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 for unlawful conduct in relation to the affairs of an NPO. The judgment was imposed 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 ordered them personally to pay the inclusive sum of approximately NIS 13 million.
The NPO in question was, according to its formal registered objectives, established for the purposes of assisting victims of drug-related crimes and increasing the public’s awareness of the pervasiveness of drug abuse. It also acted to provide information on drug-related issues and increase the public’s awareness of drug-induced violence.
Already in 2011, the court issued a liquidation order against this NPO, after the Registrar of Amutot appointed an investigator to investigate it. His report, outlining severe findings, 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 ruled 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
The investigator’s report on the NPO indeed contained severe findings. He determined the NPO’s institutions were dysfunctional and had 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. The general manager actively misled the NPO’s donors and exploited their goodwill and ingenuousness.
The report found, inter alia, that the NPO had raised a substantial amount of donations from the public, but took no action to promote the NPO’s objectives. In fact, 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 fundraising setup, the NPO kept a separate extensive fundraising setup off the NPO’s books. It found 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 NPO functionaries 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, the court ruled that the NPO’s general manager and the estate of the NPO’s executive board chairman should each return approximately NIS 6.5 million to the NPO. Collectively, this amounts to approximately NIS 13 million.
The judgment also appointed the liquidator (first appointed pursuant to the aforesaid liquidation order) as the receiver of the real-estate assets and land rights of the general manager and of all the assets of the chairman’s estate for the purpose of realization of the judgment, at the sum of the adjudged debt.
Pursuant to the provisions of Israeli law, the proceeds to be received in the NPO’s liquidation account due to the realization of the aforesaid assets should be transferred to other NPOs with similar objectives in order to fulfill the objectives for which the public’s donations were originally given.
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 law’s provisions, a person may be held personally liable and ordered to pay an NPO’s obligations and debts if the NPO operated fraudulently or those in charge made inappropriate use of funds, while breaching the duties of fiduciary and care imposed on them.
Furthermore, this judgment shines a spotlight on the importance of an NPO acting in accordance with its registered objectives and the fulfillment of those. According to the law’s provisions, an NPO must act in accordance with its formal registered objectives and may not perform 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 receives funds, whether as donations or as support in order to promote a particular objective, it must use those funds for the objective for which they were provided and not for any other objective. This applies even if such other objective falls 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 fall within the scope of the NPO’s objectives).
The Bottom Line
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 its directors, officers, and functionaries; and even, in particular instances, to the imposition of criminal sanctions.