Theories of Corporate Personalities
Theories of Corporate Personality
The concept of corporate personality means that a company or corporation is recognized by law as a separate legal entity, distinct from its members or shareholders. This concept is fundamental to company law and affects the rights, liabilities, and duties of companies and their members.
Several theories have been developed over time to explain the nature of corporate personality:
1. Real Entity Theory
This theory views the corporation as a real, independent entity, separate from the individuals who compose it.
It treats the company as a living person with its own existence.
The corporation can own property, enter contracts, sue and be sued in its own name.
Case Example:
In Salomon vs. Salomon & Co. Ltd. (1897), the House of Lords firmly established that the company is a separate legal entity distinct from its members. The company was held liable for its debts, not the shareholders.
2. Fiction Theory
According to this theory, the corporation is a legal fiction created by the law.
It does not have a physical or real existence but is treated by law as a person to enable it to function.
The company exists only because the law says it does.
Illustration:
The law "creates" a company for the purpose of transactions, but the company itself is not a living entity.
Case Example:
Early English courts followed this approach before the Salomon case, treating companies as creatures of statute, created by legislative act.
3. Concession Theory
This theory holds that the corporation exists because the State grants it a charter or license (concession).
The company’s existence, powers, and limits are defined by this concession.
The corporation can only act within the powers granted by the State.
Case Example:
In some cases before the concept of general company registration, corporations existed only by virtue of royal charters or specific legislative acts.
4. Agency Theory
This theory views the corporation as an agent of its members or shareholders.
The company acts through its directors and officers who represent the interests of the shareholders.
It does not have a separate personality; it is a collective of individuals acting together.
Criticism:
This theory conflicts with the principle established in Salomon that the company is a separate entity.
Courts have rejected this theory in favor of separate personality.
5. Aggregate Theory
According to this theory, a corporation is simply an aggregate or collection of individuals.
It is not a separate legal person but a group of shareholders acting together.
The rights and liabilities are those of the members collectively.
Limitation:
This theory was common before the acceptance of separate corporate personality.
It has been largely superseded by the Real Entity Theory.
Summary Table
| Theory | Description | Status in Law | Case Law Example |
|---|---|---|---|
| Real Entity Theory | Company is a separate living entity | Accepted principle | Salomon vs. Salomon & Co. Ltd. |
| Fiction Theory | Company is a legal fiction created by law | Partial; foundation for corporate personality | Early English company law |
| Concession Theory | Company exists by State’s grant | Mostly obsolete, historical | Royal charter companies |
| Agency Theory | Company acts as agent of members | Rejected by courts | N/A (Rejected) |
| Aggregate Theory | Company is a collection of members | Replaced by separate personality | Rejected post Salomon |
Key Case Law
Salomon vs. Salomon & Co. Ltd. (1897)
The landmark case that established the company as a separate legal person distinct from its members.
Lee vs. Lee’s Air Farming Ltd. (1961)
Affirmed the separate personality of the company, even when one person controls the company, and held that the company and the controlling individual are separate legal entities.
Conclusion
The Real Entity Theory is the modern and accepted explanation for corporate personality.
The Salomon case is the foundation stone establishing that a company is a distinct legal entity.
Other theories like the Fiction and Concession theories are historical or partial views.
The Agency and Aggregate theories have been rejected in favor of recognizing a company’s separate legal identity.
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