The term ‘Lifting the veil’ is corporate law’s most broadly used doctrine to decide when and how a person will be liable for obligations of the corporation. The doctrine does exist to check the principle that, shareholders should not be accountable for the wrongdoings or debt that someone else did of their corporation. In the first instance, is the company seen as a legal person entity. And when the court or the government feels that there is some wrongdoing, they will lift the veil to see the truth. One of the motifs for lifting of the corporate veil is fraud. The courts will lift the corporate veil when they feels that there is fraud.
There are 4 situations in which the veil will be lifted
Attribution of some physical or mental state or character. This means that the court is trying to know the nationality of the person who control the company
Use a company to commit fraud, or as a sham. In this situation the individual is not keeping her obligations. The mistake cannot be count on the company.
Company is employed as an agent or its controllers. This means that a company’s can act as
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The case is called ‘Gilford Motor Company Ltd v. Horne’. In this case was MR. Horne an employee of the ‘Gilford motor company’, where he became fired. He had an employment contract which he agreed to not solicit the costumers of the company where he has been working for years. In order to destruct this, he made a plan. The plan was that he did incorporate a limited company in his wife’s name. And of course, he solicited the costumers of the company. When the Gilford Company exposed this, they sued him. The Court of appeal: “the company was formed as a device in order to mask the effective carrying on of business of Mr. Horne. “In this case could we see, and it was obvious, that the primary aim of incorporating a new company was to invade fraud.” Therefore the court of appeal claimed it as a mere sham to mask his
Taking a look at Donald Cressey’s hypotheses which is now known as the fraud triangle depicts the certain criteria for the mind frame of the fraudster. The fraud triangle is a theory that consists of perceived pressures, perceived opportunity, and rationalization. It gives us the different pressures placed on individuals that would make them consider “cooking the books.” It also demonstrates where the possible opportunity lies so that we may take precautions to eliminate the opportunity. Last, it demonstrates how a fraudster rationalizes with themselves to make committing the fraud okay. Donald Cressey believes all three elements must be present for fraud to occur. Upper management is usually the focus of financial statement fraud because financial statements are done at the management level. So in this case financial statement fraud was committed by the CEO Gregory Podlucky
Health South (Lupica, 2014), one of the biggest healthcare provider, committed fraud by increasing the value of their earnings on papers and increasing the values of their stock prices. Many investors were fooled by the company’s accounting figures. Health south used to fill the gap of actual figures and target figures by making false entries in their accounts. After this fraud got exposed, many high level executive were sent to jail who spent their precious years cleaning
The Oxford dictionary states that fraud is the “wrongful or criminal deception intended to result in financial or personal gain” (Oxford University Press, 2014). It is arguable that only individuals have the ability to engage in fraud, but these individuals may lead corporations, which allows corporations also to commit acts of fraud. From a high-level perspective for combating this issue, many governments build a regulatory environment that interacts through firms and individuals. This regulatory environment exists as a series of laws and directives on the various government entities interact to ensure this protection. These laws and directives protect the public from fraud. This coverage of the regulatory environment even protects the public from fraud that happens within a corporation. Laws, such as the Sarbanes-Oxley act of 2002 give protection against internal fraud. Understanding the effects of regulation on ethical behavior, and understanding the regulatory environment, ensures that one possesses a basic understanding of how the regulatory environment protects the public.
Business is a game of gambling. In poker, a person can be honest and keep his or her hands above the table, but there is always a person that has hands under the table. Businesses find many people with hands under the table when the issue of corporate self- dealing appears. Corporate self-dealing is when a trustee or other fiduciary of a business takes advantage of his or her position in a transaction for self-benefit instead of the company’s overall benefit. Self-dealing can include corporate assets or opportunities. John H. Farrar and Susan Watson notes, “If a director deals with a company that he or she is a director, there is a risk of conflict of interest as well as a breach of the duty to act bona fid for the good of the company or promote success” (495). Without some form of limitations businesses have no way to control the act of self-dealing within the company. Although numerous solutions have been suggested, the solution implemented needs to be able to form to each individual business without limiting the transactions of the business. Nonintervention, Prohibition, and Majority of the Minority Vote have all been considered, however, these solutions are not efficient enough for the business world or able to best limit the role of self-dealing. Nonintervention only ignores the problem in hopes it can resolve itself, while Prohibition provides only a strict method that does not ensure that people will not perform the actions. The Majority of the Minority vote resembles a voting system, but is not time efficient. While it only guarantees that the transaction is fair, the best solution to limit corporate self-dealing is to incorporate the Fairness test into business transactions.
“…separate legal entity possessed of separate legal rights and liabilities so that the rights of one company in a group cannot be exercised by another company in that group …”
The primary liability incurs when the corporation is deemed to have committed wrongdoing itself. A corporation itself, however, has no capacity for physical action or the possession of intention or knowledge which differ from human beings. Denning LJ in H L Bolton stated that directors and managers were simply like human brain in a corporation which controlled its body (the corporation) by their directing mind and will. The state of mind of these decision makers represented the state of mind of the company and was treated by the law. As in criminal law, the directors or managers were found to be guilty mind would render the company itself guilty.
In today’s day and age, there is a lot of news that is related to corporate accounting fraud as companies intentionally manipulate their financial statements to show a better picture of their financial health. The objective of financial reporting is to provide financial information about a company to its various stakeholders such as investors and creditors so that these stakeholders can make decisions accordingly. Companies can show a better image of their financial well being by providing misleading information. This can be done by omitting material information from the books or deceitful appropriation of assets such as inventory theft, payroll fraud, check forgery or embezzlement. Fraudulent financial reporting will have an effect on the
evidence to show that the company was in fact acting as an agent in a
The judgment in the case of Continental Tyre & Rubber Co (Great Britain Ltd) v Daimler Co Ltd states that a company as a 'virtual person ' is an artificial construct for the sole purposes of the law, and the 'mind ' of the company therefore reflects the corporate mind of the members. Therefore , there was some insufficiency in the Companies law of
Madura, Jeff. What Every Investor Needs to Know About Accounting Fraud. New York: McGraw-Hill, 2004. 1-156
The judgment in the case of Continental Tyre & Rubber Co (Great Britain Ltd) v Daimler Co Ltd states that a company as a 'virtual person ' is an artificial construct for the sole purposes of the law, and the 'mind ' of the company therefore reflects the corporate mind of the members. Therefore , there was some insufficiency in the Companies law of 1862.
The fraudulent financial reporting is the information in financial statement that will misleading, omission, and misrepresenting the users in order to attract potential investors and fulfil the shareholder’s expectation wealth. The company may has intended to use wrongly the accounting principle which related to classification, method of depreciation,
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Enron was one of the major energy corporation in America before it went bankrupt. A contributing reason to Enron’s failure was a lack of ethical management. Enron scandal proves that the company infringed the transparency, dignity and responsibility ethical principles of the Global Business Standard Codex (Paine et al. 2005). Effective management practices help businesses manage risk by reducing the likelihood of breaching the misconduct, but ethical dilemmas cause illegal or immoral activities.
In corporate law a company is considered to be a separate legal entity. The law sees the company as being separate from those who manage it. According to the law a company owns its own properties. The companies properties do not belong to the owners and those who manage it, which makes it a separate legal entity from its owners. Therefore if a corporation is considered to be it’s own separate person whenever it is involved in any legal action. According to an online business dictionary, separate leg...