Who wants to volunteer to be personally liable for debts of an NGO?

Who wants to volunteer to be personally liable for debts of an NGO?

Yair Aloni, Adv.
August 23, 2020

A person volunteers to be a member of an NGO or even more - to participate in the actual management of the NGO by sitting in its board - and one fine day receives a statement of claim from an employee of the NGO demanding him to be personaly liable for pension funds to which she is entitled, after such were not transferred by the NGO to the pension fund due to the NGO’s financial difficulties (similar to many NGOs). Can a volunteer find himself personally liable for the NGO's obligations?

One of the basic principles in a company is the principle of the separate legal entity of the corporation. The Israeli Companies Law, unlike the Israeli Law of NGOs, sets exceptional cases under which the corporate veil may be ignored (or in legal terms: "pierced") and the company's shareholders may be held directly liable, even if such did not personally perform the acts for which the company is sued. This will happen, inter alia, when the principle of separate legal entity is abused to deceive a person or deprive a company creditor. Despite the difference between the purpose of incorporation of a company, which is made for profit, and the purpose for which a non-profit organization is established, over the years case law taught us that an NGO is also not immune from piercing its corporate veil. However, because the NGO has no shareholders, the question arises as to who would be exposed by piercing the veil? Whether the members of the NGO, who usually act voluntarily and for important social purposes, or the board members, who actually runs the NGO.

In exceptional cases when case law dealt with the issue of piercing the corporate veil of an NGO, the principle of 'piercing the corporate veil' has been applied in a manner similar to that used in a limited liability company, but with emphasize on officials who were aware, by force or de facto, of the wrongful use of the separate legal entity. For example, in a case decided in 1998 an NGO, established to assist a candidate for mayor of the city of Haifa in the election, hired the services of an advertising company and the chairman and the treasurer knowingly paid with a bank check without cover. The Court held that they were both personally liable. In contrast, in another case where the withdrawal of the check was not for the purpose of misleading and creditors' fraud, but for the normal and routine operation of the organization, no liability was imposed on a member of an NGO.

In a case decided in August, 2020, by the National Labor Court, the tribunal refused to impose personal liability by virtue of 'piercing the corporate veil' on three NGO board members just because the NGO acted improperly. The question at issue was non-transfer to a pension fund of funds deducted from an employee's salary. It was held that not only should the degree of involvement and knowledge of the management board members be reviewed, but that the scope of 'piercing the corporate veil' should also be set under the circumstances and only one of the board members, who was aware of what was happening, was held personally liable. Also, the corporate veil was pierced only in relation to a specific cause of action and not in a broad manner that attributes all NGO obligations to him. In practice, the Court implemented tests of personal responsibility instead of corporate veil piercing and perhaps even abolished the principle of piercing the corporate veil in an NGOs.

There is no doubt that joining an NGO for the purpose of promoting a social goal is an important and worthy thing. However, it should be remembered that commercial conduct that is not in good faith, whether within a company or within an NGO, may create personal liability, whether by way of piercing the corporate veil or by way of personal liability. It is advisable to be involved in a balanced manner while showing responsibility and consulting with the relevant parties, and especially to make sure that the NGO, even if it costs money, is accompanied by a legal advisor knowledgeable in corporate law. In an NGO with significant activity that could create personal liability, one should also consider D&O insurance. In any case where misconduct is suspected, it is important to immediately seek legal advice.