Fiction Theory versus Realist Theory of Corporate Personality

Think of a town's Ramlila committee. It has staged the Ramlila every Dussehra for fifty years; its members have changed many times, and its meetings often decide things no single member wanted. One day it registers as a society. A fiction theorist says: before registration there were only the townspeople; registration made a new person that exists only on paper, because the law chose to pretend. A realist replies: the committee was a living group with a will of its own long before any registrar saw it; registration merely recognised a person that was already there. Both agree the committee can now own the costumes and sue the tent contractor; they disagree about what it is. Note 33 surveys all the theories and Note 83 compares legal and natural persons; this note sets the two classic poles against each other and asks what difference the choice makes in court.

1. The Question Both Theories Answer

A company has no body or mind, yet it owns factories, contracts and can be convicted. What does the law mean when it calls it a person? The fiction theory answers: nothing real; the word is a legal device. The realist theory answers: a real group, with a unity and will distinct from its members. The other theories lean toward one pole or deny that there is any corporate person at all.

The concession theory is the fiction theory's political twin: whatever the corporation is, it has personality only because, and so far as, the State grants it. The bracket or symbolist theory of Jhering (also spelt Ihering) says the members are the only real holders of rights; the corporate name is a bracket placed around them. The purpose theory of Brinz treats corporate property as property owned by no one and dedicated to a purpose. Note 33 explains each.

2. The Fiction Theory

Origins

The idea is medieval. Canon lawyers had to explain how a cathedral chapter, a monastery or a city could hold property and litigate. The notion of the corporation as a persona ficta, a feigned person, is traditionally associated with Pope Innocent IV in the thirteenth century, who is said to have reasoned that a corporation could not be excommunicated because it had no soul. English law repeated the thought: Coke, in the Case of Sutton's Hospital (1612), observed in substance that corporations cannot commit treason or be excommunicated because they have no souls, and an old remark, usually traced to Lord Chancellor Thurlow, complained that a corporation has neither a soul to be damned nor a body to be kicked.

Savigny and Salmond

Savigny gave the theory its classic form in his System of Modern Roman Law. For him the concept of a person coincides with the concept of the human being, because rights exist to secure the freedom of individual wills. A juristic person is therefore an artificial subject admitted by a pure fiction, and its capacity is confined to what the fiction was adopted for, above all the holding of property. It follows that such a person cannot really will or act; it acts only through representatives, and on Savigny's view it could not commit a crime.

Salmond adopted the approach in England. For him legal persons are fictitious persons, beings other than humans to which the law attributes personality, and their personality is a creation of the law; the natural person alone is a person in fact. The corporation is a useful abstraction: a unit that survives the death or departure of its members.

Strengths and weaknesses

The fiction theory fits the form of company law: a company comes into existence on registration, has only the capacity its constitution and the statute allow, and ends when it is wound up. Its weakness is that it cannot explain why the law should impute acts, knowledge and fault to something that does not exist. If a company is merely imagined, who commits the fraud when it deceives investors? It also shades into the concession view, under which the State that invented a corporation may control or abolish it at will.

3. The Realist Theory

Gierke and the Genossenschaft

Otto von Gierke attacked Savigny's Romanist individualism from the standpoint of Germanic legal history. In his great work Das deutsche Genossenschaftsrecht he traced the Genossenschaft, the fellowship or association formed by its members, through guilds, towns, village communities and churches. Such bodies, he argued, have a real group will and a life outlasting their members; they are real collective persons. The law does not conjure them up; it recognises them, as it recognises human beings. The theory is therefore also called the organic or real entity theory.

Maitland and the English realists

F.W. Maitland translated part of Gierke's work as Political Theories of the Middle Age (1900), and his long introduction became the classic English statement of realism. In 'Moral Personality and Legal Personality' (1903) he pointed to unincorporated groups, such as clubs and trade unions, which nevertheless behaved like persons. Harold Laski drew pluralist conclusions: if groups are real, the State is one association among many.

Strengths and weaknesses

Realism explains what fiction cannot: why a company can intend and be blamed, and why unincorporated groups act as units. Its critics reply that the group will is a metaphor: it is in fact the will of a majority or of the directors, and saying the group wills adds nothing to that. The organic analogy can also be turned to exalt the State above its citizens. And realism cannot explain juristic persons that are not groups at all: a corporation sole, a fund or an idol.

4. The Two Theories Compared

5. What Difference the Choice Makes

Corporate criminal liability and mens rea

On a strict fiction view a company can neither act nor intend, and imprisonment cannot reach it. Modern law answers in realist terms through attribution: the acts and state of mind of those who are the company's directing mind and will, a phrase from Lennard's Carrying Co v Asiatic Petroleum (House of Lords, 1915), are treated as the company's own (Note 34).

Lifting the corporate veil

Salomon v A. Salomon and Co. Ltd (House of Lords, 1897) held a duly incorporated company a person separate from its members, even where one man owns almost all its shares. The reasoning is closer to fiction and concession: the statute created the person. Yet in LIC v Escorts Ltd (Supreme Court, 1986) the Court held that the veil may be lifted where a statute requires it, where fraud or improper conduct is intended, or where associated companies are really one concern. Lifting the veil is closest to Jhering's bracket, removed when the separate person is abused (Note 33).

Companies and fundamental rights

In State Trading Corporation of India v Commercial Tax Officer (Supreme Court, 1963) a company, though a person, was held not to be a citizen, so it cannot claim the Art. 19 freedoms confined to citizens. The reasoning is fiction flavoured: citizenship belongs to natural persons. But in R.C. Cooper v Union of India (Supreme Court, 1970, 11 judges), the bank nationalisation case, a shareholder whose own rights were impaired could challenge the law: the Court looked through the corporate form to the real human interests behind it. Art. 14, given to any person, remains available to companies (Note 83).

Idols as juristic persons

The Hindu idol shows the limits of both poles. It is not a group, so realism does not fit; yet courts say it has, through its shebait, a will of its own (Pramatha Nath Mullick, Privy Council, 1925). Its personality is best explained as recognition serving the purpose of the dedication, close to Brinz's purpose theory.

Rivers

In Mohd. Salim v State of Uttarakhand (2017) the Uttarakhand High Court declared the Ganga and Yamuna legal and living entities, with officials as guardians; the Supreme Court stayed the order. It shows that law can confer personality on anything it chooses, but a person with no real bearer of duties raises the question of who answers when the river floods.

6. Evaluation

Neither theory alone explains the law. Fiction and concession describe how companies are formed and ended; realism describes how they behave and why they can be blamed. Courts use the language of fiction in Salomon and State Trading Corporation, of realism in Iridium, and the bracket picture in LIC v Escorts.

The analytical jurists explain why. Kelsen treats every person, natural or juristic, as a personification of legal norms, so the contrast between a real and a fictitious person dissolves. Hart, in 'Definition and Theory in Jurisprudence' (1953), argued that asking in the abstract what a corporation really is invites a false answer; we should explain how statements about corporate rights work. Indian law is similarly pragmatic: it asks which rights and liabilities an entity should bear, and chooses the picture that serves justice.

7. Frequently Asked Questions

Q. What is the core difference between the two theories?
A. The fiction theory holds that only human beings are real persons and that a corporation is a person only in the contemplation of law, created by it. The realist theory holds that an organised group is itself a real person with its own will, which the law recognises rather than creates.

Q. Which theory does Indian law follow?
A. Neither exclusively. Separate personality (Salomon) and the rule that a company is not a citizen (State Trading Corporation) reflect fiction and concession; attribution of mens rea (Iridium) reflects realism; lifting the veil (LIC v Escorts) resembles Jhering's bracket theory.

See also: Note 33 (legal personality and all the theories), Note 83 (legal person versus natural person), Note 34 (liability, including corporate liability), Note 12 (Kelsen), Note 68 (Savigny versus Jhering), Note 45 (fundamental rights).