Legal Updates

Failure to issue a tax invoice/receipt and misuse of the incorporation veil may justify piercing the corporate veil

February 6, 2023

A company that was hired to carry out renovation work in a residential apartment entered into liquidation procedures. The shareholder was required to personally compensate the customers for damages and many defects discovered in the works.

The Court accepted the claim in part and held the shareholder is personally liable for defects and damages, due to its misuse of the incorporation veil. Piercing the corporate veil and holding the company organ personally accountable with the company debts will be done in exceptional cases such as abuse of the principle of separate legal entity to defraud the company creditors. Here, the shareholder was not a party to the renovation works contract nor was it a guarantor to the company’s obligations that was active at the time. However, in this case it was a 'family' company that received compensation for work performed, but it never issued tax invoices/receipts and never reported its income to the tax authorities. In practice, the shareholder did not make the separation needed between the company's funds and its own funds and used the funds paid to the company. In addition, the company did not pay its fee to the Corporation Registrar for ten years and did not submit an annual report to the registrar of corporations for 28 years. Moreover, even after the company entered into liquidation procedures, the shareholder continued to work on other projects, under a new company it founded. These are not mere omissions or improper management but a conduct that constitutes an abuse of the company separate legal personality in order to defraud the company creditors and harms the purpose of the company. As a result, the corporate veil was pierced and the shareholder was required to compensate the customers for their damages.