Q: “Corporation is an artificial being, invisible, intangible and existing only in contemplation of law. It has neither a body of its own.” Explain and illustrate.”
Inroduction:
A fictitious legal entity/person which has rights and duties independent of the rights and duties of real persons and which is legally authorized to act in its own name through duly appointed agents. It is owned by shareholders. Usually created under the authority of state law.
A corporation, or body politic, or body incorporate, is a collection of many; individuals united in one body, under a special denomination, having perpetual succession under an artificial form, and vested by the policy of the law with a capacity of acting in several respects as an individual, particularly of taking and granting property, contracting obligations and of suing and being sued; of enjoying privileges and immunities in common and of exercising a variety of political rights, more or less extensive, according to the design of its institution or the powers conferred upon it, either at the time of its creation or at any subsequent period of its existence.
In the case of Dartmouth College against Woodward, 4 Wheat. Rep. 626, Chief Justice Marshall describes a corporation to be ‘an artificial being, invisible, intangible, and existing only in contemplation of law. Being the mere creature of law,’ continues the judge, ‘it possesses only those properties which the charter of its creation confers upon it, either expressly or as incidental to its very existence. These are such as are supposed best calculated to effect the object for which it was created. Among the most important are immortality, and if the expression may be allowed, individuality properties by which a perpetual succession of many persons are considered, as the same, and may act as the single individual, They enable a corporation to manage its own affairs, and to hold property without the perplexing intricacies, the hazardous and endless necessity of perpetual conveyance for the purpose of transmitting it from hand to hand. The words corporation and incorporation are frequently confounded, particularly in the old books. The distinction between them is, however, obvious; the one is the institution itself, the other the act by which the institution is created.
Definition of Corporation: A corporation is a distinct and independent entity that is separate from its owner. It is legally endowed with rights and responsibilities and has a life of its own independent of the owners (shareholders). It has been defined by the United States Supreme
[1] This definition point towards five characteristic of a corporation. They include creation through law, artificial person, separate entity from the members, perpetual existence and the common seal.
Business and Corporate Law 2nd edition; For CA PE-II ; Chapter-23
[1]This definition tells about only two characteristic of corporation, as; Corporation is a group of persons and these persons get together for a common aim.
Issues & Trends of Information Technology Management in Contemporary Organization; By Mehdi Khosrow; Vol-1; Page-585
Court as “an artificial being, invisible, intangible and existing only in contemplation of the law.” In essence, a corporation can do almost anything an individual can. Own property, open a bank account, establish credit, obtain a social security number (called a tax identification number),“have children” by setting up subsidiaries, and even “get married” by merging with other corporations and taking their name. The owners of the corporation are called stock or share holders. Unlike a sole proprietorship, the owners are not liable for the corporation’s debts. If a corporation files for bankruptcy protection, its creditors cannot force the shareholders to pay back the corporation’s debts.
Characteristics of Corporation:
On the basis of above definitions the following characteristics of corporation become conspicuous;
E Separate Legal Entity
E Incorporated Body
E Artificial Legal Person
E Perpetual Succession
E Limited Liability
E Common Seal
E Right to Own Property
E Right to Sue
E Right to Enter in to Contracts
E Flexibility of Investment
E Separation of Control from the Ownership
[1] http://www.vakilno1.com/bareacts/companiesact/companiesacts.htm
[1] In this definition a corporation means the association of some people, collecting small money by these people and raising a large capital through this collected money and using this collected capital for a collective aim.;
The Principles of Political Economy ; by John Stuart Mill ; Book-5 ; Chapter-9
Essential Feature of a Corporation:
A corporation is legal entity with a perpetual succession and common seal. It is a voluntary association with a common capital divided into transferable shares. The liability of the members is limited to the extent of the nominal value of the shares. Its existence is quite distinct from its members.[1]
- Legal Entity: A corporation is artificial person created by the law[2]. It derives all its authority from law. It is a legal entity distinct and independent of the existence of its members, who own it. It is capable of holding property, incurring debits and suing and has sued in its own name.
- Corporate Existence: Corporation law has granted corporate existence to the members of a corporation. The mode of incorporation and dissolution of the corporation and the right of the members to transfer shares freely guarantees the continuity of the existence of the corporation, quite independent of the life or otherwise of the members. It, therefore, enjoys perpetual succession. Its duration is not affected by the good or bad position of the members. Members may come and members may go and the corporation goes on forever. Law gives birth to a corporation and law alone can terminate the existence of a corporation.
- Corporate Finance: Usually a corporation raises huge amount of capital for its business. Capital is divided into large number of shares of small value. These shares are purchased by the large number of every walk of life. In the absence of any restriction on the maximum number of members of a public corporation, it is able to raise large amount of capital by small contributions of different classes of people.
- Transferability of Shares: The shares of a corporation are freely transferable. Shareholders can, thus, withdraw their investments from the corporation at any time they like. It ensures necessary safeguards to these shareholders who are in a majority group. Further, it enables new members to join the corporation and help its management by their new improved ideas and progressive trends.
- Unlimited Number of Members: A public limited corporation have any number of members exceeding seven, helps the corporation to draw upon the financial and managerial resources of a large number of people.
- Limited Liability: the liability of the members of accorporation is generally limited to the extent of the nominal value of the shares help by them. In any event, shareholders cannot be called upon personally to pay any thing more than the unpaid value of the share money. Creditors cannot look to the private assets of the members for the payment of the debts of the corporation. However, the liability of the corporation continues to the unlimited.
- Publicity and Compliance to Various Legal Formalities: A joint stock corporation is required to file several documents with the Registrar of companies and publish them for the information of the public i.e., Memorandum and Articles of Association, Prospectus, Annual Report etc.
- Common Seal: Any document which does not bear the common seal of the corporation shall not be binding upon the corporation. Common seal is the official signature of the corporation. Corporation consents to a contract and authenticates a document by putting its common seal.
Types of corporation:
Corporations are divided into public and private.
Public corporations, which are also called political and sometimes municipal corporations, are those which have for their object the government of a portion of the state and although in such case it involves some private interests, yet, as it is endowed with a portion of political power, the term public has been deemed appropriate.
Another class of public corporations are those which are founded for public, not for political or municipal purposes, and the whole interest in which belongs to the government. The Bank of Philadelphia for example, if the whole stock belonged exclusively to the government, would be a public corporation; but inasmuch as there are other owners of the stock, it is a private corporation.
Nations or state are denominated by publicists, bodies politic, and are said to have their affairs and interests and to deliberate and resolve in common. They thus become as moral persons, having an understanding and will peculiar to themselves, and are susceptible of obligations and laws. In this extensive sense the United States may be termed a corporation; and so may each state singly.
Private Corporations. In the popular meaning of the term nearly every corporation is public, inasmuch as they are created for the public benefit; but if the whole interest does not belong to the government, or if the corporation is not created for the administration of political or municipal power, the corporation is private. A bank, for instance, may be created by the government for its own uses; but if the stock is owned by private persons it is a private corporation, although it is created by the government and its operations partake of a private nature. The rule is the same in the case of canal, bridge, turnpike, insurance companies, and the like. Charitable or literary corporations, founded by private benefaction, are in point of law private corporations, though dedicated to public charity, or for the general promotion of learning.
1. ^ see HG Henn and JR Alexander, Corporations (3rd edn, Hornbooks 1983) ch 7, 344, n 2 for a list of terms the court uses. They are, mere adjunct, agent, alias, alter ego, alter idem, arm, blind, branch, buffer, cloak, coat, corporate double, cover, creature, curious reminiscence, delusion, department, dry shell, dummy, fiction, form, formality, fraud on the law, instrumentality, mouthpiece, name, nominal identity, phrase, puppet, screen, sham, simulacrum, snare, stooge, subterfuge, tool.
Private corporations are divided into ecclesiastical and lay.
Ecclesiastical corporations in the United States are commonly called religious corporations they are created to enable religious societies to manage with more facility and advantage the temporalities belonging to the church or congregation.
Lay corporations are divided into civil and eleemosynary. Civil corporations are created for an infinite variety of temporal purposes, such as affording facilities for obtaining loans of money; the making of canals, turnpike roads and the like. And also such as are established for the advancement of learning.
Eleemosynary corporations are such as are instituted upon a principle of charity, their object being the perpetual distribution of the bounty of the founder of them to such persons as he has directed. Of this kind are hospitals for the relief of the impotent, indigent and sick or deaf and dumb.
Corporations, considered in another point of view, are either sole or agregate.
A sole corporation, as its name implies, consists of only one person to whom and his successors belongs that legal perpetuity, the enjoyment of which is denied to all natural persons. Those corporations are not common in the United States. In those states, however, where the religious establishment of the church of England was adopted when they were colonies, together with the common law on that subject, the minister of the parish was seised of the freehold, as persona ecclesiae, in the same manner as in England; and the right of his successors to the freehold being thus established was not destroyed by the abolition of the regal government, nor can it be divested even by an act of the state legislature.
A sole corporation cannot take personal property in succession; its corporate capacity of taking property is confined altogether to real estate.
An aggregate corporation consists of several persons who are united in one society, which is continued by a succession of members. Of this kind are the mayor or commonalty of a city; the heads and fellows of a college; the members of trading companies, and the like.
[1] Accountancy; by R.K. Mittal and A.K. Jain; chapter-7
[1] http://www.corporationformationindia.com/index.html
[1] According to Sec. 3(i) (iii) of the Companies Act, 1956, a private corporation means a which by its articles of association- (a) Restricts the right of members to transfer shares (if there is any); (b) Restrict the number of its members up to 2 to 50. The following are not counted among members: i) We are present employees and also the members of the corporation and ii) Those people who were previously the employees of the corporation as well as its members but now are no longer its employees but continue to be its members. (c) Puts a ban on inviting the public to subscribe its Shares and Debentures. (d) Puts a ban on inviting the public to subscribe its Public deposits. (e) must have a minimum paid-up share capital one lakh (this amount of capital is subject to change from time to time)
Conclusion:
Corporation has achieved more popularity in spite of many limitations. Its important is increasing, particularly for large-sized business where more capital and efficient managerial staff are required. In the absence of the Joint Stock principles, the efficient exploitation of a country’s natural resources and its economic and industrial development would not have been possible. It can be said with reference to the defects of corporation that, these defects are shortcoming of those people who established the companies rather than those of the corporation system.
Bibliography:
2. AW Machen, “Corporate Personality” (1910) 24 Harvard Law Review 253
3. J Dewey, “The Historic Background of Corporate Legal Personality” (1926) 35 Yale Law Journal 655
4. C Alting, “Piercing the corporate veil in German and American law – Liability of individuals and entities: a comparative view” (1994–1995) 2 Tulsa Journal Comparative & International Law 187
5. Melvin Aron Eisenberg, “Cases and Materials on Corporations & Other Business Organizations (concise 9th Edition) ch 4, 171
6. Melvin Aron Eisenberg, “Cases and Materials on Corporations & Other Business Organizations (concise 9th Edition) ch 4, 171
7. Business and Corporate Law 2nd edition; For CA PE-II
8. Issues & Trends of Information Technology Management in Contemporary Organization; By Mehdi Khosrow; Vol-1
9. http://www.vakilno1.com/bareacts/companiesact/companiesacts.htm
10. The Principles of Political Economy ; by John Stuart Mill ; Book-5
11. Companies Act, 1956
12. Lindley on Companies (Companies’ Act 1862)
13. The Political and Economic Doctrines of John Marshall
14. Teaching of Commerce and Business Management; by B.K. Prasad
15. Business and Corporate Law 2nd edition; For CA PE-II
16. Definition and Formation of Joint Stock Companies
17. Accountancy; by R.K. Mittal and A.K. Jain
18. Accountancy; by R.K. Mittal and A.K. Jain
19. http://www.corporationformationindia.com/index.html
20. Sec. 3(i) (iii) of the Companies Act, 1956
[1] Teaching of Commerce and Business Management; by B.K. Prasad; Chapter-7; Page-57
[2] Like a natural person– i) The Corporation can enter into contracts. ii) The Corporation can enforce the contractual rights against other. iii) The Corporation can sue in its own name. iv) The Corporation can be sued in its name. v) The Corporation can own and hold property in its name. vi) The Corporation has nationality. The registration of a corporation in a country determines the nationality of that corporation to that country.
Unlike a natural person– i) The Corporation has no physical shape or form. ii) The Corporation can not shake by hand, marry, smile or weep, take oath, commit a crime like murder. iii) The Corporation has no citizenship because a citizen of a country is personal right peculiar to human beings only.
Business and Corporate Law 2nd edition; For CA PE-II ; Chapter-23
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