On Jabotinsky and the new national sport – personal claims against control holders

On Jabotinsky and the new national sport – personal claims against control holders

Doron Afik, Esq.
December 14, 2019

An article in The Observer newspaper 5.5.1939 by Ze'ev Jabotinsky opens with the words: "Not every nation has its own national sport; and if there is, then the other nations soon come and learn it and immediately they start to play it, maybe better than the inventors themselves and by that it ceases to be national... ". I initially considered offering for the next Olympics to turn Israel's new national sport, personal claims against corporate control holders, into an Olympic sport, but in light of the warning by the founding father of the Revisionist Zionism, maybe this sport should be coverted so that other nations will not covet it. Perhaps also because it is not really sportive, not really proper, and causes unnecessary burden on the Courts system.

The basic principles of corporate law set that a company is a separate legal personality from its shareholders, as also expressly stipulated in the Israeli Companies Law. Thus, the "corporate veil" prevents the attribution of debts and rights of the corporation to its shareholders, unless there is a cause for "piercing the corporate veil" - personal debt allocation due to the abuse of the corporate veil, or personal liability of the shareholder for actions that the shareholder performed. In some cases (for example, debts to employees of the corporation), Court are less hesitant to pierce the corporation veil, but in principle even a company wholly owned by a single person still constitutes a separate legal entity, similar to the fact that even in a single-parent family, the parent is not deemed to be the same as the child.

If so, why is it that almost any lawsuit against a small company (and many of the lawsuits against companies in which there is a substantial controlling interest) is also accompanied by a personal claim against the controlling shareholder? Because it is possible. A lawsuit against the controlling shareholder puts pressure on the company to settle (even when the claim is frivolous) and Israeli courts today, unfortunately, do not reject such claims outright and do not punish the plaintiff (at least by ordering it to pay actual costs after the claim is rejected) for filing a frivolous claim personally against the controlling shareholder. A lawsuit against the controlling shareholder (especially when such is a recognized figure and this may be published) produces "noise" that sometimes causes the controlling shareholder to compromise just to save time, money, bad publicity and, most of all, annoyance and in an era where judges are hesitant to take courageous decisions that will also significantly reduce the huge burden on the Courts, it is also probably the right tactical step to take. Who cares if there really is a personal cause of action against the controlling shareholder if the Court in any case does not punish the plaintiff for filing a false claim?

This is the case, for example, in a case where our firm represents a recognized figure who was previously in control of a company and even personally paid funds to a number of its creditors when the company ran into difficulties. A third person, who claims to be a creditor of the company (and which the controlling shareholder did not even know at the relevant dates that he was a creditor of the company), filed a lawsuit against the company (and also against the shareholder who is not the shareholder for years). Now, the shareholder needs to cope with a claim when the plaintiff does not even disclose any evidence that personally binds the shareholder to the debt except that he has paid to other creditors. A national sport...

So what is the solution to this unsportsmanlike sport? Apparently there will be no solution until the Courts will begin to order real costs against plaintiffs who files claims against control holders for now reason and will decide on motions to dismiss already at the beginning of the proceeding (two things that are not done today, and see, for example, a judgment given early December, 2019, in the Tel Aviv District Court where a person claim was rejected only at the end of the proceedings with a relatively high order of costs of ILS 60,000, which is surely still far from the real costs of defense of the control holder). Without this change of policy the Courts will continue to be overwhelmed with these frivolous tactical proceedings and the national sport will continue uninterrupted ...