This country-specific Q&A provides an overview of Restructuring & Insolvency laws and regulations applicable in Israel.
What forms of security can be granted over immovable and movable property? What formalities are required and what is the impact if such formalities are not complied with?
Israeli law distinguishes between pledging an individual’s assets and pledging corporate assets. This chapter focuses on pledging corporate assets. There are four types of pledges: fixed pledge, floating pledge, limiting floating pledge, and specific pledge for the purchase of property. A fixed pledge is a pledge of a specific corporate asset. A floating pledge is a nonspecific pledge of corporate assets which, under certain conditions, becomes fixed. With regards to a floating pledge, transactions of the company’s assets may continue until it becomes fixed. A limiting floating includes a restriction that prohibits the company from executing transactions of its assets not in the ordinary course of its business or placing additional pledges on the assets which are included in it. A restriction that has been registered with the Companies Registrar supersedes later pledges which were made in violation of such restriction. A specific pledge for the purchase of property is a first in rank pledge on an asset to obtain credit for its purchase, and therefore it supersedes floating pledges that precede it. All pledges should be registered with the Companies Registrar within 21 days following their formation and at times, are registered with additional registrars as well (such as the Land Registry). If not registered within 21 days without first obtaining leave from the Registrar, they shall be effective with respect to third parties only as of their registration date and not their formation date.
What practical issues do secured creditors face in enforcing their security (e.g. timing issues, requirement for court involvement)?
When repayment is due on a debt for which an asset has been pledged, the creditor can exercise the pledge. Pursuant to the Lien Law, 5727-1967 (the “Lien Law”), a pledge is exercised by Court. If the pledge applies to moveable assets or securities, it will be exercised through the head of the Execution Authority. If it is a guarantee to a financial institution, it will be exercised through that financial institution. When it is a right that was pledged, or in any other manner set by law regarding a particular type of pledge, it will be exercised by the creditor independently.
The Securities Law, 5728-1968 (the “Securities Law”), which relates to pledges in favour of holders of note which were publicly issued and traded, allows the exercise of a pledge even before payment is due if the terms stipulated by law or in the terms set in the parties’ agreement are met. These terms include a material deterioration in the issuer’s (pledgor’s) business and a genuine concern that he will not be able to timely pay these debentures, failure to pay debentures on time or nonfulfillment of another material commitment in favour of the holders, the lapse of 30 days following the legal publication deadline for a financial statement that has not been published by the issuer, and the removal of the debentures from trade on a stock exchange. The creditor must notify the issuer of his intent to exercise the pledge unless such notice will hinder the exercise of the pledge. Additionally, if there is an agreed upon period during which the issuer may take an action that would vitiate the grounds for immediate repayment or exercise of guarantees, that period must be allowed to conclude without any such action having been taken. When there are several holders, the consent of the majority of the holders of that same series by means of a vote at a meeting of such holders is necessary.
According to The Insolvency and Economic Rehabilitation Law, 5778-2018 (the “Law”), a secured creditor or a creditor with a right of lien may realise a fixed pledge or a floating pledge subject to the Court’s approval. A creditor who owns an asset subject to an ownership certificate can also obtain the possession of the asset subject to the Court’s approval.
A creditor who intends to exercise a pledge, other than financial institutions, must notify the court-appointed officer. The court-appointed officer then has 14 days to redeem the pledged asset before the creditor can exercise the pledge. The pledge will only be exercised if an estimate of the value of the pledged asset is not significantly higher than the secured debt.
What is the test for insolvency? Is there any obligation on directors or officers of the debtor to open insolvency procedures upon the debtor becoming distressed or insolvent? Are there any consequences for failure to do so?
According to the law, insolvency is an economic state in which debtors cannot pay their debts in their due date, or that their financial liabilities exceed their assets. Directors and officers of the debtor might be liable for failure to take reasonable steps to minimise insolvency or for fraudulent management. Regarding the first type of liability, no liability will be imposed on the directors and officers if they relied in good faith on information indicating that the corporation is not insolvent or took steps––receiving assistance from experts on corporate restructuring, negotiating with the corporation’s creditors to reach a debt restructuring agreement or commencing insolvency proceedings. If the directors or officers are found liable, they can be liable for the debts incurred by their actions. If they fail to act according to the provisions of the Law, the Court can impose on them all the corporation’s debts.
What insolvency procedures are available in the jurisdiction? Does management continue to operate the business and/or is the debtor subject to supervision? What roles do the court and other stakeholders play? How long does the process usually take to complete?
Under a Court order to wind up a corporation as a part of an order to commence insolvency proceedings, the corporation will be liquidated by realising the assets of the debtor fund and distributing them to the creditors by the order of preference under applicable law, and according to the principle of equal repayment to creditors in the same preference. The Court will appoint an officer to implement the proceedings. The competent court is the District Court, and it is involved with all the insolvency proceedings while supervising the court-appointed officer.
Creditors and shareholders can influence the process through applications to the Court, dealings with the court-appointed officer, on their votes regarding issues brought before them by the court-appointed officer. There are no specific restrictions upon them to file motions with the Court or dealing with the court-appointed officer. The creditors may establish a creditors committee to represent their rights in the proceeding. Usually, shareholders have less influence as they are “last in line” to recover from the corporation.
It usually takes between a few months to a few years to complete the process. However, the new procedure under the Law, which is a new law, might change this period.
How do creditors and other stakeholders rank on an insolvency of a debtor? Do any stakeholders enjoy particular priority (e.g. employees, pension liabilities)? Could the claims of any class of creditor be subordinated (e.g. equitable subordination)?
All creditors are subject to the insolvency proceedings and there is no special restriction with respect to any particular type of creditors. The principle of preference order in creditorship applies in the following order: (1) secured debts; (2) insolvency expenses––all the expenses deriving from actions taken by the court-appointed officer or anyone on his behalf in the insolvency proceedings; (3) priority debts such as salary and alimony obligations; (4) debts secured by a floating pledge (in an amount that will not exceed 75% of the proceeds from realising the sale of the collateral and the balance will be deemed unsecured debt); (5) unsecured debts; additional interest, which is the interest that accrued on the past debts of the corporation (excluding deferred debts) from the grant date of the order to commence proceedings until their repayment, including interest accrued on secured debts which cannot be repaid from the collateral, as well as interest for delay added until the grant date of the order to commence proceedings; and (6) deferred debts – debts to the shareholders of the corporation deriving from their being shareholders of the corporation and debts to shareholders of the corporation with grounds suspend the repayment thereof under the Israeli Companies Law, 5759-1999 (the “Israeli Companies Law“) or any other law.
A court may cancel an action that results in repayment of a debt to a creditor or the advance of the creditor in the repayment order if it is taken up to three months prior to the issuance of an order to commence proceedings or a year if the creditor is a relative of the debtor; on a date on which the debtor was insolvent; and because of such action, the creditor will receive a larger payment compared to the portion that would have been repaid according to the repayment order. This applies other than for an action immediately adjacent to which the debtor received appropriate consideration or an action that was carried out in the debtor’s regular course of business in relation to a debt created during his/her regular course of business
Can a debtor’s pre-insolvency transactions be challenged? If so, by whom, when and on what grounds? What is the effect of a successful challenge and how are the rights of third parties impacted?
Transfer of assets by a debtor which is insolvent or in the zone of insolvency to a third party could be held by the Court to be an unlawful preference of creditors or a fraudulent conveyance and therefore subject to cancellation by the Court. In the case of a transfer of an asset to a creditor, the period of examination of the transaction is three months before the application for an order to commence proceedings or one year regarding a transaction with a creditor that is a related party of the debtor (such as holder of a controlling interest, officer, or director). When the transaction includes no or insufficient consideration for the asset, the period of examination is two years, or four years if the transferee is a related party. In the event of a fraudulent transfer, the transfer may be cancelled within up to seven years following the application to commence insolvency proceedings; in addition, the debtor and its officers and directors may be liable for fraudulent management or the Court may defer the moratorium. Actions of unlawfully reserving a repayment right, such as a loan from a shareholder made in exploitation of his power in the company, may lead to the Court deferring the debt.
What form of stay or moratorium applies in insolvency proceedings against the continuation of legal proceedings or the enforcement of creditors’ claims? Does that stay or moratorium have extraterritorial effect? In what circumstances may creditors benefit from any exceptions to such stay or moratorium?
A stay of proceedings is available and applies from the time of granting an order to commence proceedings. A creditor who seeks to realise a pledge over an asset must obtain the Court’s approval, and creditors with residual ownership rights or a lien may be required by the Court to transfer the asset to the court-appointed officer.
What restructuring and rescue procedures are available in the jurisdiction, what are the entry requirements and how is a restructuring plan approved and implemented? Does management continue to operate the business and/or is the debtor subject to supervision? What roles do the court and other stakeholders play?
The recovery of a corporation under court supervision can be by way of an economic rehabilitation plan, selling its business operations, or a combination of the two. An economic rehabilitation plan requires the Court’s approval following the approval of each class of creditors. The court-appointed officer is entrusted with presenting the plan to the Court and he may approach any party, including the public, for devising an economic rehabilitation plan. The creditors and shareholders can also influence, block, or gain an advantage regarding the proposed rehabilitation plan by voting at class meetings based on the various interests of the parties involved. The Court can approve an economic rehabilitation plan even if it has not been approved in all the stake holders class meetings, in specific situations stated in the Law, including if the Court is convinced that the proposal is fair and just with respect of each member in a class that did not approve the proposal.
Corporations can also enter a procedure of “protected negotiation term”, in which creditors which the corporation seeks protection from their claims, are stopped from applying to the Court to authorize a settlement or to issue an order to commence proceedings and are unable to demand an immediate repayment. This procedure doesn’t require court approval, but the court may remove the protections granted to the corporation at the request of the creditors.
The corporation may enter this procedure only if the Board of Directors has confirmed that it has no unrepaid debts that are past their due date and that it is unlikely that it will not be able to repay its debts in their due dates in the following nine months. Under this procedure, the management of the company continues to operate the business, and the corporation is not subject to a strict supervision. The stakeholders do not play a significant role under this procedure.
Can a debtor in restructuring proceedings obtain new financing and are any special priorities afforded to such financing (if available)?
The court-appointed officer may enter into a new credit agreement with the Court’s approval. This credit will have priority in repayment out of the creditors’ fund as expenses incurred as part of the insolvency proceeding.
Can a restructuring proceeding release claims against non-debtor parties (e.g. guarantees granted by parent entities, claims against directors of the debtor), and, if so, in what circumstances?
The Law authorises the Court to stay proceedings for collection, disposition of assets, transfer of possession of assets, pledging of assets, attachment of assets, commencing or continuing legal proceedings, or adding interest or penalties on arrears for non-payment of a debt against one who is not a corporation, including a corporate officer, under exceptional circumstances and for reasons that must be put into the record; Provided that the Court issues an order to commence rehabilitation of the corporation and where such a stay of proceedings against one who is not a corporation is essential for the purpose of such rehabilitation and the proceedings against him or her derive from that person’s activities in the corporation or the debts owed by the corporation. A stay of proceedings will not apply to criminal or administrative proceedings other than collection proceedings and proceedings seeking to impose financial sanctions under exceptional circumstances and for a limited period if the Court finds that the sanction proceeding will harm the insolvency proceedings.
Is it common for creditor committees to be formed in restructuring proceedings and what powers or responsibilities do they have? Are they permitted to retain advisers and, if so, how are they funded?
The Court has the authority to appoint a creditor committee to oversee the court-appointed officer activities. However, this authority has, until now, only been exercised sparingly and only in especially complex and complicated cases that are of particular import. There are no provisions of law that regulate the employment of outside advisers. The expenses involved in the convening and management of the committee are financed by the creditor fund as insolvency proceeding. Additionally, in reported corporate debt restructurings, the creditors appoint a representative on their behalf who will conduct negotiations and observe the Board; such representative is generally paid for by the company or the creditors. Considering the trend to reduce costs under the Law, it is unlikely that the employment of outside advisers will be financed by the creditor fund.
How are existing contracts treated in restructuring and insolvency processes? Are the parties obliged to continue to perform their obligations? Will termination, retention of title and set-off provisions in these contracts remain enforceable? Is there any ability for either party to disclaim the contract?
Insolvency proceedings do not lead to cancellation of contracts or obligations towards the debtor nor will they confer upon other parties to the contract a right to cancel it. However, if the court-appointed officer and the counterparty to an existing contract agree to cancel it during insolvency proceedings, it will be cancelled. If the court-appointed officer believes that an existing contract should be cancelled since it may be an onerous contract that complicates the rehabilitation and recovery proceedings, but the counterparty disagrees, the court-appointed officer may apply to the Court to cancel it. Anyone who is harmed by the cancellation will be deemed a creditor of the corporation in the amount the damage caused him, and the debt will be deemed a past debt.
What conditions apply to the sale of assets / the entire business in a restructuring or insolvency process? Does the purchaser acquire the assets “free and clear” of claims and liabilities? Can security be released without creditor consent? Is credit bidding permitted? Are pre-packaged sales possible?
According to the Law, at the time that the corporation is put into operation as part of the rehabilitation or liquidation proceeding, a pledged asset may be sold (including a sale when the asset is clear of all pledges or rights), even without the consent of the secured creditor, unless it was proved to the Court that the exercise or the sale are not required for the rehabilitation of the corporation or that they are undertaken without protection of the secured creditor. The sale of the business in its entirety under a financial rehabilitation plan requires the Court’s approval as well as approval by a creditors’ meeting and a shareholders’ meeting. A sale in the course of a liquidation includes the sale of corporate assets out of the creditor fund and its distribution to creditors. Afterwards, the corporation is dissolved by Court order. When a property is sold by the Court, the Execution Authority, or by another authority by law, ownership transfers to the purchaser free of any pledge, attachment, or any other right in the property that does not serve as a guarantee for a financial obligation, or that is not voided pursuant to the sale terms.
The Law provides no specific reference to converting liabilities into shares or to an undertaking to sell shares or a business of the company before entering insolvency proceedings.
What duties and liabilities should directors and officers be mindful of when managing a distressed debtor? What are the consequences of breach of duty? Is there any scope for other parties (e.g. director, partner, shareholder, lender) to incur liability for the debts of an insolvent debtor?
See sections 3, 18.
Do restructuring or insolvency proceedings have the effect of releasing directors and other stakeholders from liability for previous actions and decisions?
See section 10.
In addition, in the framework of restructuring the debt, and exemption may be granted to officers or shareholders for liability subject to the Court’s approval, considering their activities in the context of the insolvency. The Court must take into consideration the fairness of the proceeding, the merits of potential claims against the directors and officers and may also consider the directors’ and officers’ contribution to the insolvency on the one hand and to the insolvency proceedings on the other hand.
Will a local court recognise foreign restructuring or insolvency proceedings over a local debtor? What is the process and test for achieving such recognition? Does recognition depend on the COMI of the debtor and/or the governing law of the debt to be compromised? Has the UNCITRAL Model Law on Cross Border Insolvency or the UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments been adopted or is it under consideration in your country?
The Israeli provisions for recognising foreign restructuring or insolvency proceedings are based on the principles of the UNCITRAL Model Law on Cross Border Insolvency. A foreign officer authorised under a foreign proceeding to conduct the proceedings may file to the Israeli Court an application to recognise a foreign proceeding conducted against a corporation in a foreign country in which the corporation’s centre of interest is located or in which it conducts an economic activity which involves employment, unless otherwise proved, and the foreign officer manages all its assets.
Can debtors incorporated elsewhere enter into restructuring or insolvency proceedings in the jurisdiction? What are the eligibility requirements? Are there any restrictions?
Debtors that are incorporated elsewhere can enter restructuring or insolvency proceedings in Israel only if they have business in Israel, or if they have assets in Israel.
How are groups of companies treated on the restructuring or insolvency of one of more members of that group? Is there scope for cooperation between office holders?
The departure point for the relationship between companies constituting members of a group is the principle of separate legal personality and limited liability, under which no company will be obliged to repay the debts of another company which is a member in the same group. However, the Court has the power to “pierce the corporate veil” between companies in situations defined in the Israeli companies’ law. In such cases, access could be allowed to the assets of a company against which no insolvency proceedings have been commenced but to which assets have been transferred on behalf of a subsidiary or a related company to discriminate creditors. The officers and directors in all the companies in the group are subject to the duties of care and loyalty, including in the period before entering insolvency, and in the event of cooperation between officers and directors in various insolvent companies to conceal assets by transferring them from one company to the other, they may be liable for fraudulent management.
Is your country considering adoption of the UNCITRAL Model Law on Enterprise Group Insolvency?
As of now, the possibility of adopting that model is not under consideration.
Did your country make any changes to its restructuring or insolvency laws in response to the Covid-19 pandemic? If so, what changes were made, what was/is their effect and were/are they temporary or permanent?
Companies under insolvency proceedings that were unable to meet the monthly payment they are required to make due to Covid-19 received an option to postpone payments by approximately four months. Furthermore, corporations can apply to the Court for a stay of proceedings, to appoint an administrator and receive additional temporary relief for the purpose of reaching a debt restructuring, to allow a debt restructuring without taking away the corporation’s control of its operations. Furthermore, reporting duties were imposed on the corporation during the stay of proceedings period, regarding any substantial change in its economic condition and a prohibition to perform extraordinary transactions or distributions. These changes are in effect for one year until March 2022, yet this period may be extended.
Are there any proposed or upcoming changes to the restructuring / insolvency regime in your country?
At this time, we are unaware of new initiatives to amend the Law (which is a relatively new law).
Is it a debtor or creditor friendly jurisdiction?
The Law’s approach is that insolvency is not per-se a wrongdoing of the debtor, but a realisation of a risk inherent in participation in the credit market which increasingly is becoming more developed and advanced. That said, the Courts see the main purpose of insolvency proceedings, including the rehabilitating of the debtor, to be achieving the maximum benefit for its creditors. Thus, Israel stands in the middle between creditor-friendly and debtor-friendly jurisdictions.
Do sociopolitical factors give additional influence to certain stakeholders in restructurings or insolvencies in the jurisdiction (e.g. pressure around employees or pensions)? What role does the state play in relation to a distressed business (e.g. availability of state support)?
A recent study found that there are several factors, such as the number of company employees, that impact the success of corporate rehabilitation proceedings, prior to the Law. According to the authors of the study, a small number of employees facilitates exploiting the gap between the company’s power and the employees’ power to obtain their consent and bring the proceeding to a successful close, while a large number of employees brings about, in addition, the enlistment of workers’ unions and political entities in the effort to end the proceeding successfully. An additional factor is the geographical location of the company. When it is located in the economic periphery of the country, the chances of rehabilitation for the sale of the company decrease dramatically. The state is involved in the insolvency proceeding by means of the Official Receiver, who is an administrative entity who oversees the trustee’s activities and presents his recommendations to the Court.
What are the greatest barriers to efficient and effective restructurings and insolvencies in the jurisdiction? Are there any proposals for reform to counter any such barriers?
An empirical study that recently examined the factors that are connected to the success of the company’s recovery proceedings reached the conclusion that the failure to present data and information regarding the company’s financial status to the Court contributes to especially low chances at rehabilitation. Additional factors that impinge upon the rehabilitation proceeding’s success include a very high or very low number of employees and its location in Israel’s geographic periphery. In addition, it is argued that the obligation to appoint a trustee in insolvency proceedings under Court supervision discourages company officers from taking recourse to such a proceeding and encourages them to favour attempts to reach a creditor arrangement outside of court in the framework of protected negotiations that are time-limited and therefore generally lead to failure despite the attempts. Currently, under an emergency directive due to the Covid-19 crisis, the period of protected negotiations has been extended, and therefore it is possible that the creditor arrangement will become more effective.
Additional factors that hinder the sale of companies as active businesses are the small number of investors in the Israeli economy, the small number of sources of financing, the time limitation on conducting negotiations, the lack of information for potential purchasers, and conflicts of interest between shareholders and creditors. However, it is possible that the new Law will provide solutions for the difficulties of the time limitation, the dearth of information, and conflicts of interest.
As noted previously, as of now we are unaware of any planned reforms in connection with the impediments to the success of insolvency proceedings.
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