DISTRICT COURT: LACK OF COMMERCIAL REASONING BEHIND A PURCHASE ORDER JUSTIFIES PERSONAL LIABILITY OF OFFICEHOLDERS

The Israeli District Court has held that notwithstanding the general lack of personal liability by officeholders and shareholders for the debts of a limited liability company, the absence of commercial reasoning behind a purchase order for goods, amounting to bad faith by an officeholder, justifies levying personal liability on the officeholder issuing the purchase order. In this case, due to unjust enrichment, the court additionally ordered payment by the controlling shareholder where the officeholder also served as CEO.

 

The plaintiff supplied a limited liability agricultural association with copper coils in the amount of NIS 2.7 million. This exceeded by 300% the amounts ordered in the preceding months. Three months following the issuance of the purchase order, and a month after the delivery of the goods, the agricultural association filed for bankruptcy and did not pay for the goods. The liquidator sold the copper coils and the proceeds were used to repay outstanding credit lines guaranteed by the controlling shareholder. Thereafter, the plaintiff filed a suit against the agricultural association’s controlling shareholder, as well as against, among others, the agricultural association’s former chairperson and former CEO who at the relevant time also served as officeholders in the controlling shareholder.

 

The Court held that in order to levy personal liability on the officeholders and shareholders of a limited liability company the plaintiff must prove extraordinary circumstances, justifying deviation from the principles of corporate law. In this case, the plaintiff failed to prove that the controlling shareholder guaranteed the debts of the association or that the association’s failure to disclose its financial distress provided sufficient grounds for levying personal liability.

 

The Court further held that the purchase order had no commercial reasoning because of the association’s financial distress when it was issued and that its issuance amounted to bad faith by the association’s then CEO. While the court found that the controlling shareholder was not personally liable for the issuance of the order, it had unjustly benefited from it, as the proceeds derived from the inventory were used to repay outstanding debts that it had guaranteed.

 

Under the circumstances, the Court ruled in favor of the plaintiff, ordering the controlling shareholder and the association’s former CEO, jointly and severally, to pay the plaintiff approximately NIS 1.4 million attributed to the portion of the purchase order that exceeded the volume of orders in previous months.  

 

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