Virtual Piercing of Corporate Veil
Articles

Virtual Piercing of Corporate Veil

July 5, 2017
Print
PDF

A well-known principal of corporate law is that between a company and its shareholders a corporate veil separates the legal personality of the corporation and the legal personality of the shareholders. However, the corporate veil is not hermetically sealed and where the corporation and the shareholders do not separate their activity torts may arise due to abuse or improper operation of the principle of separate legal personality. Thus, it is sometimes necessary to pierce the corporate veil.  Such necessity is even more required when the corporation has no real economic existence other than creating such corporate veil.

Piercing of the veil cancels the separation between the legal personality of the corporation and the personality of the shareholders and prevents the shareholders from usurping the principle of separate legal personality of the corporation for a non-legitimate purpose by seeking to hide behind the corporate veil in order avoid consequences of an illegal activity.

In a verdict given by the Haifa District Court in June, 2017, a middleman filed a claim for finders fees based on an oral and a written agreement. The written agreement named a corporation as the paying party. The Court held that this means that the defendant indeed chose to perform his obligations under the agreement through the corporation, but this does not set the corporation as the contracting party. Because there is no evidence that the corporation has any purpose, content, capital or business activity, and no evidence was brought to show that the corporation passed a resolution to contract the middleman, it was held that this is a mere attempt to avoid paying the finders fees. Under such circumstances, the Court held that the existence of the corporation should be ignored and conducted a "virtual piercing of the corporate veil."

Unlike an ordinary piercing of the corporate veil by which the company's obligations and rights are attributed to its shareholders, in a virtual piercing of the corporate veil, the veil is ignored and as a result the shareholder is identified with the company. Ignoring the veil under such circumstances led the Court to hold that the defendant will bear the finders fee and not the corporation. Note, that the defendant claimed that the he is the head of a group that holds the corporation but is not a shareholder in it so piercing the veil will not assist the middleman. The Court held that this strengthens the conclusion that the defendant is obliged under the agreement by ignoring the corporate veil and not piercing it.

In light of this innovative holding, it is even more important than before to consult an attorney in the drafting of any commercial agreements but certainly when a company is involved, even if the entity employing the company is not a shareholder in it.