Author: Shruti Mistry, a student at Amity Law School, Amity University Chhattisgarh

ABSTRACT

This study delves into the legal status of corporations, with a specific focus on the concept of legal personality. Its objective is to clarify both the theoretical underpinnings and practical implications of corporate personality within contemporary legal frameworks, drawing upon critical analysis of key cases, statutes, and research.

The medieval period, particularly the late twelfth century, witnessed extensive debate on corporations within canon and Roman law glossators. Despite being subjected to adoption, alteration, questioning, and refinement by Aristotelian philosophy specialists in arts colleges, the concept of the corporation remained of paramount importance in later medieval political discourse.

Practical challenges arising from collegiate churches posed significant questions for canonists, while advocates of conciliar government applied corporation theory to understand the relationship between the pope and the universal church, as well as to analyze other communities such as kingdoms and towns.

This research seeks to contribute to the understanding of corporate governance, legal theory, and evolving corporate regulation in the global context by exploring the intricacies of corporation law and its intersections with other legal principles. Its goal is to enhance comprehension of the complex nature of corporate personality in modern legal systems by examining the challenges in defining and distinguishing the legal status of corporations from a jurisprudential perspective.

Keywords: Corporations, Legal Personality, Corporate Governance.

INTRODUCTION

In legal systems worldwide, the concept of legal personality is essential for defining the rights, obligations, and liabilities of entities governed by the law. Among these entities, corporations hold a unique position as artificial beings with legal identity. The concept of corporate personality, grounded in both statutory provisions and legal theory, emphasizes the distinct character of corporations and their ability to act independently in legal matters.

According to this concept, a corporation possesses a separate legal existence from its members. The landmark case of Salomon v. Salomon, which affirmed the separate legal entity of a firm from its members while rejecting the idea of corporate personhood, solidified this understanding.

Corporations, categorized as groups of individuals organized for specific purposes, have a corporate personality that enables them to undertake various legal transactions and activities within their jurisdiction. This legal characteristic empowers corporations to initiate and defend lawsuits, acquire and dispose of property, enter into contracts, and engage in other legal actions independently of their individual members. The principle of corporate personality recognizes corporations as distinct entities with rights and obligations separate from those of their members.

The distinction between corporate aggregate and corporate sole illustrates the concept of legal personality in the realm of company law. Corporate aggregate refers to the collective identity of a corporation comprised of multiple members, while corporate sole refers to a single entity, often represented by a single person, possessing legal personality.

HISTORICAL EVOLUTION

The evolution of the legal personality of corporations, as examined in medieval jurisprudence, reflects a nuanced interplay of legal, theological, and philosophical ideas. In the late twelfth century, scholars of canon and Roman law, known as glossators, initiated detailed discussions on the concept of corporations. These discussions laid the groundwork for subsequent modifications, challenges, and advancements that shaped the understanding of corporations as legal entities.

Initially, the concept of the corporation was primarily a legal construct, emerging from interpretations and applications of canon and Roman law. Glossators wrestled with defining the nature and rights of corporations within the existing legal framework, providing a foundation for theological and philosophical exploration of the concept. Theologians and experts in Aristotelian philosophy, particularly within the faculties of arts, contributed significantly to adapting and refining the concept of corporations. Their discussions extended beyond legal considerations to include broader metaphysical, ethical, and governance questions. Through these dialogues, the concept of the corporation gained depth and complexity, becoming intertwined with theological and philosophical ideas about community and governance.

Corporation theory evolved into a multifaceted concept incorporating theological, philosophical, and practical aspects. It was developed to comprehend and regulate collegiate churches, which presented challenges in legal interpretation and governance. This theory was later applied beyond ecclesiastical contexts to broader political debates, such as the relationship between the pope and the universal church. The international standard for understanding the legal status of corporations can be viewed as the outcome of a complex interplay of historical developments, intellectual debates, and practical needs within medieval Europe.

BACKGROUND

Philosophers and legal thinkers have grappled with a dilemma regarding the origin and nature of the company, leading to the development of various theories that have influenced multiple schools of thought. Among these theories are legal literary fiction, concession, real entity, nexus of contract, aggregate, and corporate social responsibility.

The central questions revolve around the nature of corporate personality. Is there a theory of corporation law that is universally accepted and cannot be challenged? To what extent has the history and nature of the company been accurately captured by any particular theory of corporate law?

EMERGENCE

The House of Lords ruling in Salomon v. Salomon & Co. Ltd. had a significant and enduring impact on corporate law by establishing the idea that a corporation is a separate legal entity from its members. However, it is important to note that the concept of separate legal entity for entities other than humans existed long before the Salomon case was resolved in 1897.

Jurisprudential theories on juristic persons, dating back to the early days of Roman law, have been developed to support the recognition of legal persons other than humans. It has long been established that the State, religious organizations, and educational institutions are separate legal entities from their members. When a company’s corporate personality is officially recognized, it signifies the acknowledgment of another non-human entity as a legitimate legal entity. Various jurisprudential theories on corporate personality illustrate this.

“The majority of the main theories of corporate personality jurisprudence maintain that a corporation’s legal entity is artificial. The idea that a corporation does not exist as a legal person has been supported by theories such as fiction, concession, symbolism, and purpose. These theories suggest that a corporation’s existence as a legal person is essentially a construct imposed by the law. For example, the fiction theory asserts that a corporation’s legal personality is entirely fictional, and the rights granted to it are contingent on the legal fiction imposed upon it by the law.”

UNDERSTANDING THE LEGAL STATUS OF CORPORATIONS

The fact that legal entities such as corporations have laws designed to recognize them does not necessarily mean they enjoy the same absolute rights as individual citizens of a nation. Even individuals in India have certain rights subject to appropriate limitations. The scope of corporate personality’s legality in India encompasses various aspects.

Practically speaking, corporations are legitimate entities with their own names, the ability to buy and sell real estate, the capacity to sue or be sued, and the ability to engage in contracts, among other activities. These actions are carried out by the corporation’s employees on behalf of the company rather than in their personal capacities. The concept of corporate personality becomes institutionalized with incorporation, as established in the ruling of Salomon v. Salomon & Co. The Limited Liability Principle further reinforces this validity, limiting members’ liability to the amount of shares they possess. Consequently, if a business incurs losses, it can only recover those losses from its assets, potentially leading to business failure while protecting the personal wealth of owners or directors.

However, there are consequences when corporate interests are subordinated to those of individuals, as explained by the concept of lifting the veil. This legal doctrine allows courts to disregard the corporate entity and hold individuals personally liable for their actions. Sections 45, 147, 212, 247, and 542 of the Companies Act formally recognize the idea of “Lifting the Corporate Veil,” allowing courts to intervene when necessary to ensure justice, prevent fraud, penalize individuals for deception or tax evasion, or take quasi-criminal actions against the business.

The legal principle of corporate personality itself may be disregarded in certain situations, as held in P.N.B. Finance Ltd. v. Shital Prasad Jain, when necessary for the interests of justice. The doctrine of piercing the corporate veil may be invoked to prevent the corporate entity from being used as an instrument of fraud.

Various theories have been proposed by jurists to explain corporate personality, including the Fiction Theory, Realist Theory, Bracket Theory, and Concession Theory. These theories have influenced the development of relevant jurisprudence and law, shaping the current understanding of corporate personality.

Overall, the legal standing of corporations in India has evolved over time, influenced by judicial interpretation, principles of justice, equity, and legislation, granting them a distinct legal status while also subjecting them to certain limitations and responsibilities.

REFORMS

Theories of corporate personality, which address the legal recognition of a company as an independent entity from its owners, have undergone significant changes over the years. Reforms in this field often aim to strike a balance between the rights and obligations of corporations, stakeholders, and society at large. Here are some key developments and trends in corporate personality theories:

1. Expanded Corporate Social Responsibility (CSR): One prominent reform trend is placing greater emphasis on corporate social responsibility in the definition of corporate personality. This means that businesses are under increased pressure to consider how their decisions may impact other stakeholders, such as the environment, communities, customers, and employees.
2. Corporate Governance Reforms: Many countries have implemented corporate governance reforms to enhance transparency, accountability, and the protection of shareholder interests. These reforms often involve measures to improve board supervision, refine transparency regulations, and increase shareholder involvement in decision-making processes.
3. Piercing the Corporate Veil: Judges have the authority to “pierce the corporate veil” in certain situations to hold shareholders or corporate officers accountable for the company’s actions. Reforms in this area may include clarifying when the corporate veil can be lifted and imposing stricter sanctions for corporate wrongdoing.
4. Legal Personhood for Non-Human Entities: There have been debates and legal disputes regarding extending the concept of corporate personality to non-human entities such as artificial intelligence, robots, and even natural entities like rivers and ecosystems. These issues involve reassessing the criteria for legal personhood and analyzing the rights and duties of non-human entities within a corporate framework.
5. Integration of Environmental and Social Governance (ESG): Investors and regulators are increasingly integrating governance, social, and environmental considerations into their decision-making processes. Reforms in this area may involve requiring companies to publish ESG-related data, incorporating ESG standards into corporate governance frameworks, and considering ESG factors in investment decisions.
6. Global Corporate Law Harmonization: With cross-border commercial operations, there is a growing need to harmonize corporate rules and regulations globally. The aim of these reforms is to establish uniform requirements for corporate responsibility, shareholder rights, and corporate governance across different legal systems.
7. Stakeholder Primacy vs. Shareholder Primacy: The debate over whether corporations should prioritize shareholders’ interests (shareholder primacy) or consider the interests of other stakeholders, such as customers, workers, and communities (stakeholder primacy), is ongoing. Reforms may involve clarifying the legal responsibilities of business officers and directors regarding these conflicting interests.

In broad terms, changes in corporate personality theories reflect broader social expectations about the role and behaviour of firms in society and the economy. The goal of these reforms is to ensure that corporations act in the best interests of all stakeholders while also promoting corporate innovation and entrepreneurship.

CHALLENGES

Although theories of corporate personality have evolved to provide businesses with legal status as distinct entities, they still face several challenges stemming from practical, ethical, and legal considerations. Here are a few key challenges that these theories must overcome:

1. Abuse of Limited Liability: One major issue is the potential for abusing corporate limited liability provisions. Corporate officers and shareholders may sometimes act dishonestly or unethically, using the corporate veil to shield themselves from personal accountability. This could have adverse consequences for creditors, workers, and other stakeholders who may suffer financial losses due to corporate wrongdoing.
2. Erosion of Corporate Responsibility: Critics argue that traditional notions of corporate responsibility have been overshadowed by the legal recognition of businesses as distinct legal entities. Some believe that corporations prioritize profit maximization over social and environmental concerns, rather than considering themselves as moral actors with societal responsibilities.
3. Rise of Stakeholder Capitalism: The importance of considering the interests of various stakeholders, such as workers, customers, communities, and the environment, is becoming increasingly evident. However, corporate personality theories historically focused on enhancing shareholder value, leading to potential conflicts between shareholder interests and broader societal issues.
4. Jurisdictional Differences: The implementation of corporate personality theories varies depending on the jurisdiction, as corporate laws and regulations differ significantly between countries. Multinational companies operating across borders must navigate a complex patchwork of laws, leading to compliance challenges and legal ambiguities.

Addressing these challenges requires a multi-faceted approach, including improved corporate governance procedures, stakeholder involvement, legal reforms, and increased accountability and transparency. By encouraging moral behaviour, corporate accountability, and fair treatment of all stakeholders, corporate personality theories can better serve the interests of society as a whole.

CRITICISMS

The idea of limited liability is criticized for encouraging moral hazard, wherein shareholders and company executives take risks knowing their assets are shielded from legal consequences.

Corporate personality theories have been suggested to aggravate income disparities by concentrating wealth and power in the hands of a small number of shareholders and firm leaders. This power concentration may result in worker exploitation, environmental damage, and other negative social effects.

Critics argue that theories of corporate personality enable firms to privatize profits while socializing risks and expenses, hence facilitating the outsourcing of costs.

CONCLUSION

When artificial persons are recognized by the law, they are endowed with limited legal capacity. The restriction lies in the fact that artificial entities don’t have personalities in the truest sense of the word. Their ability to engage in legally recognized conduct is restricted to what the law permits, nothing more.

For instance, while a body corporate, such as a joint-stock corporation, is considered a “person,” it cannot be equated to a human being in the same way that an apple and an orange are not. The theory of ultra vires regarding joint-stock companies prohibits such artificial entities from performing acts or undertaking relations that fall outside their scope of activities as specified in their Agreement and Articles of Association.

While humans, as natural persons, have the capacity for every act and relation possible in reality, an artificial person is only capable of those acts and relations allowed by law.