Legal Updates

Under certain circumstances in a claim against a shareholder one may claim rights belonging to the company

July 24, 2018

An entrepreneur led a group of purchasers in a construction project and contacted the purchasers both by himself and through a company wholly owned by him. In the insolvency proceedings of the entrepreneur, his creditors requested to receive rights belonging to the company wholly held by him.

The Supreme Court held that Israeli law enables two types of piercing the corporate veil: “classic” piercing - attributing company debts to its shareholders; and a "reverse" piercing, i.e., the attribution of rights of a company to its shareholders or attribution of rights or obligations of a shareholder to the company. The “classic” piercing will be done in exceptional cases only when the use of the separate legal personality is done for the purpose of fraud or deprivation of a creditor; or when the use is done in a manner that harms the company's purpose while taking unreasonable risk.  In contrast, the Court's discretion is broader in the “reverse” piercing and it is possible when the Court "finds that under the circumstances it is just and proper to do so," even in the case of creditors of the shareholder demanding the rights of the company held by him. Here the case involves mixing the company's assets with the assets of the shareholder and a shareholder holding 100% of the company's shares, managing it exclusively and controlling its operations, and thus blurring the scope of the association.  Thus, it is possible to apply the “reverse” piercing of the corporate veil.