Court ruling with a deterrent effect – imposing personal liability on directors of an Israeli non-profit organization (NPO)
In May 2015, the Jerusalem District Court issued a judgment imposing personal liability in light of lawful conduct of the affairs of an NPO, on the general manager and authorized signatory of the NPO, as well as on the estate of the general manager’s father, OBM (who had been the chairman of the NPO’s executive board). The Court adjudged them personally to pay the inclusive sum of approximately NIS 13 million.
At issue is an NPO which, according to its formal-registered objectives, was established for the purposes of assisting victims of drug-related crimes, of increasing the public’s awareness of the pervasiveness of drug abuse, of providing information on drug-related issues and of increasing the public’s awareness of drug-induced violence.
Already in 2011, the court had issued a liquidation order against this NPO, after the Registrar of Amutot (NPOs) had appointed an investigator to investigate the NPO and his report of severe findings had prompted the Registrar to file a motion with the court to liquidate the NPO. At that time, based on the investigator’s report, the court had ruled that it was clearly the court’s duty to liquidate the NPO for the good of the public and appointed a liquidator for the NPO’s assets pursuant to the liquidation order.
The investigator’s report on the NPO indeed contained severe findings: that the NPO’s institutions were dysfunctional and failed to supervise the activities of the NPO’s general manager, whose actions were contrary to the interests of the NPO and had nothing to do with fulfillment and promotion of the NPO’s objectives, while misleading the NPO’s donors and exploiting their goodwill and ingenuousness. Thus, the report found, inter alia, that the NPO had raised a substantial amount of donations from the public, but took no action to promote NPO’s objectives; in fact, the gist of the NPO’s activities amounted to recruiting donations for the purpose of paying salaries to the NPO’s employees (which itself constitutes a prohibited distribution).
The report also found that, in addition to the routine fund-raising setup, the NPO also kept a separate extensive fund-raising setup that was off the NPO’s books; that the funds collected through charity boxes (approximately 1,500 charity boxes dispersed at different places of business) and payment vouchers never reached the NPO, but rather, were unlawfully misappropriated by functionaries at the NPO and used to pay salaries. The report also found that cash payments were being made to employees without duly reporting them to the tax authorities.
In light of all of the above, and as a result of the liquidator’s motion, the court ruled that the NPO’s general manager and the estate of the NPO’s executive board chairman (the general manager’s father) shall each be adjudged to return approximately NIS 6.5 million to the NPO, and collectively, approximately NIS 13 million. The judgment also appointed the liquidator (who was appointed pursuant to the aforesaid liquidation order), as the receiver of the real-estate assets and land rights of that general manager and on all assets of the chairman’s estate for the purpose of realization of the judgment and at the sum of the adjudged debt. Pursuant to the provisions of the Israeli (Non-Profit Organization) (‘amutot’) Law, the proceeds to be received in the NPO’s liquidation account as a result of the realization of the aforesaid assets shall be transferred to other NPOs having similar objectives for use towards fulfilling the objectives for which the public’s donations had originally been raised.
This judgment constitutes an example of the imposition of personal liability on directors and officers of an NPO without requiring any lifting of the corporate veil. Pursuant to the provisions of the law, a person may be held personally liable and adjudged to pay obligations and debts of an NPO if the NPO was being fraudulently operated or if inappropriate use was being made of funds by those in charge, while breaching the duties of fiduciary and care that are imposed on them (pursuant to sections 373 and 374 of the Companies Ordinance, which apply to an NPO under liquidation by virtue of section 54 of the NPO (‘amutot’) Law).
Furthermore, this judgment shines a spotlight on the importance of an NPO to act in accordance with its registered objectives and fulfillment of those. According to the provisions of the law, an NPO must act in accordance with its formal-registered objectives and prohibited from performing actions that do not fall within the scope of its objectives. Moreover, an NPO must utilize its resources (funds, assets, goodwill, equipment etc.) solely for the purpose of promoting its objectives. If an NPO has received funds, whether as donations or as support for the purpose of promoting a particular objective, it must use those funds for the objective for which they were provided and not for any other objective (even if such other objective does fall within the scope of the NPO’s objectives). Furthermore, if the representation given to donors is that a particular use shall be made of funds raised for the NPO, those funds must be expended for that purpose and may not be accumulated or allocated for other uses (even if they do fall within the scope of the NPO’s objectives).
Activities by an NPO that are not in conformity with its stated objectives may lead to its liquidation, to the imposition of personal liability on directors, officers and functionaries of the NPO, and even, in particular instances, to the imposition of criminal sanctions.