Legal Updates

A manager who makes false solvency representation to enable delay of debt payments of a company may be personally liable for company debts

March 22, 2022

A settlement agreement, signed between a company and its supplier, regarding payment of a debt of hundreds of thousands of shekels, was not honored by the company. The supplier demanded that the shareholder and manager of the company personally pay the debt in person, although he is not a party to the agreement and was not a guarantor to the company’s undertakings.
The Court held that the shareholder and manager is personally liable for company's debts both by virtue of the principle of piercing the corporate veil and by virtue of direct liability. Under Israeli law, a company debt can be attributed to a shareholder in exceptional cases where the separate legal entity is used in a manner that deceives a person or deprives a creditor of the company, or in a manner that harms the purpose of the company and while taking an unreasonable risk of repaying its debts. It is also possible to impose direct liability on a company organ in cases where such organ conducted negotiations on behalf of the company in bad faith. In this case, debt enforcement proceedings were held against the company in respect of the debt. The shareholder and director of the company negotiated a settlement agreement in which the company undertook to repay the debt in installments when it was agreed that subject to the first installment the collection proceedings would be delayed. Once first payment was made and proceedings were delayed, no further payments were made. During negotiations the shareholder knew that the company was in financial difficulties and could not meet its obligations, but nevertheless made a false representation that the debt would be repaid in installments. By doing so, the shareholder acted deceivingly and in bad faith in order to gain an economic advantage - rescuing the company from debt collection proceedings - in a manner that justifies piercing the corporate veil and also direct liability to the company debt.