In the early 2000s, the National Labor Court ruled that the use of the legal tool “piercing the corporate veil” should be expanded insofar as the matter pertains to employees. The Labor Court maintained this approach even after the causes for piercing the corporate veil were constricted in the Companies Law.
In an appeal of the National Labor Court judgement on the matter of R-Z Plastek Ltd. to the Supreme Court, sitting as the High Court of Justice, the Supreme Court ratified the rulings of the National Labor Court and decreed that the rules for piercing the corporate veil are adapted to labor law and to its special characteristics by the Labor Court. The Supreme Court also ruled that it is warranted to expand the use of the legal tool of piercing the corporate veil, insofar as the matter concerns employees who are not “voluntary creditors” but special creditors, toward whom the company has an enhanced liability and a special fiduciary duty. The Supreme Court reiterated that the court is less cautious when piercing the corporate veil from a cluster of companies. It also stipulated that the founding of a new business, which continues the activities of a failing company while emptying it of its assets, justifies piercing the corporate veil, when it has been proven that the owners’ intention was to evade paying off debts to creditors.
In relation to the case at issue, the Supreme Court ruling stated that the National Labor Court was correct when it ruled that the corporate veil must be lifted between the company and its sole shareholder, the party who abused the corporate veil for the purpose of evading payment of the company’s debts to the employees, who subsequently filed a suit. The Court further concluded that the shareholder had founded an additional company to serve as a vessel that would hold the other company’s assets, while emptying the previous company of its assets, for the purpose of preventing its creditors from being able to collect their debts. The Court determined, consequently, that both companies are actually a single company.
Employers should familiarize themselves with the position of the Labor Court, who is more lenient about piercing the corporate veil than the civil courts. This position has now also been ratified by the Supreme Court.