Piercing the corporate veil: when a court attributes a company debt to a shareholder
Separate legal personality is the reason people incorporate a limited company. Section 6 of the Companies Law allows a court to disregard it, but only in exceptional cases and in two defined situations. This page goes through the wording of the section, what it permits, and above all what it expressly excludes.
“Section 6 was written in the language of an exception, and the courts read it that way.”
Adv. Erez Sapir
The veil: what it protects
Section 4 of the Companies Law provides that a company has a legal personality separate from its shareholders and from the members of its board. It follows that the obligations of the company are its own, and a shareholder does not bear them. That separation is the corporate veil, and it is the entire idea behind the limited company.
The veil is not absolute protection, nor should it be. If anyone could act through a company with no responsibility at all, the tool would become a cover. So the law allows a court to disregard the separation, but defines the cases carefully.
One clarification worth making early: piercing the veil is not the only route to the personal pocket. A personal guarantee signed to a bank or a supplier bypasses the question entirely, and personal liability of an office holder for breach of duty is a separate ground. These three routes are constantly confused.
Source: Companies Law, 5759-1999, section 6. Checked September 2026.
The wording of section 6
Here is the section as written, and it repays reading slowly.
Section 6(a)(1): a court may attribute a debt of a company to a shareholder in it, if it found that in the circumstances of the matter it is just and right to do so, in the exceptional cases in which the use of the separate legal personality was made in one of the ways set out below.
Notice three cumulative conditions already present in that sentence: the remedy is a discretion and not a duty; it is conditional on being just and right in the circumstances; and it is reserved for exceptional cases. The word exceptional appears in the statute itself, and that is the legislature speaking about policy.
Source: Companies Law, 5759-1999, section 6. Checked September 2026.
The two limbs, and the distance between them
Limb (a): use of the separate legal personality in a manner apt to defraud a person or to prejudice a creditor of the company.
This is the classic limb. It concerns using the company as an instrument: moving assets ahead of a claim, incurring a debt knowing it will not be paid, continuing the same activity through a new company while the old one keeps the liabilities.
Limb (b): use in a manner that harms the purpose of the company and involves taking an unreasonable risk as to its ability to pay its debts.
This is the less familiar limb, and it is the more dangerous one for an innocent business owner. It requires no fraud. It is enough that harm to the purpose of the company combines with unreasonable risk taking relative to solvency. A company distributing all its surplus while accumulating liabilities, or entering an obligation with no reasonable cover, is in this territory.
Note that the second limb is about risk, not outcome. The key question is not whether the company collapsed, but whether the risk taken was reasonable relative to the ability to pay at the time it was taken.
Source: Companies Law, 5759-1999, section 6. Checked September 2026.
Mere negligence is not a ground
This is the part almost always omitted, and it is the most significant protection available to a good faith shareholder.
Section 6(a)(2) provides that a person is regarded as aware of such use even if they merely suspected the nature of the conduct or the possibility of the circumstances that produced it and refrained from inquiring, except where they acted with mere negligence.
So wilful blindness does count as awareness. A person who suspected and chose not to look cannot claim ignorance. But mere negligence is expressly excluded. Someone who simply did not pay attention, managed poorly or misjudged does not fall within the section by reason of the negligence itself.
This is the line between poor management and abuse. Businesses fail, and business failure is not a ground for piercing. The section is aimed at the person who used the separation, not at the person who managed badly.
Source: Companies Law, 5759-1999, section 6. Checked September 2026.
The two further remedies in section 6
Section 6 does not end with attributing a debt, and it contains two further tools that receive less attention.
Section 6(b). A court may attribute a characteristic, right or obligation of a shareholder to the company, or a right of the company to a shareholder in it, if it found that in the circumstances of the matter it is just and right to do so. This is piercing in the reverse direction, and also sideways: a characteristic of the individual is attributed to the company. For example, knowledge or a qualification of the shareholder relevant to an engagement the company entered.
Section 6(c). A court may suspend the right of a shareholder to repayment of a debt owed to them by the company until after the company has paid in full all of its obligations. This is a significant tool in insolvency: a shareholder loan is subordinated behind every other creditor. A shareholder who injected money as a loan rather than as equity may find they are last in line. See liquidation of an insolvent entity.
Source: Companies Law, 5759-1999, section 6. Checked September 2026.
Conduct that invites an application
These are the patterns that recur in applications, and most of them arise from convenience rather than bad intent:
Mixing funds. A personal expense paid from the company account, and the reverse. This is the first item any creditor checks, and the easiest to prove.
A company with no equity proportionate to its activity. Incorporated with nominal capital and taking on obligations of an entirely different order.
Moving the business to a new company. Same clients, same team, same goodwill, new entity, and the debts left behind.
Owner drawings during difficulty. Withdrawing funds while knowing the company is struggling to meet its obligations.
No corporate record at all. No minutes, no resolutions, no separation. A company run like a private pocket invites the argument that this is exactly what it is.
Keeping the veil intact
The protection is operational rather than legal, and it is cheap. Five rules:
Absolute separation of funds. A separate account, a separate card, and no personal expenses through the company. If the company pays the shareholder something, give it a name: salary, dividend or a documented expense reimbursement.
Equity proportionate to the activity. Not nominal.
Record material decisions. A short minute beats a good memory.
Disclosure and approval for every related party transaction. See corporate governance.
Particular care during difficulty. Once the company struggles to meet obligations, every drawing, every preference of one creditor and every transfer of an asset is examined afterwards in a different light.
Legal support
We handle both directions. For a creditor seeking to reach the shareholder, we first check whether there is a personal guarantee or a ground of office holder liability, which are shorter routes than piercing. For a shareholder facing an application, we map what in the conduct falls within section 6 and what falls within poor management, which is not a ground.
To reach us: 02-5953322 in Jerusalem, 03-3030430 in Tel Aviv, WhatsApp 050-4411343.
Frequently asked questions about piercing the corporate veil
When will a court pierce the veil?
Is poor management enough to pierce the veil?
What is the difference between piercing and a personal guarantee?
What is section 6(c) and why does it matter?
What is the first thing a creditor checks?
Can the veil be pierced in the reverse direction?
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Tell us how the company is structured, how funds are handled and what was signed. We will say whether this falls within section 6 or another route.