Additional Arguments - The Causal Connection
- According to the directors, even if they breached their duty of care, and even if damage was caused to the company, this damage should not be attributed to their negligence. It was argued that the damage caused to the company could have been avoided if the accountants had clearly warned of the financial situation of the subsidiary and the economic dangers involved in the transfer of funds from the company to the factory. In addition, the directors relied on the ruling of the trial court that the claim of the company and the parents of the inmates should be dismissed because the shareholders (including the parents) were the ones who appointed the directors knowing their qualifications (or lack thereof...) and since they did not fulfill the obligation, imposed on the shareholders by virtue of the company's articles of association, to elect the members of the board of directors "from time to time". According to the directors, the causal link between their conduct and the damage was severed in light of the failures of third parties - the accountants and shareholders in the company, and therefore the directors should not be held responsible for the alleged damage.
- I am unable to accept these arguments. As is well known, there will often be several different tortfeasors who, by their actions or omissions, have caused a single damage, which cannot be divided, and they will be obligated to compensate the injured party "jointly and severally" (Civil Appeal 8133/03 Yitzhak v. Lotem Marketing Ltd., IsrSC 59(3) 66, 82 (2005); Gad Tedeschi et al. The Law of Torts: General Torts 480 (5737)). Therefore, even if it is found that one of the accountants was responsible for the damage caused to the company as a result of the decisions of the board of directors to transfer money to the subsidiary, this does not sever the causal link between the negligence of the directors themselves and the damage caused by their actions:
"The basic concept is that the intervention of a foreign factor between the act of negligence and the damage does not in itself sever the causal connection. Ordinarily, the negligent act of another person does not sever the causal connection, and even the deliberate action of another person does not sever the causal connection if it could have been foreseen (see: Civil Appeal 8199/01 Estate of the Late Miro v. Miro, IsrSC 57(2) 785, 791 (2003)... Civil Appeal 7021/99 Estate of the late Shlomi Weizmann v. Sela, IsrSC 56(1) 822, 830 (2001); Civil Appeal 576/81 Ben Shimon v. Barda, IsrSC 38(3) 1, 7 (1984)). Every negligence must be examined on its own merits according to the expectation test, and in appropriate cases, according to the risk test and the common sense test" (Civil Appeal 7008/09 Abd al-Rahim v. Abd al-Qader , at paragraph 22 of the judgment of Justice Y. Amit (September 7, 2010)).
- Against the aforesaid background, to the extent that it is determined later on that certain liability should also be attributed to the accountants for the damage caused to the company, or to some of it, the division of liability between the wrongdoers will also be determined according to the degree of fault that should be attributed to each of the parties found responsible. In any event, the liability of other parties who were negligent towards the company does not exempt the board of directors from liability for damage caused by their negligence, and these are indeed basic concepts in tort law, as stated above.
- Similarly, even if negligence could be attributed to the shareholders, and I do not express an opinion on this difficult issue, this fact does not diminish the independent responsibility of the directors. The fact that the board of directors was not replaced by the shareholders, even though the general meeting was authorized to do so, does not detract from the directors' duties to act in accordance with their duty of care (cf. Bank of North America case, at paragraph 59).
- It should also be noted that the directors did not send a third-party notice to the company or to any of the shareholders, and therefore the implied by the trial court that the shareholders themselves, or some of them, were negligent in not acting in accordance with their authority to appoint new directors, is not based on evidence or on an orderly procedure of making arguments by the relevant parties on this issue. It should also be noted that the trial court created an absolute identity between the company (as a plaintiff in the present lawsuit) and the shareholders, who were authorized to replace the board of directors, without clarifying how this identity is consistent with the fundamental principle that the company has a separate legal personality. The ambiguity described also strengthens my conclusion that there was no reason to dismiss the lawsuit against the directors due to the alleged failures of the shareholders.
- To summarize this part: I found that the directors breached their duty of care towards the Company by not being aware of the nature of the actions they approved, did not gather information as required in relation to these actions, and did not notify the Company of a change in their personal circumstances that reduced their ability to perform their duties as directors. Therefore, the burden of proof as to the reasonableness of the content of the decisions themselves was transferred to the directors (proof that no damage was caused or that there was no causal connection), but they did not lift this burden. Finally, I also rejected the directors' claims regarding the severance of the causal connection due to the alleged liability of other parties for the damage discussed as explained above.
In light of all of the above, the directors are responsible for the damage caused to the Company due to the transfers of funds to the subsidiary during the period relevant to the lawsuit, which was made available for the purposes of a fee in the sum of ILS 12 million.
- As noted, the exception is Sharon, whose responsibility is limited to the period prior to his retirement from his positions (October 2000). Since the estimate of the amount of damages to the sum of ILS 12 million was based, inter alia, on the ruling of the trial court, according to which there is no doubt that as of 2000 the transfer of funds to the subsidiary caused damages to the company, I will suggest that Sharon, who announced his retirement in the middle of this year, will not be liable for the company's damages for the transfer of funds to the subsidiary, which amounted to over ILS 12 million in the years 2000-2002.
From here I will move on to the next issue that needs to be discussed, which is the insurance issue - does the policy cover the damages caused due to the actions and omissions of the directors?