Piercing the Corporate Veil in Israel: What It Means and When Courts Apply It
Every limited liability company is recognized as a separate legal entity, which means that the company’s debts generally cannot be imposed on its shareholders. This nearly complete separation between the company’s legal identity and its owners is known as the “corporate veil” — a foundational principle of corporate law designed to encourage entrepreneurship and risk-taking, thereby stimulating economic growth and productivity. Piercing the corporate veil is the exception to this rule: a court order that removes the barrier between the company and its shareholders, holding them personally liable for the company’s debts.
By Igal Mor, Adv. & Notary
Accuracy in Legal Advice. Excellence in legal support.
What Does Piercing the Corporate Veil Mean?
Piercing the corporate veil is an extraordinary legal remedy in which a court removes the liability protection afforded to shareholders and holds them personally responsible for the corporation’s obligations. Why is this step considered so unusual? Because it contradicts one of the central principles of corporate law: the doctrine of separate legal personality. Under this doctrine — which is the foundation of limited liability companies — shareholders’ maximum financial risk is limited to the amount of their investment in the company. They are not personally liable for its debts. Piercing the veil overrides this fundamental protection, which is why the Israeli Companies Law strictly defines the circumstances under which a court may order it. The burden of proving that such circumstances exist rests entirely with the creditors seeking to pierce the veil.
When Can a Court Pierce the Corporate Veil and Expose Shareholders?
Section 6 of the Israeli Companies Law establishes two categories in which a court may — if it determines that doing so is just and proper under the circumstances — attribute a company’s debts to its shareholders. Both categories involve improper use of the company’s separate legal personality.
Fraud or Deprivation of Creditors: The first category applies when the corporate veil is used to deceive a person or deprive a company creditor. For example, a shareholder who diverts corporate resources for personal use, thereby defrauding other stakeholders.
Unreasonable Risk to Creditors: The second category applies when the corporate structure is used in a manner detrimental to the company’s purpose while taking unreasonable risks regarding the company’s ability to repay its debts. A common example is “thin capitalization” — a situation in which shareholders invest little or no capital of their own, causing the company to rely almost entirely on borrowed funds. In such cases, the shareholders assume no meaningful risk while endangering creditors’ money.
Importantly, personal liability will only be imposed on a shareholder who knew — or should have known — about the circumstances constituting the misuse. A passive shareholder who had no involvement in or knowledge of the improper conduct is likely to be protected from personal liability.
Piercing the Veil in Family-Owned Companies
As noted, piercing the corporate veil is considered an exceptional remedy. The legislature defined specific situations in which a court may order it and granted courts the discretion to determine whether doing so is just and proper. Israeli courts consistently treat veil-piercing as an extreme measure, reserved for cases where maintaining shareholder limited liability would produce a severely unjust result.
However, when a family-owned company is involved, creditors stand a greater chance of succeeding in a veil-piercing claim. The reason is straightforward: in many family companies, the shareholders also serve as the company’s directors, making it easier to argue that no meaningful separation exists between the individuals and the corporate entity. Nevertheless, the court will not order a piercing of the corporate veil unless the creditors have proven that one of the statutory grounds under Section 6 of the Companies Law is present.
Employer Liability for Corporate Debts: Protecting Workers' Rights
Violations of workers’ rights are a common occurrence in Israeli business. In such cases, employees often file claims against the company rather than the individual employer. However, when it is proven that the employer exploited the company’s separate legal personality to the detriment of workers’ rights, the court may order a piercing of the corporate veil. Courts tend to apply this remedy more readily in employment contexts, given the clear public interest in safeguarding workers’ rights — particularly where the employer acted in bad faith.
Bad faith in the employment context encompasses a broad range of conduct, including: deducting pension contributions from employees’ wages without transferring them to the insurance company (which also constitutes a criminal offense), non-payment of wages, unlawful withholding of employee compensation, and other exploitative practices.
Protect Your Interests as a Shareholder
Our firm advises dozens of businesses at every stage of their development. We conduct comprehensive risk assessments that include evaluating shareholders’ exposure to personal claims and the potential for veil-piercing actions against them. Whether you are considering forming a company, joining as a shareholder in an existing business, or have received a claim naming you personally as a shareholder — we invite you to schedule a legal consultation. We will assess your personal exposure and advise you on strategies to minimize the risk of corporate veil piercing.
Are you a shareholder? We invite you to consult with our team on all matters related to your shareholding rights and obligations.
Adv. Mor & Co.’s commercial law department has extensive experience representing entrepreneurs, businesses, and corporations — both in Israel and internationally — across all areas of corporate and commercial law. Contact us by calling 02-595-3322 or messaging us on WhatsApp at 050-441-1343.