Legal Updates

Emptying a company from operations and funds before filing a motion for voluntary liquidation may be considered as creditors defrauding

March 17, 2020

A supplier of a company demanded payment from the shareholders for a debt of the company after motion company's accounts were emptied, the company's operations were shut down and then a request for a voluntary liquidation was filed, in which the debt was not disclosed.
The Court accepted the claim and held that the corporate veil is to be pierced and the shareholders personally liable for the company's debt. Under Israeli law, a Court may attribute a company debt to a shareholder in exceptional cases where the corporate veil was used to defraud a person or deprive a creditor of the company. Withdrawing money from a company and leaving it without being able to meet its obligations constitutes crossing of a red line and so does filing a false statement of solvency of the company while concealing the existence of a debt. Here, there was no dispute about the company's debt to one of its suppliers, but the company reset it in its accounting records in 2014 and moved for voluntary liquidation in 2015, but before doing so, hundreds of thousands of Shekels were withdrawn from the company's account, leaving it unable to pay the debt. However, within the framework of the motion for voluntary liquidation, a false statement was made to the Registrar of Companies regarding the company's ability to repay all of its debts. These actions made knowingly by the Company's officers left the creditor facing an emptied company and are circumstances that are fraud of a creditor that justify piercing the corporate veil.