Legal Updates

Transfer of business activity to a new company may result in it being obligated to the debts related to the transferred activity

February 19, 2019

A taxi-station owner borrowed funds and when he could not repay the loan, transferred all the taxi station's activities, free of charge, to a company newly incorporated by his sister-in-law, who also received the station's activity and its debts from customers, but the purchase agreement specifically stated that debts of the business are not transferred.
The Court held that the debt will be attributed to the new company. Agreements should be honored, including the agreement for the purchase of activities in which only rights, not obligations, were purchased. However, an agreement that has a legal or moral defect will not be respected, inter alia, considering that it harms third parties, and especially the business creditors who worked with it, relying on its assets and revenues. When, as in this case, the transfer of the business activity and rights therein, without the obligations imposed on it, is intended to avoid payment of debts related to the business, thereby deceiving the creditors, the transfer of rights without the obligations will not be honored. It is possible to pierce the corporate veil in a corporation both to attribute to a person the debts of a company and to attribute to a company the debts of a person who holds it, which can be done in any case that the Court deems right and correct, and also in situations that are not so significant in their severity. It is possible to pierce the corporate veil not only between a company and a shareholder but also when it involves related shareholders, when the corporate veil is abused, or when assets are smuggled from one company to another - whether the companies are held by the same shareholder or by family members. Here there is a family business that was transferred free of charge to another family member and therefore the debts will be attributed to the company.