On October 24, 2002, this agreement was given the force of a judgment, and it was determined that "the office holder appointed in accordance with the agreement between the parties... He is a CPA Gideon Darman (with his consent)." This judgment concluded the proceedings in the aforementioned case. As will be clarified below, Adv. Darman's definition of an operating manager has implications for the insurance issue that will be presented below.
- On February 10, 2003, CPA Darman prepared a report entitled "Findings of the Investigative Audit - Mr. Arie Pinkovich" (hereinafter: the Darman Report), addressed to the members of the company's board of directors, in which a series of acts and omissions attributed to Pinkovich are listed, which led to great damage to the company. In the summary of the report, it was determined that Pinkowitz acted negligently, contrary to the rules of proper administration, and used his authority and power for his personal benefit. It was recommended to the board not to reinstate Pinkowitz, and certainly to refrain from doing so until the conclusion of the police investigation and the Income Tax investigation into his case.
- Against the aforesaid background, on January 24, 2003, the company, CPA Darman, and the parents of some of the residents of the village (hereinafter collectively: the plaintiffs) filed a lawsuit against Pinkowitz and against those who served as directors of the company during the period when, as alleged, Pinkowitz carried out actions that led to its collapse. The lawsuit was filed before the three months had passed, during which there is no doubt that the appointment of CPA Darman was valid. The lawsuit alleges that the directors were negligent when they did not supervise Pinkowitz's actions and did not criticize them, and served as a mere "rubber stamp." The lawsuit was also filed against Migdal, the insurance company that insured the directors, and against the company's accountants at the relevant times of the lawsuit. The judgment given in this claim is the subject of the appeal at hand. In the trial judgment, the arguments of the parties were presented at length and in great detail. Below I will present the main arguments in a nutshell.
- The Claim in the Trial Court
B.1. The Parties' Arguments Regarding Pinkowitz's Actions
- The plaintiffs claimed that Pinkowitz was negligent in all of his actions, failed in his role as CEO and as a director of the company, and breached his duty of care. Therefore, he bears responsibility for the company's damages caused by his negligence. In support of their claim, the plaintiffs attached, inter alia, the affidavit of Mr. Moti Dayag, a relative of Jose in the village, who was appointed as a member of the company's board of directors on November 25, 2002 and since 2003 has served as chairman of the board of directors (hereinafter: Dayag); an affidavit by CPA Darman to which the audit report he edited was attached; and two opinions by CPA Bilu dated December 31, 2007, one of which was intended to examine the conduct of the directors, and the other was intended to examine the conduct of the accountants (hereinafter: the Bilu Report).
As it appears from these reports and opinions, between the years 1999-2002, Pinkovich transferred a total of over ILS 17,000,000 from the company to a subsidiary of the company, Tivon Plastic, in a tax appeal (hereinafter: the subsidiary), which went down the drain. The subsidiary was established in 1991 as an "outsourcing" company in which the refugees in the village worked in sorting and packaging products. It was claimed that Pinkowitz turned the subsidiary's factory from a small factory intended to provide employment for a small number of dependents for manual labor, into a loss-making industrial factory that did not match the capabilities of the dependents and which extracted millions of shekels from the company. Thus, it was argued, the subsidiary missed the purpose of its establishment, and the ratio between the enormous investments and the meager benefit of employing a small number of clients did not meet the test of reasonableness.