Legal Updates

Breach of labor laws by itself does not constitute grounds for piercing corporate veil

May 28, 2021

An employee of a company, that ran into difficulties and ceased operations, contended sought to obligate the shareholders personally in respect of the debt to him.

The Labor Court dismissed the employee's claim and held that irregularities in wiring of payments to the employee that were made in good faith does not justify piercing of the corporate veil and holding the shareholders personally liable to company debts. The starting point is that the principle of the separate legal entity of the corporation must be held and it is not enough that a "worrying picture emerges" regarding the way in which a company employed its employees in order to pierce the corporate veil. The employee must show that the incorporation veil has been misused, with the intent to defraud or deprive the employee, or while taking an unreasonable risk as to its ability to repay debts. Here, the employee did not receive full payment of his rights at the time of termination of his employment with the company and the funds were not allocated in full to the pension fund, apparently due to some irregularities in the company and due to incorrect instructions from the company's accountant. Before it ran into difficulties and ceased operations, the company conducted itself in a transparent manner, paid ongoing social rights and acted without any intention to act as a cover for infringement of employees rights or fraud. The shareholders also acted in good faith and with fairness by paying company debts as part of the company's stay of proceedings case and for this purpose, sold residential apartments and used the financial resources available to cover debts and even refrained from withdrawing salaries from the company until they were discharged from personal guarantees given by them to the company. Therefore, as the shareholders acted in good faith there is no room for piercing the corporate veil despite the breach of labor laws by the company.