Legal Updates

A company shareholder who did not take the company’s assets after its collapse will not be liable for the company city tax debt

May 18, 2022

Two companies that operated gyms in Jerusalem ran into financial difficulties and ceased operations. The companies left behind city tax debts (Arnona) in the cumulative amount of about two million shekels and the Jerusalem municipality demanded that the shareholders and company officers pay the debt in person.

The Court dismissed the claim and held that shareholders and company officers should not be charged with the companies city tax debt. The piercing of the corporate veil is an extreme and far-reaching remedy that should be used with the utmost care in exceptional cases only. At the same time, the law allows a local authority to collect a property tax debt of a company from its shareholders if: A. The tax is charged for a property that is not used for residence; B. The debt is a final debt; C. The company did not repay the debt; D. The company is not a protected tenant in the property; E. The company ceased operations and the defendant is the controlling owner of that company; and also F. The company's assets were transferred to the shareholder for no consideration or partial consideration. In this case, despite the fact that the companies ceased operations after leaving a city tax debt of about two million shekels, the shareholders did not pocket any money from the companies' assets and they were left with a significant pocket loss after the collapse of the companies. The owners of the companies made an extreme efforts to run their business and repay the debts of the companies as much as they could. This is not an exceptional case where, for example, the separate legal entity is abused to defraud the company creditor. Therefore, the circumstances do not justify the use of the extreme and far-reaching remedy of piercing the corporate veil and the shareholders are not to be liable for the company debt.