Discussion and Decision
The Normative Framework
- The starting point in our legal system is that a company is a separate legal entity from its shareholders and is competent for any right and obligation. The principle of limited liability is a pillar that enables economic activity while separating the company's assets from those of its owners. Hence, the company's debts are not the personal debts of the shareholders and vice versa, unless proven in the most exceptional cases.
- Section 4 of the Companies Law provides as follows:
"A company is a legal entity capable of any right, duty and action that is consistent with its character and nature as an incorporated body."
- Lifting the veil is an exceptional and extreme remedy that is carried out only when the separate legal personality is abused. Section 6(a) of the Companies Law states:
")1) A court may attribute a debt of a company to a shareholder therein, if it finds that in the circumstances of the case it is just and correct to do so. In the exceptional cases In which Usage In the separate legal personality, we do one of the following:
(a) In a way that is capable of To deceive a person or Deprive a creditor of the company;
(b) In a manner that harms the purpose of society and within Taking an Unreasonable Risk As to its ability to repay its debts,
provided that the shareholder was aware of such use, and taking into account his holdings and the fulfillment of his obligations to the company under sections 192 and 193 and taking into account the company's ability to repay its debts.
(2) For the purposes of this subsection, a person shall be deemed to be aware of the use as stated in paragraph (1)(a) or (b) even if he suspects as to the nature of the conduct or as to the possibility of the existence of the circumstances that caused such use, but refrains from clarifying them, except if he acted negligently only." [Emphasis is not on maror. S.A.].
- The court will order the lifting of the veil under section 6(a) of the Companies Law only in exceptional cases in which the company's separate legal personality is abused in order to defraud a person, deprive a creditor, or by taking an unreasonable risk as to the company's solvency capacity, provided that the shareholder was aware of this and found that it was "just and right".
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- Section 6(a) of the Companies Law establishes a closed list of exceptional cases that justify lifting the veil, when the separate legal personality is used in a manner that may defraud a person or deprive a creditor of the company. Another cause of action is a use that harms the purpose of the company and while taking an unreasonable risk as to its ability to repay its debts.
- A prerequisite for lifting the veil is the shareholder's awareness of the improper use of the legal personality. The law states that even "turning a blind eye" - i.e., suspicion about the nature of the behavior and refraining from clarifying it - will also be considered awareness, but mere negligence on the part of the shareholder will not be sufficient for the purpose of lifting the veil.
- Beyond the existence of the technical grounds, the court must be convinced that in the circumstances of the case it is "just and right" to lift the veil. In this framework, the court must examine additional considerations such as the shareholder's holdings, the fulfillment of his obligations to the company, and the ability of the company itself to repay its debts (see Labor Appeal (National) 1774-09-16 Amnon Porat vs. Gabriel Okanin (May 26, 2021)).
- It should be clarified - lifting the veil is an extreme action that undermines the principle of limited liability, which is a pillar in the business world. Therefore, the court orders this remedy very carefully and only in exceptional cases, and a "worrying" picture or debt default in itself is not enough to justify lifting the veil.
- As challenging as this is from the perspective of the winner, it is not enough that the company has not paid debts to order the lifting of the veil, but the person claiming to lift the veil must prove subjective bad faith, fraud, asset smuggling or thin financing, i.e., taking a risk disproportionate to the company's capital.
From the general to the individual
- In our case, the plaintiff did not meet the burden imposed on her to prove any of the above conditions.
- In the statement of claim, it was generally claimed that defendant 2 "acted in order to deprive and deceive the plaintiff" (section 4) and this claim was not supported in anything in the statement of claim. However, at the hearing, the plaintiff's counsel tried to expand his arguments and claimed that defendant 2 was abandoning his own company in court, which was not proven.
- The plaintiff did not prove an "exceptional case", any "use" by defendant 2, no intention to defraud or deprivate, not even awareness, no harm to the purpose of the company and no unreasonable risk. The plaintiff also did not prove that defendant 2 knew about the engagement.
- First, an examination of the agreement shows that defendant 2 is not a signatory to it but Mr. Cohen (see Appendix 2 to the statement of claim).
- Second, the plaintiff's representative stated at the hearing that he had never met defendant 2 prior to the hearing, that he had not personally attended the meeting at which the agreement was signed, and that he could not say that defendant 2 was present at that meeting (Prov. p. 3, para. 9). According to him, only Mr. Levy was present on behalf of the plaintiff at the meeting to sign the agreement. Thus, Mr. Levy was not brought to testify. One way or another, the plaintiff's representative confirmed that defendant 2 was not part of the dialogue prior to the signing of the agreement, so it was not proven at all that defendant 2 "used" the separate legal personality.
- As to the intention to defraud, the plaintiff's representative stated that at first the checks that were given were paid and only after some time did they return. The checks that were used to make the payments were not attached to the statement of claim, so that even for this reason it is not possible to link defendant 2 to the transaction. In any event, the plaintiff's representative confirmed at the hearing that the checks were not signed by defendant 2.
- The purpose of the engagement was to publicize the activity of defendant 1, a consulting company in the field of mortgages, and it was not proven at all that this purpose was contrary to the purpose of the company or that the financial obligation - less than ILS 50,000 - did not correspond to the company's capital - which was ILS 1,000,000 according to the company's wording that was attached as Appendix 1 to the statement of claim.
- Defendant 2's claims that he was not involved in the engagement, and that Mr. Cohen managed the company, were not contradicted.
- Despite the plaintiff's claims that defendant 1 is a "sole proprietorship" and therefore its debts to its shareholder can be attributed more easily, this has not been proven. It should be clarified that it is not easy for the court to order that the veil be lifted even in a sole proprietorship company and that the defendant must prove all the conditions specified in section 6(a) of the Companies Law. In our case, an examination of the company's wording shows that defendant 2 is indeed the CEO and the sole shareholder, but some of his shares are held in trust for another (in the hearing it was stated that it was for Mr. Cohen) and Mr. Cohen is a director together with him.
- In the hearing on June 25, 2024, defendant 2 testified that he "knew nothing" about the transaction and was not active in the company, and that Mr. Cohen actually managed the company. According to him, he fell victim to the actions of Cohen, who acted on defendant 1 as his own, and brought legal proceedings against her and defendant 2 initiated by the Tax Authority. The testimony of defendant 2 supported his version, which was not contradicted, that he was not involved in the engagement, so that he could not be attributed the "use" of the legal personality to his personal needs, which could have led to the lifting of the veil. This is also evident from the affidavit of defendant 2 that was attached to the statement of defense, in which he detailed that he was not involved in the engagement, but that it was Mr. Cohen who managed the engagement and the company.
- Thus, defendant 2 consistently claimed that he was not active in the company, did not know about the transaction and did not meet the plaintiff's representative. The plaintiff's witness did not contradict his claiMs. Defendant 2 emphasized that the person who managed the entire company was Mr. Cohen. He also admitted that he was a director and shareholder.
- Again, the price quote (Appendix 2 to the statement of claim) is addressed to "Dear Snir, CEO of Homi Social Mortgages" and was signed by Mr. Cohen only. The plaintiff's own representative stated that most of the transaction was conducted with Mr. Cohen, but claimed that there were meetings with defendant 2 as well. At the second meeting (of the payments), he said, defendant 2 was present, who handed over checks and approved the transaction. Thus, the signed price quote is addressed to Snir Cohen. There is no specific document in the file that testifies to a second meeting with defendant 2, in which, in any case, the plaintiff's representative was not present, but only Mr. Levy, and as stated, he was not brought to testify. No checks signed by defendant 2 were presented.
- The company's wording shows that Mr. Cohen was also a director of defendant 1, and the price quote is addressed to him as CEO and not to defendant 2.
- In view of the aforesaid, taking into account that the remedy of lifting the veil is an extreme remedy taken when it has been proven that a legal personality was used to defraud a person or deprive a creditor, and that the use harmed the purpose of the company while taking an unreasonable risk to its solvency, I found that the claim against defendant 2 should be dismissed.
- It was not proven that defendant 2 was involved in the engagement, it was not proven that he used the separate legal personality, it was not proven that he took an unreasonable risk for the company. No evidence of personal involvement, fraud or intention to cheat on the part of defendant 2 was brought, so that the conditions for lifting the veil were not met.
Conclusion
- Against the background of the aforesaid, despite the absence of any dispute as to the existence of the balance of payment of defendant 1, there is no choice but to dismiss the claim against defendant 2.
- Despite the result I reached, in the special circumstances of this case, I did not find it necessary to charge for costs.
The judgment will be sent to the parties.