Legal Updates

Personal involvement must be demonstrated beyond being a shareholder in order to hold a shareholder liable for a company debt

May 8, 2020

A supplier sought to hold a shareholder personally liable for a company debt by virtue of a promissory note on which the shareholder’s signature was forged - after the company failed to pay its debt and checks that were given by it bounced due to insufficient funds.
The Court dismissed the claim against the shareholder and held that because he did not sign the promissory note, being a shareholder by itself does not justify piercing the corporate veil or holding him personally liable to the company's debts. In order to establish a personal claim against a shareholder by piercing the corporate veil or other personal liability, a personal involvement must be demonstrated beyond the mere holding of shares. Here, the supplier performed a service for considerable sums before receiving a payment and based only on the company's obligation to pay. Only after completing the service and upon request from the company to change the payment terms, was the company's financial condition first examined and it was requested to present a promissory note of the shareholder. However, despite the high amount of the transaction, the supplier did not demand that the note be signed before a witness or an attorney. Because the shareholder was not involved in the transaction and his signature was forged, the supplier was negligent by not taking any basic measures to secure the payment of the consideration, including ensuring the identity of the signatory.