A modern real entity theory of corporate personality

Introduction

Corporate law has historically been based mostly on the idea of separate legal personality for corporations. Though rarely used and lacking defined limits, the idea of “piercing the corporate veil” to ignore this unique personality in times of abuse has often surfaced in case law and scholarly debate. This paper argues that we do not require a theory of corporate “disregard” and suggests a current form of real entity theory to explain the premise of independent legal personality. Rather, it implies that the current context-specific regulations are enough to handle problems resulting from corporate misbehaviour.

The Changing Veil Piercing Doctrine

Courts and legal academics embraced the theory of “piercing the corporate veil,” which meant, for decades, that in some cases a company’s legal personality could be ignored and its controlling stockholders linked with it. Businesses were said to be metaphorically “sham,” “façade,” “cloak,” or “alternative ego” of the stockholders. Two basic problems with this theory, nevertheless, were its vague borders and rare, if ever application.

Leading cases underlined the uncertainty around the theory. Slade LJ pointed out in Adams v. Cape the “sparse guidance” on whether corporate group structures amounted to a front. In Prest v. Petrodel, Lord Sumption said the doctrine was “heavily burdened by authority, much of which characterised by incautious dicta and inadequate reasoning.” Academic observers reflected these opinions, characterising the law as “haphazard,” “messy,” and “confused.”

Notwithstanding these flaws, the theory held fast. Lord Sumption said, “consensus that there are circumstances in which the court may pierce the corporate veil is impressive.” This tenacity begs problems about why a theory that was so difficult to define and little used nonetheless dominated legal theory.

Changing Veil Piercing:

Restating the veil piercing theory in Prest v Petrodel in 2013, the Supreme Court Lord Sumption distinguished cases of “evasion,” where an independent veil piercing theory was present, from those of “concealment,” in which case it lacked. Under concealment situations, one looks behind corporate structures to find facts hidden, while ignoring the company’s distinct legal personality. Conversely, evasion instances entail circumstances in which someone poses a corporation to evade a current debt.

This redefining greatly reduced the situations in which a corporation law theory of view might be applicable—that of veil piercing. Moreover, later cases have questioned whether the evasion principle will last. Lord Briggs and Lord Leggatt expressed uncertainty in Hurstwood Properties v Rossendale on whether veil piercing was a rule of law rather than a term used to define several events when some rule of law generates apparent exceptions to the principle of distinct legal personality.

Crucially, the evasion principle does not entail a “disregard” of the company’s separate legal personality even if it still has resonance. In circumstances of concealment as well as evasion, the company’s independent legal entity status is fully acknowledged.

Clarifying the Challenge of Identifying Separate Legal Personality

The historical evolution of company law from English partnership law could help to explain the ongoing misinterpretation of independent legal identity. Under the partnership arrangement, legal personhood is not separated. With courts linguistically considering businesses as aggregates of their members rather than separate entities, this historical background might have thrown a shadow into the present.

Modern academic work also reflects the notion of the company as a “association”. This perspective conforms with the currently prevailing nexus of contracts model, which sees the corporation as a fictional focal point for contractual between participants. This fiction-like portrayal of the firm would have attracted and justified arguments to overlook its distinct legal personality and consider it as an alter ego of its stockholders.

Modern Methodology: Real Entity Theory

This article offers a contemporary form of real entity theory as an alternative to the partnership/nexus of contracts approach. Unlike conventional real entity theory, which anthropomorphised businesses, this new method uses sociology and psychology’s research to grasp organisations as real in their implications social phenomena.

When people cooperate, organisations result from the routines that grow into processes and procedures. Some of these procedures get formalised as companies expand, and a culture results. Social structure refers to the way that human action is shaped by these routines, procedures, policies, and culture. Organisations bring about behaviour that would not otherwise exist, and psychological studies have demonstrated how the assumption that one is working for an organisation shapes people’s perspective.

New members of this social system learn and adopt the behaviour, so it is constant. Human agency, however, also exists and can vary from and alter social structure across time. Although social structure and human agency interact in a complicated manner, current surroundings always influence even creative behaviour.

Relating Separate Legal Personality to Real Entity Theory

Real entity theory and independent legal personality are argued to have a relationship in this essay. It implies that law finds organisations as a social phenomena and offers them a means to enable better functioning. Reference to the history of contemporary businesses, the method by which businesses are established and closed, and the laws enforcing tortious and criminal culpability as well as regulatory requirements on firms helps one to justify this.

Traditionally, the provision of a legal structure for companies matched the era after the Enlightenment. First created to provide a more appropriate and better accountable tool for the vast commercial enterprises of the Industrial Revolution, the Companies Act was The corporation form helps companies to expand beyond the capacity of a trust or partnership arrangement may provide.

The way a corporation is formed supports the claim that the corporate structure is meant primarily to help a company or firm to run independently. Companies have a registered office, a unique identity, appointed officials to speak for them. The public registry and certificate of incorporation solve the issue with an organisation lacking a basic physical existence.

Furthermore supporting this link is a company’s termination procedure. The legal need for the winding up and dissolution process enables us to establish a link between businesses or organisations. For companies, this degree of stability is important since it guarantees that interactions with several players terminate in a neat way.

Moreover, the guidelines of corporate responsibility assist to establish this link. Companies are now liable in both tort and crime; the modern technique of assigning criminal liability through a failure to prevent model shows that the law understands that businesses can act autonomously through their operations.

Non-organizational Applications of the Corporate Form

Although businesses can be set up for uses other than running an organisation or firm, such owning an asset or being dormant, this does not compromise the insight that the corporate form can be defined by reference to the paradigmatic example of a company running an organisation or firm. Although a legal tool is being used for another purpose, it is theoretically acceptable to believe that it has evolved for a main objective, which explains its characteristics.

The corporation form’s availability for all legitimate uses does not invalidate its main design for allowing autonomous organisational action. This wide availability has strong policy reasons as well: it lets micro-enterprises expand into bigger companies and helps to prevent the requirement for ad hoc approval of incorporation, which previously did not eradicate fraud.

Dealing with Corporate Form Abuse

The strong availability of the corporate form has drawn significant scholarly criticism since it can lead to injustice by giving creditors less priority than stockholders. But since Otto Kahn-Freund memorably described the 1940s ruling in Salomon v. Salomon as “calamitous,” the law has evolved several mechanisms to handle corporation form abuses.

Rules on phoenix firms, dishonest and wrongful trading, directors’ disqualification, and phoenix companies fairly handle circumstances whereby people use businesses for illegal purposes without regard to the creditors of the company. These systems make illegal controllers answerable without compromising the company’s independent life.

Regarding corporate organisations, the law has evolved several instruments to handle such abuses. These include provisions in pension, consumer, and competition laws that have adjusted to the predominance of group structures; modern sanctions regimes that target corporate group structures; and tort law construction of liability of parent companies involved in operational management of subsidiaries.

Moreover, modern laws rely on a failure to prevent model to assign liability for behaviour related with corporate groups and supply chains. This approach respects the legal limits of independent legal personality and imposes responsibilities on businesses to stop any kind of misconduct by any agent working for their advantage.

Final Thought

This paper contends that there has lately been rejection of a notion of corporate “disregard” by the courts The roots of UK company law in English partnership law and the influence of the nexus of contracts approach help to explain the challenges experienced by courts and academic studies in properly comprehending the consequences of independent legal personality.

Drawing on theoretical and empirical research from the larger social sciences, the suggested current version of real entity theory describes businesses as vehicles for individuals to act independently. This model gives a theoretical and empirical support for a strong premise of independent legal persons.

Although businesses can be employed for non-organizational goals, the paper argues that they have developed for the classic goal of allowing a company to better operate independently. Though it is still useful for other purposes, the characteristics of the corporation form fit this basic need.

A lot of case law and legislation has developed to handle corporate form abuses since Kahn-Freund’s characterising of Salomon v. Salomon as “calamitous”. The paper comes to the conclusion that we do not require a principle explaining the “disregard” of the distinct legal personality of the corporation. Rather, context-specific norms and current legal systems are enough to solve problems resulting from corporate abuses without compromising the integrity of the independent legal personality concept.

This modern real entity theory of corporate personality helps to resolve the long-standing conflict between the necessity to acknowledge companies as unique legal entities and the goal to prevent abuses of the corporate form by offering a more coherent explanation for the principle of separate legal personality. This method provides a more complex and realistic framework for corporate law, able to solve the complexity of modern corporate structures while preserving the basic principle of separate legal personality by grounding the knowledge of corporate personality in empirical observations of organisational behaviour.