Shimon is a seasoned business man, with interests in the construction industry. Shimon’s neighbor, Dror, owns a factory that peels and markets vegetables and does business as “Best Produce”. As it so happened, Dror’s business encountered some difficulties, and Dror offered to sell the business to Shimon.

Following a negotiation process, the parties agreed that Shimon will purchase the factory and the land it occupies for the total sum of ILS 6,000,000. The transaction included the purchase of the factory and land, but excluded the business’debts to its various creditors. The operations were eventually transferred into a newly incorporated company named “The Promised Land”, which Shimon specifically setup for this purpose.

After signing the deal, Dror introduced Shimon to his various business partners and suppliers.

One of the suppliers, a kibbutz in the center of Israel, supplied the factory that Dror sold to Shimon with tomatoes.

The kibbutz knew about Dror’s financial troubles. In order to ensure prompt payment for the goods, the kibbutz asked Dror to write an additional check for the sum of ILS 90,000.

According to their agreement, Shimon became an authorized signatory for “Best Produce”, Dror’s company. This measure was effected such that Shimon could verify that Dror would not be able to over-extend the purchasing ability of the company, which would effectively worsen its situation.

Both Shimon and Dror signed the ILS 90,000 cheque and presented it to the kibbutz. Since at that time the factory’s operations were still not transferred to “The Promised Land”, Shimon’s corporation, the cheque was drawn from “Best Produce”’s account.

For various reasons, the bank refused to honor the cheque.

The kibbutz sued Dror, “Best Produce”Corp., Shimon, and “The Promised Land”Corp.

The kibbutz had several different claims. Amongst other claims, the kibbutz argued that by signing the cheque, Shimon offered a personal guarantee to the kibbutz. And thus, since the cheque was returned by the bank, Shimon is personally liable for the ILS 90,000, and should personally pay said sum to the kibbutz.

In his verdict, the judge stated that Shimon’s signature on the cheque drawn from “Best Produce”’s account, which he signed in according to his role as an authorized signatory, does not constitute a personal guarantee made by Shimon to the kibbutz.

Article 3 of the Guarantee Act (1967) states that “the guarantee is created in an agreement between the guarantor and the creditor, or by a commitment made by the guarantor in a notice sent to the creditor…”

The act of signing a cheque as an authorized signatory of a corporation does not constitute a personal guarantee. A legal corporation is an artificial entity. Actual flesh and blood persons act and sign on its behalf. As long as it has not been established that the authorized signatory signing the cheque intended to personally guarantee the payment of the cheque (and stated so either verbally or in written form), this person cannot be held liable when such a cheque is returned unpaid.

In short, the personal claim made against Shimon was rejected.

And this is the moral of the story. When one reasonably expects a cheque received from a corporation to be returned unpaid, one should demand the owners of said corporation to personally guarantee said payment in writing. This will create a valid guarantee that may offset the risk of the cheque being returned unpaid.