Legal Status of Corporate Personality

INTRODUCTION

Corporate Personality has evolved as an important concept in the Jurisprudence of various subjects and has laid the foundation of various Company Laws, Insolvency and Bankruptcy Laws, Trade Union Rules and Partnership Laws. This is because an individual cannot do all the work and it is the collective act of many that pushes and strives. These corporations deal with other corporations and with individuals. To govern their relationship and even in some cases conflicts, there are laws, but to what extent are these corporates and their actions legal pose a question before us as they are not human beings and thus, do not get all those rights which a person has.

Who is a person? In layman terms, a person means a human being having ability to think, express and capable of holding rights and exercising liabilities. But is “person” restricted only to natural persons? The answer is negative. The definition of person extends beyond a natural person, including even an artificial person in its purview. As Salmond defines a person as, “Any being to whom the law regards capable of rights and duties, any being that is so capable, is a person whether human being or not and nothing that is not so capable is a person even though he be a man.” [1] Thus, non-natural entities like temples, universities, public authorities and companies all are persons under law and slaves and sanyasis are not. Even the Indian Penal Code under Section 21 defines the word ‘person’ as including any company or association or body of persons, whether incorporated or not. [2]

CORPORATION SOLE AND CORPORATION AGGREGATE

Like the Roman and British laws, the Indian law also recognizes the concept of Corporate Personality as Corporate Aggregate and Corporation Sole and their respective rights, duties, liabilities, immunities and privileges as the case maybe. Corporation Aggregate talks about many people coming under one unit to promote and achieve their common interest. Therefore, all the bodies or the organizations that are incorporated under the statute of parliament and state legislatures and even those not incorporated are all corporate personalities like Reserve Bank of India, Roadways Corporations, Co-operative Societies, Trade Unions etc. On the other hand, Corporation Sole is an incorporated series of successive persons. It is a creation of law which continues to exist even when the human changes. Like President, Prime Minister, Post-Master General etc. Thus, a single human exercise rights of two nature, i.e. rights as a human being and that of Corporation Sole.

Corporation Personality continues to exist even if the human beings change. This is the reason why we have had 14 different persons for the same post of President and Bombay Dyeing continues to be in operation since 1879 and Colgate since 1806. Thus, it is formed by law and ended by law only.

LEGALITY OF CORPORATE PERSONALITY

With the laws made for recognition of these juristic persons does it prove that they have absolute rights on the same length as the human beings have in a country. Even individuals in India don’t have absolute rights but have rights with reasonable restrictions. So, what about the extent of legality of corporate personality in India?

There is legality in practice, they have a name, right to buy or sell property in their own name, right to sue or can be sued, right to enter into a contract etc.[3] All these acts are undertaken by the people of the corporation, but not in their individual capacity but in the name of that corporation and for its benefit. Thus, as held in Saloman v. Saloman Co. that with the incorporation, the entity of the company becomes institutionalized. This principle of the independent corporate existence and the principle of corporate personality of a company was recognized. A corporate body has its own personality distinguished from its members.[4] The legality is also confirmed by the “Limited Liability Principle”. The members are liable only to the extent to which they hold their shares. If a company incurs loss, it is from the company’s assets only that the losses will be recovered. There are circumstances where the company winds up but the director or the owner of the company is wealthy.

It is a privilege for members of a corporation. But when individual interests start overpowering the interest of the corporation then there are repercussions, and this is explained by the concept of lifting of veil. That means, in the end any corporation is run by a natural person and when that natural person starts making decisions fraudulently, dishonestly or for his own benefit, then the claim of his that all the acts were done for corporation’s benefit are overlooked, and the person in individual capacity is held liable. The principle of ‘Lifting the Corporate Veil’ has found statutory recognition in certain provisions like Sections 45, 147, 212, 247 and 542 of the Companies Act. Corporate veil is said to be lifted when the court ignores the company and concerns itself directly with the members or managers. Thus, in circumstances where to know the real nature of company, to prevent abuse of process of law, to punish the person in quasi-criminal cases against the company, in matters of fraud or even for tax evasion.

In P.N.B. Finance Ltd. v. Shital Prasad Jain, the court held that “the doctrine of piercing the corporate veil may be invoked whenever necessary by the court in the interest of justice, to prevent the corporate entity from being used as an instrument of fraud, and the fundamental principle of corporate personality itself may be disregarded having regard to the exigencies of the situation and for the ends of justice.[5] The corporations are made liable when they fail to fulfill their obligations. Thus, contractual liability. Even in criminal cases, liability arises but is restricted till fines. Lastly, under tortious liability the company is made vicariously liable for the acts done by its employees during the course of employment.

There are various theories that are pen down by the jurists on the same subject. These include Fiction Theory of Savigny, Salmond and Dicey which state corporations have a fictitious personality. Realist Theory propounded by Gierke talks about corporations not being fiction but real in all senses. Whereas Bracket Theory of Jhering states that it is just a bracket that is put on the group of individuals to act as a single unit for convenience purposes. Concession Theory being on a similar footing as to Fiction Theory believes that these Corporations are a concession on the part of state. Thus, it is with concession that these personalities are created, existed or recognized. There are other theories too, all having some merits and demerits. But it is on the basis of these theories that have helped in shaping the law and related jurisprudence till the present time. The concept as it was in the 19th century is totally different from what exists this year. It is judicial interpretation, justice, reason, equity and conscience along with the legislature that have played a major role and given the legal status to same.

CORPORATES AS CITIZENS

Having a legal identity and having a citizenship are two entirely different concepts. It is only the natural citizens that are given citizenship under the Indian Citizenship Act and not to the juristic persons. In Tata Engineering Company v. State of Bihar, it was held that since the legal personality of a company is altogether different from that of its members and share­holders, therefore, it cannot claim protection of fundamental rights although all its members are Indian citizens.[6] Supreme Court in State Trading Corporation of India v. Commercial Tax Officer held that companies cannot claim protection of such fundamental rights as are expressly guaranteed to citizens, but it can certainly claim the protection of such fundamental rights as are guaranteed to all persons whether citizens or not. [7]

Though a company is not a citizen, it does have a nationality, domicile and residence. In case of residence of a company, it has been held that for the purposes of income tax law, a company resides where its real business is carried on and the real business of a company shall be deemed to be carried on where its Central management and control is actually located.[8]

CONCLUSION

Thus, juristic persons play a chief role in every aspect. Any practice devoiding them of their existence or causing hindrance in the practice of its acts to promote their objectives has a right to sue them because corporate personalities have legal status. This status is given, recognized as well as promoted by the State as of separate nature than of its members.

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Endnotes

[1] Dr.N.V.Paranjape, Studies in Jurisprudence and Legal Theory, 8thEdition, Central Law Agency, Pg. 496.

[2] Section 21, Indian Penal Code, 1860.
[3] Section 34, Companies Act, 2013.
[4] (1897) AC 22.
[5] (1983) 53 Comp. Cas.66.
[6] AIR 1965 SC 40.
[7] AIR 1963 SC 1811.
[8] Corporate Personality, available at http://www.legalservicesindia.com/article/173/Corporate-Personality.html , last accessed on 18/02/2020.

Author Details: KHYATI TONGIA (3rd year Student, GOVERNMENT NEW LAW COLLEGE)