This article is written by Kaushiki Keshari and Ishani Khanna. This article is further updated by Debapriya Biswas. This article explores the meaning of corporate personality, covering the different types and theories of corporate personality as well as the components that form the personality of a corporate entity.

Introduction

There are two types of persons that are recognised under law — natural persons and artificial (or fictitious) persons. A natural person, as per its definition, is any individual who has natural rights and obligations, like a human. Meanwhile, an artificial or fictitious person can be referred to as an individual who is not natural or human, like a corporation. However, that does not mean artificial persons do not have rights or obligations, because they do due to their fictitious personhood that is made by law.  

This fictitious or artificial personhood of corporations and other corporate entities originates from the concept of corporate personality, which we will explore in this article in detail.

What is corporate personality 

As briefly discussed earlier, corporate personality can be defined as a legal concept that gives a corporate entity personhood in the eyes of the law. In simpler words, corporate personality allows a company to be legally recognized as an artificial or fictitious person for the enforcement of its rights and obligations. These rights include the right to own properties under its name along with the right to enter into contracts and agreements as a party. In addition to that, corporate entities can sue and be sued just like any other person recognised by the law.

This concept was established and coined by the House of Lords in the landmark judgement of Salomon v. Salomon & Co. Ltd. (1897), in which it was held that a corporation has an identity that is separate and completely independent from its shareholders and other members working under it. Thus, due to the separate identities, the shareholders and members of the company cannot be held accountable for the actions taken by the company in its name. This separate legal identity is known as the corporate personality, which is responsible for giving a company its artificial personhood.

The legal aspects of the corporate personality of any company can vary from nation to nation since the laws of each jurisdiction depend on the legal provisions and case laws of the said region. Due to the varying precedents and laws of each jurisdiction and nation, there can be a lot of differences in the rights, liabilities, and commitments of companies.

Thus, to establish or recognise the corporate personality of any corporate entity or organisation, three conditions need to be fulfilled:

• There should be an organisation or association formed by several individuals with a specific purpose or goal. 
• The said entity should have different organs or departments that can act upon corporate functions, such as management, sales, human resources, import and export, etc.
• The organisation or association shall have a ‘will’ as per legal fiction.

Once all of these three conditions are met, the corporate entity or organisation can be legally recognised for its corporate personality and enjoy its advantages. These advantages include the privilege of owning assets and property during business transactions and conducting financial transactions in the name of the company while operating independently from the shareholders and its members. However, to represent the collective will, a common seal is often used by the entities. 

As a result of its corporate personality, a company can engage in similar rights and actions as an individual, which include opening and managing bank accounts, taking debts, lending money, hiring employees, entering into contracts and agreements, as well as suing and being sued. This is especially beneficial for the shareholders of the company, who are technically its owners but can also act as creditors, given the occasion. 

While some shareholders may own a significant portion of the shares of a company, it would not make them personally responsible for the company’s actions. This can also be applied vice versa, where the company is not liable for the shareholder’s actions. This is because the shareholders are not the company’s agents and cannot be legally bound to the company’s actions or even bind the company through their actions outside of the affairs of the company. 

In other words, a company is neither an agent nor a trustee for its members or shareholders. The assets and property owned by the company are not inherently theirs. This also means that neither the members nor the shareholders of a corporation can be directly held accountable for the legal matters to which the company is a party. They can, however, collectively make decisions in a general meeting as the ‘will’ of the company but cannot directly exercise their rights in such matters. 

This legal distinction is usually established upon the incorporation of a company, where it is established as a juristic person in the eyes of the law. In simpler words, a corporate entity can have the same rights and obligations once it is incorporated and legally recognised. In its essence, a company operates no differently than any other legal person, with a representative or an agent carrying out the company’s actions for it.

This view was supported by the Privy Council in the landmark case of The Citizen’s Life Assurance Company v. Brown (1904),  where it was ruled that corporations can also be held accountable for their actions indicating malicious intent. Thus, ‘artificial’, ‘juristic’, or ‘legal’ persons such as corporate entities and organisations or associations of people are capable of having rights and liabilities just as any natural person, once legally recognised.

Features of corporate personality

As mentioned earlier, corporate personality is distinct from natural personality. Some of the features that make corporate personality distinct are given as follows: 

Artificial personhood

Corporate personality gives a fictitious or artificial personhood to corporate entities. This enables the corporate entities to have their own presence separate from their agents and conduct day-to-day business activities such as financial transactions in their own name. It also allows a company to engage in actions such as opening and managing bank accounts, taking debts, lending money, hiring employees, entering into contracts and agreements, as well as suing and being sued. 

Rights and obligations 

Once incorporated, a company gains its separate personality from its members and shareholders. This corporate personality enables them to have their own rights and obligations since they are recognised as a legal person in the eyes of the law.  

Independent operations 

Corporate personality enables a company to operate independently from the shareholders and its members. This is possible due to a separation between the company and its members by creating a separate legal identity or personality, which we will cover more in detail later in the article. 

Collective will

While corporate personality creates a separation between the identity of the company and its members, a company cannot quite function without its members either. As an artificial person, a company needs natural persons to act as its agents or representatives. 

The will of the natural persons forming the company; that is, its members and shareholders help create the will of the company. Their collective will is decided by voting in general meetings and whatever decision is made by the majority, the company would act on it. This decision would then be expressed through a common seal, which is the physical symbol of such collective will.

Evolution of corporate personality

The concept of corporate personality slowly developed from the late 1800s, with Foss v. Harbottle (1843) being the first case where the identity of a company was considered separate from its members and shareholders. In this case, two members of a company had sued an outside party in the name of the company. The reason for the suit was that the company suffered a significant loss in property due to the negligent and fraudulent actions of the outside party. 

The Court of Chancery held that while the actions of the defendant may have been fraudulent, the two shareholders were not proper plaintiffs as they lacked the qualifications to represent the whole company. As mentioned earlier, a collective will of the shareholders is needed to make decisions as a company. In the present case, there was no such collective will, only the will of the two individual shareholders.

Thus, according to the Court, the company suffering the loss can be held as a proper plaintiff or claimant. And as a legal entity itself, the company has the power to initiate a suit in its name. The Court held that the identity of the members of the company is distinct from its corporation and thus, they do not have the right to sue the defendants for the damage incurred to their company.

In the end, the Court dismissed the case, stating that the corporation needed to file a suit in its own name to claim the damages instead of the shareholders of the company attempting to sue on its behalf. 

This ideology of a company having a separate identity from its members and shareholders was later backed by the Calcutta High Court in the case of Re: The Kondoli Tea Co. Ld. vs Unknown (1886). 

In the aforementioned case, a tea estate was transferred over to Kondoli Tea Company Limited, which was paid in the form of the company’s shares and debentures. The issue arose when the matter of taxation of such a transfer came into question. Since there were only eight shareholders in the transferee company, the argument was raised that they only passed over the tea estate property to themselves under a different name. However, the shareholders contented against it and refused to pay the ad valorem tax due on the transaction of the land, for which they were sued. 

The Calcutta High Court ruled in the favour of the shareholders, stating that the company exists as a separate legal identity from its shareholders and that any property transferred to its name should be recognised as the property of the corporation. The shareholders of the company, regardless of their numbers, should not be held liable for the tax on a transaction done under the name of the company. 

The Court also emphasised how the tea estate transferred was the property of the Kondoli Tea Company Ltd, which was a legal entity with the capability to outlast all of its members beyond their lifetime. Thus, whoever the shareholders of the company were did not matter or affect the transaction since the company was not synonymous with its shareholders. 

However, the actual concept of corporate personality, not just a different legal entity, was first established in the landmark judgement of Salomon v. Salomon & Co. Ltd. (1897). This case established the idea of a corporate ‘veil’ or ‘shield’ that protected the members of a company from the decisions taken in the name of the company during the course of business.

In the aforementioned case, Mr Salomon had incorporated a company of which he was the majority shareholder as well as the principal creditor at the same time. The issue arose when the company went bankrupt and the procedure of insolvency was initiated by the liquidator. Since Mr Salomon had secured debentures, the payment of his loans was to take precedence over the unsecured debts of other creditors. However, since he was the majority shareholder and also the one who incorporated as well as managed the company, the question arose if the priority of his debentures should be allowed as such. 

In the initial judicial proceedings, the company was interpreted to act as an agent for Mr Salomon, thus, making the ruling against him and making him responsible for the unsecured debts of the other creditors. However, the House of Lords overturned this ruling and held that the company has a separate legal identity from that of its shareholders and due to this identity, the shareholders cannot be held liable for the actions taken in the course of business in the name of the company. 

The Court also held that the company had seven members who were constituted with all due procedure, thus making the incorporation of the company legitimate. Just because Mr Salomon was the primary handler of the business of the company does not mean he would be accountable for all its debts.

Another significant case that led to the further development of the concept of corporate personality was HL Bolton Engineering Co Ltd v TJ Graham Sons Ltd. (1956). In this case, the respondent company had leased its property to the appellant company in 1941. The appellant company, sometime later, had sublet the said premises in another lease. After thirteen years, the respondent corporation notified the appellant of the termination of the lease, and they subsequently notified the subtenants as well.

The issue arose when both notices were declared ineffective due to the enactment of the Landlord and Tenant Act, 1954. The respondent re-notified the subtenants with a fresh notification as per the newly enacted Act and opposed the renewal application for the tenancy by the subtenants. The subtenants argued against it, stating that they had paid for the interest within the past five years. In turn, the respondent company stated that they intended to move back to the premises to conduct business. 

During the judicial proceedings, however, it was discovered that no formal resolution was passed by the directors of the respondent company regarding this matter. The plaintiff argued that the respondent company could not terminate the lease without passing a formal resolution to show the collective will of the company. Meanwhile, the Respondent stated that even without such a resolution, the actions of the company still expressed its collective will for the same. They highlighted that they had been meeting with the architects and conducting other actions that relayed the will of the company to occupy the premises to conduct their business. 

The Court of Appeal held the judgement in favour of the Respondent, stating that the will of directors could be interpreted as the will of the company. According to the Court, a company could be equated to a living organism, with its members acting as the organism’s nervous system while its directors or board of directors as the brain of the company. Based on their intentions and orders the company functions. In simpler terms, the members of the company act as its limbs and organs and thus, any functions conducted by the company can be interpreted as the will of the members that are acting as its agents (or limbs).

Another case that played a significant role in the development of corporate personality as a legal concept was Lee v. Lee’s Air Farming Co. Ltd (1960), where New Zealand’s Judicial Committee of the Privy Council iterated on how a company’s legal personality can differ from its members and how a director of a company can still be considered employed by the company despite controlling it alone.

In this case, the respondent company was created by the appellant’s husband, who also acted as a majority shareholder and director. He was the major decision-maker and had the final say in every decision taken in the name of the company. Unfortunately, the director had expired during his employment as a pilot, following which the appellant had sought compensation under the New Zealand Workers’ Compensation Act, 1922 for work-related injury from the respondent company. 

During its initial judicial proceedings, the appellant’s claim was dismissed since the Court recognised her husband as the employer (or the company) himself rather than a worker for the company, given how he had complete control over the corporation. However, this ruling was overturned once the case was brought to the Privy Council. The Council held that the company has its own personality and identity that differs from that of its members. And while a single owner can run it, that does not mean the owner and the company become synonymous or interchangeable. 

According to the Council, the contractual relationship of employer and employee between the respondent company and the appellant’s husband cannot be overlooked only because he was the primary shareholder of the company. Thus, the respondent company was liable for compensation to the appellant since there was a service of contract between the company and her (now) deceased husband.

Thus, this is how the concept of corporate personality evolved in the field of company law. Many other concepts surrounding the same, such as the doctrine of corporate veil and limited liability also developed alongside this, which we will discuss later in the article.  

Types of corporate personality

Corporate personality has two types: Corporation Aggregate and Corporation Sole. Let us discuss each type in a more detailed manner.

Corporation Aggregate

Corporation Aggregate, as the term suggests, is a type of company that is formed by combining several individuals working under it either as members or as shareholders. In other words, it is a corporate existence that is made up of various natural persons but still maintains a separate legal identity from its members, shareholders, and employees. 

A corporation aggregate acts as a unit where the individuals under the company are ‘absorbed’ into one identity rather than existing as separate legal persons. It focuses on the legal relationship between the members of the corporation, which is made for a specific purpose common among all its members. This purpose can be anything, whether it be financial, charitable, legal, or even political. This concept of corporation was first introduced in England by the Royal Charter, which was later added to its Act.

The main feature of this type of corporate personality is the perpetual succession of the positions of its members and business. That is, even after the retirement or death of any of its members or shareholders, their titles will merely pass on to the next individual, and the corporation will carry on. This is how many corporations continued their business ventures for more than a century. 

The legal character of these corporations is based upon the recognition by law that they receive upon incorporation of the company after registering their Articles of Association (AOA) and Memorandum of Association (MOA). The MOA acts as the constitution of the corporation, while the AOA acts as the legal guideline that helps frame the ‘laws’ regulating the legal relationships within the company.

As observed in the landmark case of Tata Engineering and Locomotive Company Ltd. v. Province of Bihar (1964), a corporate body is a person under the law, even with its fictitious presence. Just because it is not a natural person does not entail that it would not have any rights or liabilities. A corporation has a completely different identity from its agents and members, as well as their successors. However, the obligations binding the corporation shall also bind its members and agents in lieu, even when the tenure ends and a new individual succeeds them.

In its essence, a corporation aggregate is nothing but a group of individuals with a common purpose who take actions as a unit. They express their collective will through a common seal. The most common type of corporate aggregate observed would be all the private and public limited companies, along with multinational corporations. 

Furthermore, there are many advantages to corporation aggregate, due to which it is the most popular type of corporate personality adopted by corporations worldwide. Some of these advantages and utilities are listed as under: 

• It is easier to handle and aid in administration with this type of corporate personality.
• It promotes better cooperation between its members.
• It has a better foundation due to its ability to sustain its members perpetually. 
• A corporation aggregate can be any kind of corporation (general or specialised).
• It is more efficient due to various individuals co-existing under such a corporation at the same time.
• The members of this type of corporate personality have a separate identity from the corporation and, thus, have their assets protected against losses and debts incurred by the company.

Corporation sole

Unlike corporation aggregate, corporation sole consists only of a single individual who has the head and representative in a corporate position. It is more permanent than its counterpart and can also have perpetual succession for that sole individual. The most common examples of this type of corporate personality can be seen in the Presidents and Prime Ministers of nations, as well as the monarch heading a country. Whether it is the Prime Minister of India or the King of England, they will be recognised as a corporation sole.

While the concept of corporation sole is a fictitious and artificial one, the individual heading it is a natural person. The distinction here comes in the form of the position giving the authority rather than the person. For instance, if the Prime Minister of India declares a public holiday, it would be the authority of that fictitious position that would give more power to the declaration than the person in that position. 

In most cases, corporation sole is only seen in public offices or as an official position with a more executive character. This type of corporate personality also has its rights and obligations, which might be dictated by a statute, unlike the corporation aggregate. 

In India, many official positions can be identified as corporations. This includes the Prime Minister of India, The Governor of any state, the PostMaster General, the Registrar of Trademark and Patents Registry, etc. Even positions like Chief Justice of India and Comptroller and Auditor-General of India can be classified under this type of corporate personality. 

The character of a corporation sole, as highlighted by the Supreme Court in the case of S. Govinda Menon vs The Union Of India & Anr (1967), is not much different from that of a general corporation. Even if the person in the position of corporation sole has a regular character, they would not be perceived as having any difference in the eyes of the law. For instance, if the governor of any state is prosecuted for a crime, they would be prosecuted as the governor regardless of the nature of the crime. 

Purpose of incorporation

Incorporation of a company, as one may already be aware, refers to the legal procedure of forming a company or any other corporate entity. This procedure allows the company to be legally recognised as a person and gives it a corporate personality that is distinct from its members and shareholders. 

The main purpose of such incorporation is to get it recognised in the eyes of the law and to establish an independent identity for the corporation to act under. Since most people cannot directly handle the obligations and debts that might be incurred by a corporation, the independent identity not only protects them from such liability but also helps to create an identity that represents the collective will of its members.

Furthermore, proper incorporation of the company also allows a company to create personhood that has its own rights and legal obligations along with the ability to conduct actions such as opening and managing bank accounts, taking debts, lending money, hiring employees, entering into contracts and agreements, as well as suing and being sued.

Incorporation of a company also reduces the complete control of the shareholders and the directors on the assets and property of the company since they are transferred and owned by the Company only. This also means any debts and liabilities (like lawsuits) of the company are also its own only and the shareholders, directors or any other members of the company cannot be held liable for the same. 

With incorporation, the company is institutionalised and recognised legally. In essence, it acts as a little democracy and the incorporation simply helps legalise the same and whatever decision such an institution makes based on the common will of its members and shareholders.

Moreover, once a company is incorporated and gains its own personality, it can act as an artificial person separate and independent from its members. Thus, even if the members of the company change, leave, retire or expire, the company will continue to exist and enjoy perpetual succession. 

Benefits of corporate personality

There are many benefits of a corporation having its own personality, some of which are mentioned below:

Independent Identity 

As mentioned earlier, corporate personality allows a corporation to have a separate legal identity from its members and shareholders, giving the corporation its own existence and presence. This separation helps protect the shareholders from the liabilities of the actions of the company while giving the company freedom from any arbitrariness that might be committed by its major shareholders or directors.

Such independent identity also allows easier legal proceedings in case of a lawsuit, allowing a company to sue and be sued in its own name. Furthermore, any property that is in the name of the company is solely owned by the company and not any of its members. 

However, while all the decisions made in the name of the corporation are treated as its own, its will originates from the collective will of the members composing it. This collective will is expressed during the general meeting through voting and is often seen in the form of a common seal on official documents. Thus, while the company has its own identity and personality, it still derives its authority from the natural persons working under it. 

Limited liability 

One of the most popular and sought-after advantages of corporate personality is the limited liability aspect. In simpler terms, it is the privilege of a member or shareholder of a company where their liability is limited by how much they invested in the company. None of the shareholders and investors are liable beyond the amount they have invested in the corporation. 

Thus, in the event of insolvency or winding up, none of the liability of debts and obligations of the company falls upon the shareholders and their personal assets. This is especially beneficial given that the liability does not fluctuate with time or price. 

Since the company has its own personality and identity, it stands to be liable for its obligations. Such liability is unlimited and all the assets and property relating to its business is seized for the same. In such a scenario, the Limited liability of the shareholders protects them from incurring any further loss. No shareholder or member of the company would be bound to contribute anything more than the nominal value of shares they may have of the aforesaid company. This stands to be one of the more popular benefits of the corporate personality that the investors opt for. 

Perpetual Succession 

As mentioned earlier, since the identity of a company is not dependent on its members and shareholders, it can exist beyond their lifetime. Even if all the members quit, change, retire or even expire, the company would retain its identity until it has been wound up. The assets, property and any other privileges enjoyed by the company would continue as long as it shall exist. 

This is exactly how many companies and businesses have existed and boasted of existing for more than a hundred years  

Shares and their transferability 

Shares of a company, like any other asset, can be treated as movable property that can be transferred and even inherited. According to Section 44 of the Companies Act, 2013, the nature of shares, debentures and any other interest that a member may have in the company is a movable property that can be transferred in the manner as prescribed by the AOA of the company. 

Since the shares are transferable, by selling their shares to the public, a company generates its capital and finances. The maximum corporate finance can be generated in a very quick and easy manner by listing the shares and debentures of the company publicly and allowing public subscriptions at a fixed rate.

Furthermore, this transferability of shares of a company allows easy liquidation of the asset when needed by the investors while also giving stability to the company by providing adequate funds from the investors. Even if the shareholders change, the existence or management of the shares does not change nor is it affected. 

Separate assets and property 

As mentioned earlier, all the assets and property bought or transferred in the name of the company remain in its name. It is not owned by the shareholders nor do they have any right on property vested in the corporation. This not only allows a perpetual succession of the property through the company despite the changes of its members and shareholders but also allows the company to have complete power over the property just as any other legal person. 

A corporation can own, use, sell, transfer, lease, etc., their assets and property just like any other legal person. And since its identity is distinct from its members and shareholders, the chances of fraudulent transfer or arbitrary actions over such property are reduced. This also means that the property in the name of the company is owned by the company itself, not by its shareholders as joint owners, as also held by the House of Lords in the case of Macaura v. Northern Assurance Co Ltd (1925).

While the shareholders do have the power to manage and control all the actions relating to the property, it has to be decided through the voting of a general meeting to convey the collective will of all the members. 

Centralised management 

The management of any corporate entity is divided into several levels and is considered different from the formative control that is usually exercised by the shareholders. In simpler terms, ownership and management of a company are two completely different things. The management of a company is usually handled by the employees of the company, including the board of directors. They are the ones who decide the policy and actions of the company while the shareholders simply vote and give a general consensus on whether they want the company to act upon such decisions or not.

This centralised form of management helps create more efficiency and a distinction between the identity of the shareholders and the company, in which we can also see the corporate personality playing a vital role. This gives the company its own autonomy and flexibility regarding its decisions and policy-making under the guidance of the professional expertise of its directors and employees. 

To sue and be sued

Due to corporate personality and the resulting separate legal identity, registered corporate entities have the capacity to sue and be sued in their own name. And while the company needs to be represented by a natural person, all the liabilities and rights from a lawsuit shall be of the company itself. This includes any kind of claim, compensation, or even punishment for criminal offences. A company can even sue for defamation if its image was hampered by any such false and/or defamatory comment. 

Disadvantage

While there are many benefits to corporate personality, there are quite a few disadvantages as well, some of which are given as follows:

Formalities and complexity 

Unlike direct ownership businesses or even partnership firms, corporate entities with limited liability require more complex procedures. This can be seen in the form of general meetings to get consensus on every decision to be made by the company along with other procedures where all the members and shareholders of the company have to be notified.

Such formalities often result in unnecessary complexity along an extended delay in time. If the expenses are to be accounted for as well, for the incorporation of the company, the notifying of the shareholders and every other administrative and management formalities, then it can be observed that such actions are quite expensive in comparison to direct ownership businesses. 

Not a natural person 

While the corporate personality may have given the corporation personhood, such personhood is artificial or fictitious in nature and cannot have the rights that only a natural person can have, like citizenship. And while that also can be seen as a benefit for many people, the issue arises when different countries apply different types of taxes based on such factors. One may argue that the origin place of a company can be considered its domicile but law does not recognise it as such.

Risk of fraud and evasion of obligations 

As observed through many recent events, shell companies have often been made by individuals to evade tax and other obligations. Such fraudulent activities, while uncovered and punished justly through the doctrine of lifting the corporate veil, still run rampant. In such cases, corporate personality acts as a double-edged sword.

Separate legal entity 

As discussed earlier in the article, a separate legal entity refers to a corporate entity that has a separate legal identity from its members and shareholders. In simpler terms, it is an entity recognised by the law as a judicial person that has an identity independent from the members comprising it. This allows the company to have its own legal existence, allowing it to have rights and obligations like any other judicial person.

Corporate personality usually derives from a separate legal identity as it creates a distinction between the company and its members. Other elements of a separate legal entity include the corporate veil, which we will discuss in the section of the article.

Corporate veil

In a nutshell, corporate personality can be referred to as a legal concept that differentiates a company from its shareholders, directors, officers, and other members. This legal distinction is also commonly known as the ‘incorporation’ of a company or the ‘corporate veil’, and it was first established in the landmark case of Salomon v. Salomon. It is one of the defining aspects of corporate personality since it sets apart a company as a legal entity that is independent of the identity of its members.

Due to this legal distinction between the identities of the company and its members, the company can continue its business for years even after the members working under it retire. In simpler words, through perpetual succession, companies can continue for years even if a majority of their members retire, expire, or resign. Only when the company is winded up will it cease to exist.

Any company with a corporate veil remains unaffected by changes like the resignation of employees, changes in shareholders through share transfers, and even the retirement of their directors. None of these changes impact the company’s rights, immunities, properties, or possessions. It can continue to exist despite all the changes in its membership over the years. 

A corporate veil also acts as a protective shield for the members and shareholders of a company, shielding them from the actions of the company that were made in the name of the company itself, especially in cases of default or insolvency. For instance, if a director of a company defaults, only the company would be liable for such a default and not the other members of the company. Thus protecting its members from the consequences of the actions taken in the name of the company. This principle also applies to other corporate actions, like legal breaches and financial obligations.

However, while the concept of the corporate veil is made to protect the members of the company from the effects of the actions carried out in the name of the company, it can often be misused to carry out fraudulent activities by the members of the company. Thus, to resolve this, the process of ‘lifting’ the corporate veil was introduced.

Lifting the corporate veil

As mentioned earlier, the concept of the corporate veil has a lot of privileges that are oftentimes attempted to be misused by the members of a company to commit fraud and other illegal activities in the name of the company. This is done by the members so that in the situation where negative consequences of such fraudulent activity arise, the guilty members can separate themselves from it and instead make the company liable for those actions. In many cases, people have made shell companies just to commit illegal activities and later shift all the blame on the actions of the ‘company’.

In such situations, the law looks behind the corporate veil to identify the actions of the guilty members of the company. It is mostly because an artificial or fictitious person is not capable of committing fraudulent or illegal activity. This principle is known as the ‘piercing’ or ‘lifting’ of the corporate veil, as given under Section 34(2) of the Companies Act, 2013.

In other words, lifting or piercing the corporate veil refers to the process of looking behind the company’s facade as an artificial or fictitious person to find the person liable for the actions committed in the name of the company. This principle uplifts the shield provided by the corporate personality to the members of the company and holds the individual member or shareholder liable for their actions. 

As held by the Court of Appeal in the case of Adams v. Cape Industries plc (1990), since a company is an artificial person and can only act through its human representative or agent, the corporate veil usually helps draw a line between the agent and the company for the actions taken in the course of business. The principle of lifting the corporate veil helps to see whether the actions undertaken by the human agents of the company were actually within the course of business or were those actions a misuse of the corporate facade. 

Under the company law, a company can find itself liable in two ways: 

• Direct liability, where the company directly commits the actions; or
• Indirect or secondary liability, where the agent or representative of the company commits the actions during any business transactions.

Based on this, the principle of lifting the corporate veil is applied through two methods. In the case of direct infringement, the ‘instrumentality theory’ of lifting the corporate veil is applied. For this theory or method, the Court examines where the corporate entity is used as a shell for its members to act for their benefit rather than the benefit of the business and the company. 

Meanwhile, for secondary or indirect infringement, the alter-ego or the other-self theory is applied. This theory advocates that there is a distinct boundary between a corporate entity and its members. Thus, any actions committed by the members or agents of the company not concerning the company or in its name directly or for the business would not be the liability of the company. This theory helps in establishing liability for fraudulent or illegal actions committed by the agents of the corporation for their benefit and usage, even if it is within their course of employment under the company. 

Statutory Aspect

There are usually two circumstances in which a corporate veil can be lifted, in which the statutory aspect involves certain provisions from the Companies Act, 2013. These provisions act as a protection for the third parties dealing with the corporate entities for business or any other transactions. 

Starting with Section 2 (60) provides for an “officer who is in default”, who is nothing more than a person in charge who would be held liable to any penalty or punishment as prescribed by the Act. This provision provides for the scenarios where the corporate veil is lifted to enact the appropriate justice. Many other provisions in the Act of 2013 reference the same to penalise the persons responsible, such as Section 76A, which penalises contravention of Section 73 that deals with the prohibition of acceptance of deposits from the public and Section 76 deals with the instances where certain companies are allowed by the Act to accept deposits from the public for securities.

Section 3A of the Act talks about the reduction of members in a company beneath the limits given in the statutes. As the minimum number of members is given under Section 3(1), if any company falls short of such numbering and continues with its business for more than six months, then the obligations and liabilities incurred by the corporation would be directly placed on the individuals who are aware of such fact. In a nutshell, if the number of members falls beneath the minimum, the company would no longer have the protection granted by its corporate personality or corporate veil and all the actions taken by the company in such a period would be interpreted as the actions of the members directly. 

Meanwhile, Section 5 establishes the AOA and prescribes in the manner which it should be amended and followed. This section gives a rundown of the prescribed manner in which each transaction in the company shall work through, preventing any arbitrary actions. Any transaction or decision made in violation of this section would be considered voidable on the part of the other party.

The Act further draws the line for liability of the members of the company through Section 34 which establishes criminal liability for misstatements in prospectus and Section 35 which establishes civil liability for misstatements in prospectus. Both sections provide for liability placed on the members responsible for the fraudulent activity rather than the company itself. These are further followed by Section 36, which penalises for fraudulently inducing other people or companies to invest money.

On the other hand, Section 38 of the Act penalises members of the company that create fictitious identities to personate and acquire shares, securities or otherwise in a company. This includes the creation of a shell company to solely acquire shares of another company. In such a case, one cannot hide behind the corporate veil of the shell company.

Section 219 establishes the power of the inspector to look into the affairs relating to the company, which may also include looking into affairs of another affiliated company or the members of the aforesaid company. This power especially comes in handy when the investigation is about alleged mismanagement, fraud and other illegal activities, or oppressive policy towards the members of the company, as given under Section 241 of the Act. 

The Act also includes provisions like Section 378ZM that provide for penalty for contravention for any persons that willfully fail to provide or furnish information as required or contravene against the provisions of the Act and the chapter herein mentioned. Other provisions such as Sections 447 to 453 also mention liability for persons who may be members of the company or officers who are in default. These provisions help incorporate the doctrine of lifting the corporate veil in the company law without even directly mentioning the term as such. 

Judicial Aspect

The other circumstance in which the corporate veil can be lifted is the judicial instances, where the Court observes the facts and interprets the law accordingly to observe whether the corporate veil should be lifted or not. During its evolution, certain instances were categorised through judicial proceedings where the corporate veil would be lifted or pierced, some of which included the determination of the enemy character of the company, fraudulent behaviour or illegal activities conducted by the members of the company, the agency of the company, improper behaviour, sham or facade, tax evasion, etc. 

The case of Daimler Co. Ltd. v. Continental Tyre & Rubber Co. (1915) is a classic example of lifting the corporate veil to observe whether the character of the company had changed or not. It was also the first case where the House of Lords established the principle of determination of enemy character of a company, which was later backed by Connors Bros. v. Connors (1938) in which the Supreme Court of Canada pierced the corporate veil to hold that since the German director of the company had complete control over its management, any financial transaction towards the company would lead to helping the economy of the enemy country. Thus, the Court had held the company of enemy character.

Another significant judgement would be the case of Jones v. Lipman (1962), in which the Court of Chancery lifted the corporate veil to see whether there was any ground for fraud on the side of the company. Since the company had only two directors and members with no actual business transaction or usage, the Court held that the defendant had transferred the property in the sale agreement to the company to evade performing his part of the agreement and thus, such action was fraudulent and the transfer was held to be void in nature.

The case of Re: R.G Films Ltd. (1953) can also be taken as another example where the corporate veil was lifted to see whether the films produced by the British company were actually British productions or was the company merely acting as an agent for another company. In this case, it was found that the British company was merely an agent whose banner was used by an American film production company that had the majority of the shares in the said company. Thus, based on this finding, the films produced by the company were not certified as British production films since it would be misleading the audience.

Meanwhile, in the case of Subhra Mukherjee v Bharat Cooking Coal Ltd. (2000), the respondent company had transferred all the assets in its name to the wives of the directors of the company. Upon lifting the corporate veil, the Supreme Court of India found that the said decision was made solely by the directors without any proper consultation or voting from the shareholders of the company. Since such a transfer was not made in the interest of the company and would only benefit the directors of the company, the transfer was held to be void since the whole action itself was a sham. 

In a way, it can be concluded that the Court lifts the corporate veil of a company, especially in cases of economic offences that might be committed with the corporate persona as a cover or shield. This can be observed in the case of Santanu Ray v. Union of India (1989), where the company was held liable under Section 11 of the Central Excise and Salt Act, 1944 and was later alleged with violation of the same since attempts to evade excise duty were made through fraudulent actions such as misrepresentation and concealment of relevant facts. The Delhi High Court held that the directors of the company directly responsible for this action should be held liable rather than the company itself, thus, lifting the corporate veil to deliver the appropriate justice for the given instance.

Limited liability

The principle of limited liability arose as a concept contradicting that of the corporate veil. While a corporate veil exists to protect the shareholders and members of a company from any liability arising from the company’s actions, the principle of limited liability holds the partners and shareholders of the business accountable for losses up to a predetermined amount, which does not exceed the amount they had previously invested in the company. In simple words, limited liability holds the shareholders and partners of a corporation accountable for the losses faced by the company, but only up to the amount they have invested in the said business venture. Any additional losses beyond that amount are not incurred by them, thus saving their other assets from facing the same loss.

In large corporate entities, the personal assets of investors or shareholders can be safeguarded from the consequences of the company’s actions, especially if losses are incurred. However, in the case of sole proprietorships, where the owners have a direct role in the company’s operations and can be held responsible for all the company’s liabilities, a corporation traditionally confines the individual risk of its shareholders and investors. 

In these types of circumstances, the concept of limited liability helps restrain the accountability of the owner and shareholders to a certain limit, safeguarding their assets from the losses incurred by their business venture. 

The most common types of companies seen in the market with a limited liability concept are as follows:

• Corporations, where shareholders and investors enjoy limited liability and are only accountable for the losses or debts incurred by the company up to the amount they have invested in the corporation,
• Limited Liability Companies, or ‘LLCs’, are corporations in which the shareholders and members are not accountable for the debts or losses incurred by the company. However, it does provide flexibility in taxation to the members of the corporation through the ‘pass through’ method. Through this method, all the losses and profits incurred by the company can be filed in the personal tax returns of the shareholders and members of the corporation.
• Finally, the Limited Liability Partnership, or ‘LLP’, is one of the most common forms of limited liability observed in the market. LLPs are partnership business structures with limited liability obligations for the partners of the professional firm. Their liability does not extend to the actions or omissions of other partners but does include the responsibility for the actions of the firm or their actions within the firm.

Fundamentally speaking, the ideology behind limited liability directly opposes the concept of corporate personality since its ideology depends on lifting or piercing the corporate veil and holding the members of the company liable. However, while the concepts may stand as conflicting, both exist in the market and are used by different corporations for the fulfilment of their purposes.

Jurisprudence behind the concept of corporate personality

In philosophy, personality refers to the characteristics and behavioural patterns of a person, generally a human being. However, with time and evolving technology, the definition of personality has been extended beyond that of its humanistic definition. 

Now, personality can be defined as characteristics of a ‘person’, that can be artificial or fictitious as long as it is recognised by the law. Legal or judicial personality, on the other hand, is referred to as the characteristic of having rights and legal obligations. 

The major reason for giving personality to inanimate objects like corporate entities is to enforce the collective rights and obligations of the people working under or acting as members of the company. Enforcement of their individual rights and obligations regarding the same goal and association can create unnecessary legal complexity. Thus, to reduce such complexity and to enforce the rights and obligations of the members and employees of the companies more efficiently, corporate entities are given their own personhood. 

While natural personality exists without recognition, artificial personality given to inanimate objects like corporate bodies needs some kind of recognition to exist. Usually, it is argued to be legal recognition, but many theories argue that corporate personality exists regardless of whether it is legally recognised or not.

Let us discuss these theories in detail. 

Theories of corporate personality

Many legal scholars and jurists have given different theories and ideas to explore the nature and character of a corporate entity. However, since no theory is universally agreed upon to determine the exact nature of corporations, each theory is given equal importance. Given below are all of the major theories relating to corporate personality. 

Fiction theory

The fiction theory is regarded as one of the first theories made on corporate personality. It was propounded by the famous scholar Savigny and was later supported by various jurists, including Salmond and Holland. As per this theory, the identity of a corporate entity is based on legal fiction and exists as nothing but a mere concept that cannot be applied in practicality. In other words, it regards the personality of a corporation as nothing but a legal fiction made by the law for its convenience.

According to this theory, the character of a corporate entity is completely imaginary, made with the intent to make legal matters easier to navigate through. As per Savigny, a company is nothing but an artificial persona to signify the collective decisions of its members. Since a company does not have its own body, it acts through its agents and representatives. Thus, a company cannot have a separate identity from its members, who are the sole reason for its presence in the practical world. 

Under this theory, the character of a corporation is rooted in fantasy, which originates from the identity and character of its members. Furthermore, the fiction theory of corporate personality rejects the idea of any company existing without legal recognition since there is no difference between the identity of the members and the identity of the corporation as per this theory.

This theory defines corporate personality as nothing but a mere invented persona under which the members and representatives of the company carry out their actions. This artificial character is given rights and obligations of its own concerning the motivation or purpose behind its work. 

The fiction theory of corporate personality has been criticised the most due to its inability to address the legal obligations of a corporate entity, which include obligations for civil and criminal offences. The biggest critic of this theory was Frederick Pollock, who argued that the fiction theory is not recognised by the English common law. This is so since the first requirement for any entity to be recognised as a legal person under English law is incorporation. Any entity not incorporated is merely a group of individuals, and they cannot assume rights or obligations collectively.

Realistic theory

This theory of corporate personality was developed as a direct contradiction of the fiction theory hypothesis. The realistic theory was developed by Maitland in England and by Johannes Althusious and Gierke in Germany. Many legal scholars, including Sir Frederick Pollock, Lasson, Miraglia, Maitland, Geldat Pollock, and others, have supported this theory. 

Jurist Gierke contended that every organisation or association has a will and consciousness based on which it makes its own decisions. Its ability to act and make decisions comes from the collective will of its members, but that does not entail that the organisation is a mere collection of the identities of its members. Instead, every organisation has its own new and separate identity, regardless of its purpose or who it was founded by.

The realistic theory emphasises the practical aspect of corporate personality, highlighting how the company and its actions can differ from those of its members. The character and perception that a company may have in the eyes of its public can be drastically different from how its members are perceived. It argues that the character or even the perception of the character of the company is not always based on law. Rather, it can exist regardless of being recognised by law, since it is the desire and will of the members of the company that give it character.

Corporate personality, according to this theory, exists for every association since the identity and presence of an association or organisation are different from those of its members. While a corporation’s will may be acted upon by the actions of its agents or representatives, they simply act as a physical medium for the corporation. In simple words, this theory states that a corporate entity exists as a social body that acts through its human agents as a medium, which is the physical body. The will of the corporation is manifested through the actions of its members, agents, employees, etc. 

Unlike the fiction theory of corporate personality, this theory argues that the presence of a corporation is based on its presence in physical reality through its human agents rather than fantasy. However, while the company may not be a real or natural person, that does not mean it is not a reflection of the will of its agents, who are natural persons. It is not formed by the law but rather merely recognised by it as a separate identity. 

This theory focuses on the presence of a company beyond its members, arguing that once an individual joins the corporation, they are absorbed into it and become a part of the collective presence. Unlike the fiction theory, the realistic theory holds that the company has an identity and presence based on the actual factors and actions that the law perceives. This was backed by the House of Lords in the case of Daimler Co. Ltd. v. Continental Tyre and Rubber Co (Great Britain) Ltd. (1916), where it was held that a company remains of the same character regardless of the nationality of its directors or members. Here, the realistic theory was applied to confirm whether making payment to the defendant company would amount to an offence under the Trading with the Enemy Act, 1914, during World War I. The judgement was held in the favour of the defendant, stating that the company exists as a separate identity from its German directors and paying them for the contract would not amount to any such offence.  

Professor Gray is one of the major critics of this theory, arguing that collective will does not exist in practicality and merely exists as a fabrication of legal fiction. According to him, a corporate entity does not have its own identity and also exists as an association of humans who are natural persons with their rights and obligations. He argued that this theory is not quite practical since it does not differentiate between an artificial person and a natural person. As per Realistic Theory, a company is as much of a natural person as a human and can exist in reality without any legal recognition, which is not possible in practicality.

Bracket theory

Out of all the present theories, the Bracket Theory of corporate personality is one of the more popular and agreeable ones. Also known as the ‘Symbolist Theory’, this theory was propounded by the famous German scholar, Ihering. The American scholar Hohfeld also supported this theory, albeit in a more modified form. According to Ihering, a corporate entity only exists due to its members and representatives, who also influence the character of the corporation itself. In other words, the members and agents of a corporation also affect its character and personality, thus making the corporate personality dependent on the actions of the members of the company.

The ideology behind this theory is that it is the members who represent the corporation and draw up the character of the corporation. The law only puts up a ‘bracket’ to form a corporate unit, whose rights and obligations are mostly delegated from its members and agents. This is done to increase efficiency in the case of legal applications as well as financial transactions since it is not viable for multiple people to take on collective obligations. 

Meanwhile, according to the American jurist Wesley Newcomb Hohfeld, only humans, as natural persons, have rights and obligations. Corporations, as legal personalities, are nothing more than an accumulation of interactions and partnerships between the individuals working under the company. In other words, corporate personality is mostly the establishment of legal relationships between the members of the company, which also includes financial and contractual transactions. Treating a corporation as its own identity helps the courts safeguard rights and obligations. 

The major issue with this theory is that it does not define how and when the ‘bracket’ of corporate personality is removed and added. The concept of lifting the corporate veil for this theory is vague and can result in legal inconsistency, especially since in the practical world, the identity of a corporate entity is separate from its members and representatives.

Concession theory

The concession theory of corporate personality was developed by the famous political scholars Dicey, Savigny, and Salmond since the ideology behind it is derived from the concept of a sovereign state.  As per this theory, the only reason corporate personality exists is because of the legal recognition given by the state. Similar to the legal theory, it argues that without a legal existence recognised by the state, a corporation cannot exist. 

According to this theory, the legal personality of a corporation originates from the state and its concession. This recognition is completely discretionary on the part of the domestic laws and precedents of the state. It emphasises the prudence or authority of the state and how much authority they have to recognise a company’s corporate personality. 

The criticism that was faced most by the concession theory was that it puts too much emphasis on the state’s discretionary power and how only upon its concession can a company exist. It also emphasises that if the state wishes, it can also take back the recognition given to the company as a legal person. Such absolute discretionary power can lead to arbitrary actions if left unchecked. This could be especially disastrous in cases where the corporate entity is made for any political purpose.

Purpose theory

The Purpose Theory of corporate personality was propounded by the famous German scholar Alois Ritter von Brinz and further supported by famous jurists like Demilius, Aloysand, and E.I. Bekker from England. This theory focuses on the purpose behind the establishment of a corporation, emphasising that a corporation’s legal rights and obligations can be recognised based on the purposes it fulfils. 

In other words, this theory argues that artificial persons like corporate entities should only be given rights and obligations when it helps in the protection and better implementation of the rights and obligations of natural persons working under or with them. It contends that corporate personality is vital to establishing responsibility for corporate entities in case of any legal breach or consequences of the actions committed in their name. 

The ideology behind this theory comes from the Stiftung of German Law, which contends that ‘establishments’ or ‘entities’ can also be given rights and responsibilities in certain circumstances for the fulfilment of certain purposes. As seen in the case of M.C. Mehta v. Association of India (2020), certain purposes may include anything ranging from financial obligations to obligations towards the environment. In this case, the Delhi High Court highlighted the obligation of corporations to reduce the growing pollution in Delhi, especially when it was a direct result of their activities. The hazardous ventures taken by the corporations were in direct violation of Article 12 of the Constitution. The Court also highlighted that there was a significant need to formulate new laws and approaches to deter such catastrophic events. Corporate obligations in both public and private areas need to be established, especially in events like gas leaks or severe pollution caused by corporate activities that affect everyone living in the nearby areas, along with immense property damage. 

Léon Duguit, a popular French jurist, also supported this theory of corporate personality. According to him, the law exists to bring harmony and cohesion to society by safeguarding the rights of the people. Thus, if the maintenance of social cohesion needs the recognition of the corporate entities as a separate identity to help in the said objective, then it shall be done so.

The only criticism of this theory is that interpreting the company as a legal person based on circumstances can increase the chance of inconsistency in precedents. It will not only increase the pressure on the judiciary for such interpretations but also make the process of such legal matters unnecessarily long. 

Kelsen’s theory

According to the Austrian jurist Hans Kelsen, there is no distinction between a natural and legal person. In simpler terms, he contended that personality is a legal concept that encompasses all the rights and legal obligations a person may have. Thus, a distinction between a natural and legal person has no meaning since both have rights and obligations in the eyes of the law.

His analytical approach considers all the personhood similar and finds any distinction meaningless. According to him, the legal individuality in any personality is expressed through the different complexities of its rights and obligations. This is how law individualises society and provides the relevant rights and legal obligations. 

The major drawback of this theory is that it fails to account for the practical problems faced by different types of personality and how their distinction exists in the practicality. Just like how an artificial person like a company cannot have citizenship, there are many such rights that only a natural person seems to enjoy. 

Unfortunately, this theory fails to highlight such practical differences and does not throw any light on the nature of group personality like the artificial personhood of an association or institute. 

Organism theory 

The organism theory of corporate personality originates from the ideology that a corporation works like an organism, with each of its limbs and organs compared to various departments. For instance, the theory compares members of the company to its limbs and the top authorities, like the Board of Directors, to the head of the organism. Just like how the limbs and head of an organism help it function and fulfil its desired activities, the members of a company help it function and run its businesses. Without its human agents or ‘limbs’, the organism of a corporation would not be able to function 

Thus, the organism theory states that a corporate entity is an independent identity that acts as an organism whose limbs are the human agents that help it function in its day-to-day activities. This theory argues that corporations also have their own will and body, just as any organism, and, therefore, should have legal rights as well as obligations. 

The focus here is more on the aspect of the will and functionality of the company, stating that a corporate body with its own will and ‘life’ shall also be recognised as a person under the law and have its rights and obligations. Thus, according to this theory, corporate personality is similar to that of an organism, which consists of a head, limbs, organs, and other parts of a body. 

This theory is mostly criticised for the fact that it does not explain or include one-person companies or small companies where the departments are not particularly defined or present.

Ownership theory 

The ownership theory of corporate personality was first proposed by Bekker, Bzinz, and Demelius before being further developed by Planiol. As per this theory, only people or natural persons should have legal rights and obligations, not companies or any other corporate entities.

This theory argues that the only reason for the existence of any corporate entity is to own common property owned by its members and shareholders. In simple words, corporations are subjectless and intangible property that exists legally only for the common purpose of its members and shareholders. The fictitious or artificial identity given to such entities further fulfils the purpose of owning common possessions and assets.

According to the ownership theory, corporations can enter into contracts and agreements just like any other individual or natural person, since it acts as a common medium for an association of people to own property together.  Other rights, such as the right to sue and be sued, are also applied under the same logic. 

Furthermore, there are many rights that a human or a natural person may have that a corporation cannot. For instance, humans have the right to citizenship and the right to religion, but this is not the case for corporate entities. While both do share some rights and obligations, companies do not have the same as any natural person may do. 

Thus, based on this, the ownership theory argues that if a corporate personality cannot be entitled to all these rights and duties, then it should not be classified as a person and solely be identified as a subjectless property. When taken in the context of estates and assets owned by corporations from or for their business transactions, this theory is sound. 

The major criticism of this theory is that it does not particularly account for corporations that do not work for profit or own assets. Such organisations are not made for any type of ownership and only act on a collective cause, which this theory does not address at all. 

Conclusion

In the end, the concept of corporate personality is a significant one not only for the company law but also for the business aspirants aiming to open a company,  be it small or big. Not only does this legal concept help protect the members and owners of any company from being dragged into the actions of the company, but it also helps establish companies as separate legal entities of their own that can be held liable for their actions.

While a corporate entity may not have a spirit or soul, it does have a will that is dependent on and practised by its members. Thus, giving corporations rights and obligations was the only option to give voice to this collective will, despite a corporation not being a natural person.

Although the speculation about the character of companies and their origins may still be up for debate, it can be agreed upon that their legitimate character is partially fictitious and entirely real. Thus, it can be concluded that the character of companies is in between the two, somehow standing to exist as both at the same time.

Frequently Asked Questions (FAQs)

What is an artificial person?

Oftentimes, the law recognizes organisations, corporate bodies, associations, etc., and gives them legal personhood that allows them to have their own rights and obligations. In such cases, the said entity would be referred to as an artificial or fictitious person. This type of person is not a natural person (that is, human) but only exists as a judicial being with rights and legal obligations.

What does the incorporation of a company mean? 

Incorporation of a company is referred to the legal procedure of forming a company or any other corporate entity through formal registration. This procedure allows the company to be legally recognised as a person and gives it a corporate personality that is distinct from its members and shareholders. 

Can a company have nationality or citizenship? 

A company cannot have citizenship since it is only a legal person and not a natural person so it cannot be classified as a citizen of a country. However, according to the Supreme Court of India in the case of TDM Infrastructure Private Limited v UE Development India Private Limited (2008), a company can have a nationality based on its place of incorporation, regardless of where its central management and administration is located. 

References

• Dr. N.V. Paranjape (2019), Jurisprudence and Legal Theory, 9th edition, Central Law Agency.
• Company Law by Avtar Singh (Seventeenth Edition)
• Company Law by H.K. Saharay (Seventh Edition)
• Prithvijoy Das, 2019, Corporate Personality is the Laws Greatest Invention, available at: http://dx.doi.org/10.2139/ssrn.3373137 
• Bryant Smith, 1928, Legal Personality, The Yale Law Journal, Volume 37 No.3), pp 283–299, available at: https://doi.org/10.2307/789740