Legal Updates

Non-consideration transfer of assets and activities of a company to another may justify piercing of corporate veil due to creditors’ deprivation

February 2, 2021

A local authority sought to personally charge shareholders with various taxes and levies of a company after it ceased operations.

The Court accepted the claim and held that the company's debt to the local authority be attributed to the company's shareholders pro rata to their relative holdings in the company. Under Israeli law the corporate veil may be pierced and a debt of a company, including property taxes, may be attributed to its shareholder when actions have been taken to deprive the company's creditors and also when there is a reasonable concern of smuggling out the company's assets without any consideration by the controlling shareholders, subject to the following conditions: A. The company has accumulated a final city tax debt; B. The debt is accumulated in respect of a property that is not used for residence; C. The owner of the property is a private company, which is not a protected tenant under law; D. The company was liquidated or ceased operations; and also F. A shareholder in a company - defined as a "controlling shareholder" to whom the liability for the city tax debt passes - holds at least 25% of the company's shares, which give him, among other things, voting rights, the right to receive profits or the right to appoint an executive. Here, the company ceased operations and left debts to the local authority due to unpaid taxes and levies. Company's assets, valued at ILS1.5 million, as well as part of its business operations, were transferred without any consideration to one of the shareholder's brother, which reduced the company's assets and significantly deprived the company's creditors, including the local authority. Therefore, although two of the three shareholders in the Company were not "controlling shareholders" (as they held less than 25% of the Company's shares and did not enjoy the rights allocated to the controlling shareholders), the corporation veil was pierced and the Company's tax liabilities were attributed to them with respect to their relative holdings.