Question:

Reuven, who is the CEO and majority shareholder of a corporation, has purchased merchandise on credit from his supplier, Shimon, and agreed to pay by a certain date. On the day that Shimon was supposed to be paid, Shimon realized that Reuven’s business was no longer solvent, and that he could not count on getting his money back from the business. According to Halacha, is Reuven obligated to pay his corporation’s debt to Shimon from his own personal money?

Answer:

A. Reuven is obligated to pay his business’s debts from business funds, as allowed by the business cash flow. If there is no way that the business can repay the supplier, Shimon may collect from property that is owned by the business. However, according to Halacha, Reuven is not obligated to pay the debt from personal funds. (1)

Sources:

(1) There is a disagreement among the Rishonim in Kiddushin (8b) whether a lien (Shibud) can be placed on property even if the borrower or purchaser has no personal responsibility for the debt, or if a lien can only exist on a property if the borrower or purchaser has personal liability to pay the debt. The latter opinion is that of Tosafos (ibid. D”H Manah), and the Rosh there (10).

The concept of a corporation is that liability for any debts are limited to the company accounts, and the officers and CEO of the corporation have no personal liability for its debts. Consequently, any lien on corporate property is a lien on property without any personal liability, which is discussed in the Rishonim, as mentioned above. It would seem, therefore, that whether or not a corporation’s property may be collected in lieu of its debts would be dependent on this disagreement.

However, practically speaking, the custom in Batei Din is to allow debtors to collect their debts from corporate property. It appears to me that there are two reasons why, according to Halacha, debtors should be permitted to collect from corporate property but not from the personal funds of its owners and officers:

1. In Halacha, there is recognition for obligations that may not be technically Halachically binding, yet are considered binding in prevailing society. This is called a Kinyan Situmta. The Shulchan Oruch (Choshen Mishpat 201) states that this type of obligation is binding even in situations where a transaction does not work according to Torah law, such as purchasing futures (Davar Shelo Ba LaOlam), as is stated in the Teshuvos HaRosh. According to this, a Kinyan Situmta would also allow debtors to collect their debts from corporate property, despite the fact that there is no personal liability on its officers.

2. There really is, practically speaking, some degree of personal liability on the part of the CEO and officers. If it were clearly proven that they had been deliberately negligent with the corporation, or turned a blind eye to embezzling, etc., they would have to reimburse the company from personal funds. Therefore, we can argue that Halacha looks at a corporation not as if there is no personal liability at all, rather that it is as if an agreement has been reached that all business related debts can only be collected from specific funds, that of the company, and not personal funds. We certainly find precedent for this in Halacha, in the concept of “Apotiki” – where a borrower or debtor designates only certain funds or property that will be liable for his debt, and the liability is restricted to the designated property.

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This week’s class is based on a column by Rabbi Tzvi Shpitz, who is an Av Bet Din and Rosh Kollel in the Ramot neighborhood of Jerusalem. His column originally appears in Hebrew in Toda’ah, a weekly publication in Jerusalem. It has been translated and reprinted here with his permission and approval. His columns have recently been compiled and published in a three volume work called Mishpetei HaTorah, which should be available from your local Sefarim store.

Feedback is appreciated! It can be sent to[email protected].

This week’s class is based on a column by Rabbi Tzvi Shpitz, who is an AvBais Din and Rosh Kollel in the Ramot neighborhood of Jerusalem. HisColumn originally appears in Hebrew in Toda’ah, a weekly publication inJerusalem. It has been translated and reprinted here with his permission and approval.

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Please Note: The purpose of this column is to make people aware of Choshen Mishpat situations that can arise at any time, and the Halachic concepts that may be used to resolve them. Each individual situation must be resolved by an objective, competent Bais Din (or Rabbinic Arbitrator) in the presence of all parties involved!