Legal Updates

In the absence of intent to defraud or deprive a creditor of the company there is no place to pierce the corporate veil

September 6, 2023

A company purchased pressure tanks equipment for a diving club operation of ILS 210,000, but the equipment was not provided to it even though the consideration was fully paid. The shareholder of the supplier was demanded to return the paid consideration personally.

The Court rejected the claim against the shareholder and held that there is no justification to hold the shareholder personally liable to the company debt. A company is a separate legal entity and the veil of incorporation can be pierced only in exceptional circumstances and by doing so attribute the company's debt to the shareholder. Among these exceptional cases that may justify it, inter alia, is when the company's legal entity is used to defraud or deprive a creditor of the company. The relevant date for such scrutiny, whether the veil of incorporation should be pierced or if personal liability exists, is the relevant date when the funds were transferred. Here, the purchase transaction was carried out about two to three years before the company fell into insolvency which finally led to its liquidation in 2018. The company was still active in 2018 and at the time the money was wired the company was at a financial state that enable the supply of the equipment. Therefore, the company was not used to defraud or deprive any person or a creditor of the company and there is no place to impose personal liability on the shareholder either by virtue of piercing the incorporation veil or by virtue of personal liability due to wrongdoing.