Corporate Personality

A Corporate Personality also known as an ‘Artificial Juristic Person’ or simply as

a legal entity, is an entity, body, or a group of members recognized by law to
confer it with rights, duties, and obligations for its proper governance. It is a
separate legal entity from its members, i.e., the entity conferred with such legal
personality is not liable for the actions of its members, due to the veil of
‘Separate Legal Entity.’ The veil of ‘Separate Legal Entity’ is the separation of
the members from the entity. It protects the entity from the actions of the
members and vice versa, but when the members of the firm engage in illegal
activities like fraud or other illegal activities, the veil is lifted thereby making
each member liable for the actions of the other.

A corporation can be identified by comparison to many categories of objects

that the law has chosen to personify. Members of a corporation are the people
who make up its body. According to Section 34 of the Companies Act, 2013,
certain conditions must be met for corporations to have legal personality –

o There should be the existence of a group or body of people united for a

certain objective.

o The corporation must have organs through which it operates.

It has its own legal personality and can file and receive lawsuits in its own
name. It is perpetual because it does not cease with the passing of any of its
individual members. Contrary to natural beings, corporations can only act
through their agents. The law specifies the steps to wind up a corporate
organization.

The legal fiction of the corporate veil asserts that a corporation has a separate
legal identity that is distinct and independent from the identities of its
stockholders. As a result, any rights, responsibilities, or liabilities of a
corporation are distinct from that of its members, who have “limited liability”
and are only accountable for their share of capital. This corporate deception
was created to allow groups of people to achieve an economic goal collectively
without being personally liable or exposed to hazards. As a result, a business
can act independently of its members to hold property, enter contracts, raise
loans, make investments, and undertake other rights and obligations.
Additionally, it simplifies the legal process because businesses then can sue and
be sued in their own names.
Theories of Corporate Personality

Now, there are many theories that show and reflect the nature and scope of
this corporate personality as created by law. These theories offer us a
theoretical perspective on the topic allowing us a better understanding.
However, in the real world with practical problems, they are of little use. No
one theory completely captures the essence of corporate personality. So here
we will look at a few of the popular ones,

1] Fiction Theory

The law specialists who gave this hypothesis were Savigny, Salmond, Holland
they expressed a partnership with an imaginary characters. Company is treated
as not quite the same as its individuals The imaginary character is quality to
the need for shaping an individual association existing without anyone else and
overseeing for its recipients ‘The persona ficta’- Savigny gave the term juridical
individual.

Partnership as an elite making of law having no presence separated from its

individual individuals who structure the corporate gathering and whose acts by
fiction, are credited to the corporate substance.

The Fiction hypothesis along these lines expresses that fuse is an invented
expansion of character depending on the motivation behind working with
managing property claimed by a huge assortment of individuals.( regular) this
hypothesis neglects to answer the acceptably the obligation of the
corporation.

As per the fiction theory, a corporation exists only as an outcome of fiction and
metaphor. So the personality that is attached to these corporations is done
purely by legal fiction. The legal person is created only in the eyes of the law for
a specific purpose. The theory was propounded by Savigny and backed by
Salmond and Holland.

2] Concession Theory
This is similar to the fiction theory. However, it states that the legal entity has
been given a corporate personality or a legal existence by the functions of the
State. So as per this theory, only the State can endow legal personalities, not
the law.

The hypothesis was given by Johannes Althusious, Gierke in German and

Maitland in England. As per this hypothesis, it declines the fiction hypothesis.
The practical hypothesis keeps up with that an organization has a genuine
clairvoyant character perceived and not made by the law. There is a genuine
part in the partnership. The desire of many is not quite the same as the desire
of a person. A company subsequently has genuine presence, regardless of the
reality if it is perceived by the state.

The significant contrast between the fiction hypothesis and the pragmatist
hypothesis lies in the way that the previous rejects that the corporate character
has any presence past what the state decides to give it, the last hold that a
company is a portrayal of actual real factors which the law perceives. On
account of dalme co. restricted v. mainland tire the choice was made on the
practical hypothesis where there was the upliftment of corporate cover.

3] Realist Theory
As per the realist theory, there is really no distinction between a natural person
and an artificial person. A corporate entity is as much a person as a natural
person. The corporation does not owe its existence to the state or the law. It
just exists in reality. This is not a very practical theory as it does not apply in the
real world.

The section hypothesis was given by Ihering. The section hypothesis of the
character of the enterprise keeps up with the individuals from the organization
itself essentially according to the perspective comfort. The genuine idea of
enterprise and its individuals are kept in section.

According to this hypothesis, juristic character is just an image to work with the
working of the corporate bodies. Just the individuals from the company are
people in a genuine sense and a section is put around them to show that they
were treated as one single unit when they structure themselves into a
partnership.
4] Bracket Theory
This is one of the more famous and feasible theories of corporate personality.
The bracket theory is also known as the symbolist theory which states that a
corporation is created only by its members and its agents. So the people who
represent the corporation make up the corporation. The law only puts a
bracket around them for convenience purposes. So we consider these members
and the corporation as one unit.

In the practical world, however, we find that the personality of the corporation
is separate than that of its members and agents.

Given by Savigny, Salmond and sketchy the concession hypothesis of the

character of the partnership which is a family to fiction hypothesis not
indistinguishable says that lawful character can adhere to from law alone. It is
by elegance or concession alone that the legitimate character is in all actuality,
made or perceived.

According to this hypothesis, the juristic character is a concession allowed to an

organization by the state. It is completely at the prudence of the state to
perceive if it is a juristic individual. This hypothesis is not quite the same as the
fiction hypothesis in however much it underlines the optional force of the state
in the issue of perceiving the corporate character of the partnership. A few
pundits consider this hypothesis perilous in view of its over-accentuation on
State caution in the issue of perceiving organizations that are non-living
elements. This choice might prompt discretionary caution.

Purpose Theory

The principle ramifications of this hypothesis are that law ensures certain
reasons and expected to be possessed by juristic people doesn’t have a place
with everything except it has a place for a reason and that is the fundamental
reality about it. All juristic or fake individuals are only legitimate gadgets for
securing or offering impact to some genuine reason.

The beginning of this hypothesis has been brought back from German law for
example ‘establishments’ which were treated as juristic people. An
establishment is analogous to trust for explicit beneficent reasons like
engendering of schooling, grants and so forth In the milestone instance
of M.C Mehta v. Association of India set out the boundaries as to corporate
risk of perilous ventures and brought the private area inside the ambit
of Article 12 of the Constitution, emphasizing the need to develop new
procedure for corporate responsibility of public and private endeavours for
heartbreaking gas spillages or ecological corruption causing wellbeing dangers
and immense harm to the property.

There was an earnest requirement for the foundation of Environmental Courts

(for example Green Tribunals) with proficient specialists from Lego-climate cum
biology area and severe activity was justified against the failing corporate
bodies, what’s more, businesses for abusing the natural laws.

Separate Legal Entity —

Separate legal entity, also known as the corporate personality of a company, is

a concept that states that the company is distinct from its members. A
company acts under its own name, its assets are distinct and separate from
those of its members and there is no concept of agency and trustee between
the company and the members.

The company cannot hold the shareholders liable even if any shareholder is
holding all of its shares. This depends on the fact whether the company is a
limited company or an unlimited company. If the company is a limited
company then the shareholders can be called for payment during the process
of winding up to pay the amount which is yet to be paid by them or to pay the
amount which was guaranteed by the shareholders as stated in the
Memorandum of Association. In an unlimited company, the members need to
even sell off their personal assets during winding up to settle liabilities, but
such companies rarely exist.

In simple words, a company has a distinct identity that separates it from its
members and makes it independent of its members. The members cannot hold
the company liable if the members have any personal debts. The members do
not have any right to claim ownership of the assets of the company and nor
can the company claim any ownership over the personal assets of the
members.
The concept of a Separate Legal Entity was strongly established in two
cases, Salomon v. Salomon & Co. Ltd. and Lee v. Lee Air Farming Ltd. In both
these cases, the court held that a company is distinct from its members.

In the case of Salomon v. Salomon & Co. Ltd. (1897) , the facts of the case
were that Mr. Salomon had a boot-making business which was a sole
proprietorship. Soon after his business started to make a good profit, he
decided to make it into a company and the members of the company were
himself, his wife, his 4 sons, and his daughter. Mr. Salomon was a shareholder
and debenture holder at a floating charge, i.e., secured against the debt of his
company which made him one of the secured creditors. During the time of
winding up due to the failure of the company's business, he claimed that being
a secured creditor he must be paid prior to the claims of the unsecured
creditors. The official liquidator claimed the company to be a sham company (it
means that a company just on papers carrying out no business but only for the
purposes of holding assets of members in its name). The unsecured creditor
further claimed that the company was an agent for him and it is his duty to pay
off the debts.

The House of Lords in the above case held that the company is completely
different and distinct from its members, a company is not an agent nor a
trustee for its members, managers, or directors. The law sees the company to
be a separate, artificial legal person. In this case, the corporate personality, i.e.,
separate legal entity of the company and its members was strongly
established.

In another case, Lee v. Lee’s Air Farming Ltd. (1961) , the facts of the case
were that Mr. Lee had a company Lee’s Air Farming Ltd formed for the purpose
of running the business of aerial top dressing. Mr. Lee was the chief pilot,
director, held 1 share, and was also a salaried employee of his company as he
worked as the chief pilot. Unfortunately, during his work, he died due to an air
crash. His wife claimed compensation from the company as Mr. Lee died during
the time of his employment. The company opposed the claim on the grounds
that Mr. Lee was not a worker because the same person cannot be the
employer and the employee at the same time.

The Privy Council in the above case held that Mr. Lee and his company were
two distinct persons as per the concept of separate legal entity thus, the claim
of Mr. Lee’s wife for compensation is valid. The corporate personality of a
company is followed for all the companies whereby the company and its
members are considered as two separate persons.
Importance of a Separate Legal Entity
The following points justify the need to obtain separate legal entity:

 Rights: Although separate legal entity is not necessary for all business
types, an individual holding such status can keep property rights and
fight legal prosecutions.

 Legal framework: The legal framework prefers the existence of separate

legal entity because it gives such entity holders more protection in court.
Cases of fund misappropriation, breach of judiciary duties or other
criminal attempts can give separate legal entity’s more power to defend
themselves. It is because of their status, which is different from the
enterprise in question.
In the legal framework, companies act as separate entities. Moreover,
business owners are liable to pay taxes only on their salaries, bonuses,
and dividends. However, corporations pay corporate taxes differently
from individual taxation. This helps remove instances of double taxation.
 Exemption: A separate legal entity is exempt from dealing with annual
filings, shareholder meetings and regular maintenance. Also, separate
legal entity are not responsible for the company’s defaulted payments.
The company is thereby not free to freeze personal assets to cover its
liabilities.

 Operation: Separate legal entity status helps maintain consistency and

creates an identifiable persona for the organisation. Thus, business
enterprises can continue operating despite the death or removal of the
owner. Only a legal procedure can negate that status. Thus, the
‘identifiable persona’ creates a legal liability that includes the company’s
intangible assets like a franchise, exclusive rights, reputation, and
intellectual properties.

Benefits of Separate Legal Entity,

Some special uses of adopting a different legal status include:
 The legal definition of SLE represents the dichotomous nature of an
SLE. They can act independently from the organisation and its
building blocks.
  Individuals or business owners may choose a separate entity status
to minimise their liability and separate their functioning from that
of the business enterprise.
 Dealing with business finances becomes more accessible because it
formalises the management structure. Companies can free
themselves from lawsuits with a clear separation of entities.
 Judgements against a corporation do not affect its shareholders.
Thus, a separate legal entity can retain its assets in case of
judgements against the enterprise.
 Separate legal entities enjoy a perpetual existence that does not
dissolve when owners leave. The company does not let the absence
of prosecution of an individual or shareholder affect its status.
Moreover, separate legal entities are therefore not legally liable to
hold the burden of taxation or unpaid loans on them.
Separate Legal Entity vs Limited Liability
When a business venture separates its members and owners from its entity,
SLEs are formed. Thus, the company is a separate individual when it faces legal
suits and does not involve its owners or shareholders.
Limited liability partnership firms extend their liability to the personal assets of
the owners or shareholders. Thus, an LLC acts like a legal individual backed by
creditors managing liabilities and raising capital. If they become separate
entities, these firms can accrue debts, hire employees and deal with their assets
with detached accountability.
Why Have a Separate Legal Entity?
The primary reason for adopting a different legal status is the separation of
business liability from its individual owners. Thus, being a separate legal entity
means cases of debts and lawsuits can be deterred from the business
organisation without bothering the individuals.
You should consider entering a separate legal entity status:
 Liability protection for a business venture is an expensive affair.
Firms may enter legal battles and lose their assets. The SLE status
shields them from such liabilities in adverse situations.
 Since business owners are shielded from liability shocks, creditors
cannot take legal action against them. Individuals are, therefore,
also not required to pay insurance for liabilities.
  Sometimes, differentiating personal and business assets is difficult.
A separate legal entity acts as a corporate veil to define the extent
of these terms.
Conclusion —

The principle of separate legal entity is a very important characteristic feature

of a company. It is clear from this principle that a company is an artificial
person separate from its members. The assets of a company must be used for
the benefit of the company and not for the personal benefit of the members. If
the corporate personality of a company is misused the law will pierce the
corporate veil and hold the members liable for the acts.