heories of Corporate Personalities
1. Introduction
The concept of corporate personality means that a company or corporation is recognized as a separate legal entity distinct from its members (shareholders) or directors.
This principle was established in the landmark case Salomon v. Salomon & Co. Ltd (1897 AC 22).
Because a company is a legal “person”, it can:
Own property
Sue and be sued
Enter into contracts
Bear liabilities
The law recognizes the corporation as distinct from its shareholders, who have limited liability.
Several theories have developed to explain how courts and scholars understand corporate personality.
2. Theories of Corporate Personality
A. The Realist Theory (Entity Theory)
Definition:
A company is a real, independent entity, separate from its members.
It has its own legal rights and duties, and is not just a collection of shareholders.
Key Case:
Salomon v. Salomon & Co. Ltd (1897 AC 22)
Mr. Salomon incorporated his business and held majority shares.
When the company went into liquidation, creditors claimed Salomon was personally liable.
Court held that the company was a separate legal entity, so Mr. Salomon was not personally liable.
Significance:
Established legal entity principle in company law.
Shareholders enjoy limited liability.
B. The Fiction Theory
Definition:
A company is not a real person, but a legal “fiction” created by law.
Courts treat it as a person because law says so, not because it physically exists.
Key Proponents:
Salmond, Dicey – company is a legal construct.
Key Case:
Macaura v. Northern Assurance Co. Ltd (1925 AC 619)
The company owned timber; Mr. Macaura insured it in his own name.
When the timber was destroyed, court held he had no interest, because the company was separate legal entity.
Significance:
Emphasizes separateness of company from its shareholders.
Explains why personal assets of shareholders are protected.
C. The Concession Theory
Definition:
A company exists because the state grants it incorporation.
It is artificial, and the state can impose conditions or revoke its status.
Key Case:
Ashbury Railway Carriage & Iron Co. Ltd v. Riche (1875 LR 7 HL 653)
Company acted beyond the objects in its memorandum.
Court held company cannot act beyond the scope granted by law, reinforcing concession theory.
Significance:
Company’s existence and powers depend on statutory recognition.
Explains government control over corporate activities.
D. The Associate Theory (Aggregate Theory)
Definition:
A company is a collection of individuals (shareholders, members) acting together.
It is not fully separate; its rights and liabilities reflect the will of members.
Key Case:
Re Pullen (1910) 2 Ch 25
Court looked at the collective rights and obligations of members, showing the company as aggregate of persons.
Significance:
Useful in understanding internal governance and member control.
Explains why members’ decisions affect company actions, though they remain legally separate.
E. The Creature of Statute Theory
Definition:
A company is a creation of statute, and exists only within the powers and limitations prescribed by law.
Key Case:
Ashbury Railway Carriage & Iron Co. Ltd v. Riche (1875 LR 7 HL 653)
Reinforces that company powers are limited to objects mentioned in the Memorandum of Association.
Significance:
Aligns with modern statutory regulation (Companies Act, 2013).
Emphasizes compliance and legal obligations.
3. Comparison of Theories
| Theory | Concept of Company | Key Case | Significance |
|---|---|---|---|
| Realist / Entity Theory | Company is a real separate entity | Salomon v. Salomon | Legal separation, limited liability |
| Fiction Theory | Company is a legal fiction created by law | Macaura v. Northern Assurance | Explains separateness from shareholders |
| Concession Theory | Company exists because state allows it | Ashbury Railway Co. | State can impose conditions on company |
| Associate / Aggregate Theory | Company is an aggregate of its members | Re Pullen | Explains internal governance and collective decisions |
| Creature of Statute | Company exists by statute and within its objects | Ashbury Railway Co. | Aligns with statutory compliance |
4. Conclusion
The concept of corporate personality is central to company law.
The Entity Theory (Salomon case) is the most widely accepted in modern law.
Other theories—Fiction, Concession, Aggregate, Creature of Statute—help explain the nature, existence, and limitations of a company.
These theories guide courts in lifting the corporate veil, imposing liability, or interpreting company powers.
Key Principle: A company is legally separate from its shareholders, enjoys perpetual succession, and can sue and be sued in its own name.
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