Legal Updates

A shareholder’s consistent and intentional use of the company’s separate legal entity justifies personal liability

December 3, 2020

A company ran into financial difficulties and accumulated debts towards a supplier. The supplier demanded to personally obligate the sole shareholder, who on the one hand sought to defer the repayment of the debt and on the one hand purchased goods in excess of the company's sales, smuggled goods and selectively repaid debts to other suppliers to whom he had a personal guarantee.
The Court held that the shareholder's consistent and intentional use of the company's separate legal entity justifies imposing personal liability to the company's debt. Israeli Law enables attributing company debts to a shareholder by the doctrine of piercing the corporate veil in order to avoid abuse of the separate legal entity of the company. However, this is an extreme measure taken only in special circumstances and only with a shareholder that took an active action and was not merely negligent. The corporate veil would usually be pierced in a case of an active shareholder with significant holdings in the company, such as a sole shareholder and when a creditor of the company was deprived. Here, the active conduct of the sole shareholder of the company was intended to deprive the supplier, a creditor of the company, and indicates consistent and intentional misuse of the corporation veil in a manner that justifies its piercing and holding the shareholder personally liable to the company debt.