This article is general information, not legal advice. Every case is examined on its own facts, and every cause of action has its own limitation period.

The case

Danny worked for three years as a warehouse worker in a small office equipment company. The company belongs to Ronen, who is its only shareholder and also its manager. For the last two months Danny has not been paid his wages, and Ronen told the employees that the company has no money. During that period Ronen opened a new company in the same field, and some of the regular customers moved to it. Goods and a forklift were left in the old warehouse. Danny asks whether he can demand the wages from Ronen himself.

What the law and the case law say

The Companies Law provides that a company is a "separate legal entity", separate from its shareholders.

But there may be various situations in which the court will "lift the corporate veil", that is, make the shareholders liable for the company's debts. These situations usually arise when the company's shareholders "exploited" the company for their own benefit, or took various risks that a prudent person would not have taken. In such cases the Labour Court will examine whether two conditions are met:

The first condition is that the company's separate legal personality was used in a way that could deceive a person, or prejudice a creditor. A creditor is someone the company owes money to, and to prejudice a creditor means to harm them unfairly. The law does not require proof that this was the purpose. The condition is also met where the company was run with an unreasonable risk to its ability to pay its debts, and in a way that undermines the purpose for which it was set up (section 6(a)(1) of the Companies Law).

The second condition is that the shareholder was aware of this use. Someone who suspected what was being done in the company and refrained from checking is also considered aware. On the other hand, negligence alone, meaning a lack of care, is not enough (section 6(a)(2) of the Companies Law).

In addition, the Labour Court takes into account the shareholder's stake in the company, and the way the shareholder carried out the duties the law places on them towards the company. It also considers whether the company itself can pay its debts (section 6(a)(1) of the Companies Law).

The National Labour Court has held that employees are a special kind of creditor. The company bears heightened responsibility towards them, and this carries weight in deciding whether to lift the veil (Labour Appeal (National) 129/10 Zonenshein v Genius Sound System, 31.10.2011). Even so, as a rule, unpaid wages are not enough on their own, and neither are the company's financial difficulties. It must be proved that the company was misused, for example as a cover for harming the employee's rights (Leave to Appeal (National) 52353-08-16 Toko Chef v Negouse, 13.11.2016).

Where Danny's case stands

In the circumstances of the case before us, it seems that the Labour Court will be able to lift the veil:

The first condition is met: the company's shareholder moved customers of the company to a new company, and in effect exploited the asset of a customer list in a company that has no debts. In addition, Danny is an employee, and so the Labour Court sees him as a special kind of creditor.

The second condition is most likely also met. Ronen is the only shareholder, and he is also the driving force of the company and the one who led the transfer of the customer list to the other company. So it is hard to argue that he did not know what was being done in the company.

Where both conditions are met, the conditions for lifting the corporate veil are satisfied.

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