities in which a man may act: he may act in an official or representative capacity, or in his private capacity on his own account. But if a man has two or more capacities that does not give him power to enter into a legal transaction with himself. Double capacity differs from double personality, and law does not recognise double personality of the individual: at common law a man could not sue himself, contract with himself, or convey property to himself, even acting on each side in a different capacity.

• The set-piece — define legal personality with Gray's definition, then the seven theories, then a sorted comparison and a reasoned preference.
• The application. The Indian material on the idol, the Guru Granth Sahib and the rivers is the place to test the theories: an entity recognised by a court although it has no mind of its own fits the fiction and concession theories comfortably and the group personality theory not at all. See the companion study.
• The trap. Do not merge the fiction and concession theories. They agree in result and differ in what they are theories about — one about the reality of the corporation, the other about the source of its power.