4 Important Legal Theories of “Incorporation”- Notes

1. The Fiction Theory

This theory, which found favour with Salmond and Holland, holds that a personality is attached to groups and institutions by a pure legal fiction, and this personality is distinct from the personality of the individual beings. An idol is a legal person because the law describes it as such.

A group of persons is a legal person because it is so imagined by a fiction of law. The rights and duties of the legal person are what the law attributes to it, and no further.

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2. The Realist Theory:

This theory expounded by Gierke holds that the group of institution has an existence beyond the aggre­gate of the individualities of persons forming the group.

A corporation has a real existence and is not a fictitious construction of the law. Its personality exists not by a figment of imagination but is independent of recognition by the State, for law has to take notice of it to keep pace with the realities.

According to this theory a corporation is nothing more than the aggregate of its members conceived as unity, and this unity the organisation of human beings is a real person and a living organism, capable of actions.

This view apparently excludes corpora­tion sole from its purview. Even in the case of a corporation aggregate nobody disputes the reality of a company as the group of shareholders, which although a real thing, is yet a fictitious person.

3. The Concession Theory:

The theory expounded by Savigny holds that the sovereign and the individuals are the only realities. All intermediate groups and institutions cannot claim recog­nition as persons.

They derive their existence from the sovereign, and as such corporate personality arises only as a result of State acts and exists merely by concession of the sovereign.

4. Bracket Theory:

Paton yet regards a fourth theory of cor­porate personality. That is the Bracket Theory, which regards the members of the corporation as the bearers of the rights, and as being bound by the duties, which are for convenience referred to the corpo­ration itself.

He explains by saying that A, B and C form a company, and, as it is inconvenient to refer always to all of them, a bracket is placed around them to which a name is given—but, in order to under­stand the real position, we must remove the bracket.

One value of this theory is that it emphasises that it may be necessary for the law to look behind the entity to discover the real state of affairs. It is true that most (though not all, e.g., a group set up to prevent cruelty to animals) groups exist to further the interest of individual men if the entity is an economic one, its aim is to promote the interest of members, if it is a philanthropic or charitable one, the interest of others.

But while ultimately we may regard legal personality as merely a convenient device of the law, nevertheless it is a very important device, for it sets up a new unit and make possible a clear distinction between the property rights, and duties of the corporation on the one hand and of the individual members of the other. One can hardly make a contract with a bracket. It is socially and economically false, as well as legally untrue, to say that only individual men can be the bearers of legal rights.

Paton, in conclusion, observes that some of the theories, when the proper modifications are made, approach very closely to each other.

Thus Hallis’s form of the realist theory is that the conception of corporation personality is neither more nor less than a juristic reality which leaves aside awkward questions of psychology and philosophy.

Wolff would modify the fiction theory: “If all juristic persons are treated as if they have wills of their own and are capable of acting, it makes no material difference whether you say ‘they are real animate beings with wills of their own, and so on’ or whether, you say ‘some of them may be and some certainly are not’, but the law treats them all as if they were.”

The law is wise to treat corporation as far as possible as if they were natural men. But it can hardly be claimed that legal personality should be automatically achieved as soon as a group develops a certain stage of organization if only for convenience, the law demands complaints with certain formalities as a condition of the grant of legal personality.

Objects and Uses of Incorporation:

There are two purposes and uses of incorporation, viz., general and special. The general pur­pose of incorporation of a group of persons is to reduce the complex form of collective ownership in several men into the simple form of individual ownership.

Collective ownership and action is cumbersome to law as all the owners will have to act and it will result in various difficulties in their management and protection. Death and insolvency of the members may further complicate the matter.

These difficulties are overcome by trusteeship and incorporation. The first avoids the difficulties due to the incapacity of the beneficiary; and through the instrumentality of the second, which is a development of trusteeship; a fictitious person is made capable of doing acts on behalf of multitu­dinous persons who are scattered throughout the country. Incorpora­tion, therefore, secures permanency, uniformity and unity in the per­sonality of the group of owners.

The special purpose of incorporation is that it helps commerce. It enables the members to trade with limited liability, without risking their whole fortunes. An individual cannot run heavy risks, and a firm is prevented from launching big business projects as in the event of loss each partner is saddled with unlimited amount of loss.

In a cor­poration the liability of the members being limited the shareholders are immune from any further liability beyond the unpaid amount of their shares. Much of the commerce of the country and the develop­ment of industries as also the national dividend of the country can be attributed to the development of commercial enterprises in the form of limited companies.