Legal Updates

Payment of a shareholder to some of the creditors of a company that collapsed does not create liability to its debts

December 9, 2019

A company that dealt with training in riding and therapeutic riding collapsed and customers of the company sued one of the directors, who also held 33% of the shares, partly because she paid out of her own pocket, after the company collapsed, debts to some creditors but not others.
The Court held that there is no personal liability of the director. Piercing the corporate veil and holding shareholders personally liable is only done in exceptional cases where the corporate veil is used to defraud or deprive creditors, or when the management of the company was carried out in a manner that takes unreasonable risks of its ability to repay its debts. Here, the company operated regularly for 5 years and fulfilled its obligations to students, conducted financially with banks (and not with the gray market, etc.) and there was no misuse of its unpaid financial resources or personal withdrawal of funds by the shareholders while emptying the company's pockets and therefore there is no personal responsibility for shareholders. It is not enough that a director knows that the company is in financial difficulties to impose a personal liability on him because of his managerial responsibilities, but there is a need for real and concrete knowledge about lack of financial strength and ignoring thereof. In addition, the fact that she paid, after the collapse, to the landowners of the company, or to the company's accountant, whether she did so because of apprehension from certain creditors or because of any unpleasantness towards them, does not by itself impose any liability for the company's other debts