Legal Updates

A CFO may be personally liable to debts of company

November 14, 2022

A supplier of a company demanded that a shareholder of a company, who was also in practice its CFO, be required to personally pay the company debts for goods supplied, after presenting him with presentations that the company cash flow difficulties were easy and not a real financial hardship with an apprehension of non-payment and he continued to issue checks and sign them The Court attributed the company debt to the shareholder personally as he managed the company with thin capitalization and hid its true financial situation from the company creditor. A personal liability of a company shareholder will be imposed in exceptional cases where the special conditions for piercing the corporate veil are met. Managing a company in a state of thin capitalization, which occurs when the company equity or asset inventory is not sufficient to cover the company liabilities, is a prohibited use of the incorporation veil because the shareholder 'enjoys' the company profit prospects, but does not share the risks of loss - which are rolled over to the shoulders of the external creditors. Additionally, an organ of a company is not exempt of personal liability if acted in an undue manner towards third parties. In this case, the shareholder knew that the company debts exceeded the value of its assets but despite this the company continued, with his knowledge, to order goods and issue future checks without cover. In addition, his role in the management of the company included personally signing company checks, and accordingly reviewing its financial conduct, therefore he had a duty of care towards the supplier as part of the general duty of care of a CFO in a company vis-à-vis its creditors who rely on his representations. Therefore, the shareholder is personally liable for the company debts.