Legal Updates

A director who signs a false affidavit of solvency upon voluntary liquidation is personally liable to creditors damaged by it

March 18, 2021

A company marketed a cruise in the Mediterranean, but on the third day of the voyage a hole opened in the belly of the ship, as a result of which the ship was forced to anchor in the port of Rhodes and unload the passengers, who after long hours were returned to Israel by flight. The company sued the shipowner and received compensation but did not compensate the passengers who sued the company and received partial compensation only. About 6 years later, the company was voluntarily liquidated, with no assets distributed to the shareholders, but the passengers sought to cancel the liquidation and initiated liquidation proceedings in Court.
The Court dismissed the passengers' monetary claim filed against the director who signed the insolvency affidavit for the purpose of voluntary liquidation. The procedure for voluntary liquidation of a company has two tracks: voluntary liquidation by the company's shareholders and voluntary liquidation by the company's creditors. The company's self-liquidation procedure requires an affidavit from the directors stating that the company can, and undertakes to, repay its full debts within the twelve months from the date of liquidation, including debts that have not yet been fully materialized at the time of signing the affidavit, but were known to the company. The meaning of the affidavit is that if debts are not repaid by the company in full - it will be the director of the company who is personally indebted to repay the debt. Once the liquidation procedure is done in Court, the affidavit of solvency is no longer relevant. A director who signs an insolvency affidavit that is incorrect is liable by virtue of negligence and in order to create personal liability there must be damage and a causal link between the false affidavit and the damage. Here, even had the company declared that it was insolvent, and the liquidation authority had passed to the creditors - the passengers still had nothing to be repaid from and thus they did not adversely change their situation due to the false insolvency affidavit and therefore, despite the inconvenience by the director signing a false insolvency affidavit, the passengers have no cause of action against him.