Legal Updates

Opening a voluntary liquidation procedure in order to avoid paying the company’s debts is grounds for piercing the corporate veil

August 4, 2022

A shareholder of a company commenced voluntary liquidation of the company even though he knew that there was a debt to another company that provided services to the company in the amount of approximately ILS 200,000 which he failed to settle.

The Court accepted the claim and held that the corporate veil is to be pierced and the shareholder held liable for the company debt. Piercing the corporate veil is an extreme action which is not done as a matter of routine and there is a need for special circumstances to justify it, such as abuse of the corporate veil to defraud a person or deprive a creditor of the company. The fact that a contract is entered into with a single-shareholder company or a company controlled by a single person or that it is assetless, is not by itself grounds for pierce the corporate veil. In this case, the company had a sole shareholder who was also its manager and the living spirit behind it. The shareholder made a commitment to a supplier of services to the company that he would repay the debt, but asked to wait a little so that he could collect money from customers during this period of time which will allow him to make the payment. Later, it turned out that the shareholder usurped the time given to him and inter alia used the time to liquidate the company (by voluntary liquidation process) and falsely declared that the company is able to pay all of its debts within 12 months while he did not act to pay off the debt or settle it. Therefore, the shareholder's conduct was not in good faith and justifies piercing the corporate veil and holding him fully accountable for the company debt.