Personal liability of officers and organs of a company

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Personal liability of officers and organs of a company

The meaning of a limited liability company is legal separation between the company and its shareholders. To the extent that the company has not fulfilled its obligations, and has breached an agreement with you, your legal right is against the company and not against its shareholders, as it is a company in which the liability of the shareholders is limited.

However, the shareholder and officer of the company must know that if they do not run the company’s business affairs in an acceptable manner and in good faith, and exploit the company’s separate legal
entity for illicit purposes and advancing their personal interest at the expense of the company’s creditors, the corporate veil may be pierced and they may be held personally liable for the company’s duties, in which case the separation of the company from its shareholders will not apply, the company and its shareholders will be considered a single entity and the shareholders will be held personally liable for the company’s duties.

There is a distinction between the liability of a shareholder for the company’s duties and the personal liability of an officer for acts that he has performed within his capacity in the company. Sometimes an
officer is not a shareholder of the company, but will be held personally liable for the company’s duties to the extent that he has acted on behalf of the company towards third parties in bad faith or has committed a civil wrong within his duty, such as theft, fraud or negligence.

Liability of a shareholder

The classic cases in which the court has pierced the corporate veil and has held shareholders personally responsible is in the case of a shareholder with the highest holding rate in the company, who may make decisions and make moves within and on behalf of the company, taking an unreasonable risk, hiding information on a poor economic condition of the company before a contractual engagement and acting in bad faith.

Therefore, we always recommend in the case of a shareholder engaging on behalf of a company with a third party to do so in good faith, disclose the material details related to the company and the transaction and know that he is not taking that third party to an engagement in which there is a chance that the company will not be able to fulfill its obligations.

Personal liability of an officer and organ of the company:

In most cases, the company is managed by functionaries, or as they are defined in the law, officers, who effectively manage the company’s business affairs. Officers have been defined in the Companies Law as a chief executive officer, chief business officer, assistance to the CEO, deputy CEO, any other functionary as stated in the company even of a different title, and a director or manager answering directly to the CEO.

Within their capacity, officers who are not shareholders of the company make business decisions on a daily basis on behalf of the company with various third parties, and their decisions bind the company to all intents and purposes.

In certain circumstances, an officer and an organ of the company will be held personally responsible and will be personally liable in accordance with contracts and torts law owing to the decisions that he has made on behalf of and for the company. Ostensibly, this is a problematic situation, inasmuch as sometimes the officer is not a shareholder and has no financial interest like that of a shareholder.

This does not mean that an organ of the company will assume personal tortious liability only due to being an organ of the company, but the foundations of the civil wrong with respect to his action must
be proved. The test for holding an organ of the company personally responsible is an ordinary test of torts law – the existence of the foundations of responsibility. Examples include the wrong of negligence, the wrong of theft and fraud, all of which are civil wrongs. Should the foundations of the wrong be proved, i.e. that the officer acted unlawfully on behalf of the company, and his acts or omissions damaged a third party, he may find himself liable for the duties of the company, despite not being a shareholder.

Like the personal responsibility under torts law, the courts hold an officer and organ of the company personally liable under contracts law pursuant to Section 12 (the pre-contractual stage) and Section 39
of the Contracts Law (the contractual stage), to the extent that they acted in bad faith when they engaged with a third party on behalf of the company.

Our recommendation is that in the case of an officer, it is extremely important to explain to him his responsibility towards third parties, and that the fact that he is not a shareholder does not diminish from his liability for the company’s duties. He must act with great care when he commits the company.