Legal Updates

One who hands over company checks knowing that the company is unable to pay them is exposed to personal liability

October 2, 2022

A supplier of a company demanded that a shareholder personally pay the company debt of ILS 700,000 after checks he provided to the supplier on behalf of the company bounced for insufficient funds.

The Court accepted the claim and held that the shareholder is personally liable for the company debt in full as it abused the corporate veil and deprived a creditor of the company. 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. In this case, the company was managed by a single shareholder who continued to order goods from the company supplier despite knowing that the company could not meet these obligations. The company became insolvent not due to a lack of financial success or mere negligence, but due to the shareholder's decision to sell the company's activities and after it decided to empty it of its assets while concealing it. The shareholder abused the corporate veil and acted to drain the company of its assets and to deprive the company creditor. Therefore, it was held to pierce the corporate veil and to hold the shareholder fully liable for the company debt.