Pursuant to research conducted by the Bank of Israel with respect to Israel's corporate bond market between 2008 and 2015, using a sample of 106 distress events, the average recovery rate is 53% and the median is 50%; average recovery and default rates are shown to compare well with the experience in other countries. Pursuant to this research, the yearly average default rate between 2008 and 2015 was 2% of the public firms, and 4% of the share of distressed debt in total par value of corporate bonds.
Pursuant to the above research, the influence of sector-specific circumstances was negligible, and the value of distressed firms at the time of default was found to be mostly influenced by the financial conditions of peers in the industry and in the market; in particular, low liquidity and high average leverage ratios of other market participants were found to have a negative effect on the anticipated recovery rate.
In September 2019, the new Israeli Insolvency and Economic Rehabilitation Law, 2018 (the Insolvency Law) entered into force (the "New Insolvency Law"). The New Insolvency Law effectively replaces and/or amends the entire existing Israeli insolvency regime, although in many cases it adopts and regulates the Israeli case law evolving through the years. Where relevant, we will refer also to pre-existing regulatory regime.
During the last decade, Israel has been going through an extensive replacement of the economic elite. The elite was composed of a few families, which controlled a significant part of the major Israeli corporations through 'pyramids', enabling them to control a large group of subsidiaries through a relatively small investment at the top of the pyramid. Those structures led to a great degree of leverage, leading to the collapse of many of those groups in an unprecedented wave of debt arrangements, influencing the better part of the Israeli corporate bonds market, including the IDB, Delek, Africa Investment and Petrochemical debt arrangements. Alongside this natural loss of control of those pyramids, the Israeli legislator introduced limitation on the creation and an obligation to dismantle within a few years any such pyramid structure of more than two layers, in the framework of the Promotion of Competition and Decrease of Centralization Law, 2013; the law further included certain obligations to separate financial holdings from other major holdings and an obligation on the Israeli institution to take into account competition considerations when allocating public resources.
The restructuring market is an evolving Israeli market, which is influenced by the introduction of new legislation and rulings, as shall be described below. Furthermore, this market is influenced by development of the Israeli corporate bond market, as well as a trend of activism by the institutional investors with respect to restructuring of traded bonds. This trend leads to increased involvement of bondholders in the affairs of companies that are experiencing financial difficulties.
The New Insolvency Law effectively replaces the pre-existing provisions of the various laws relating to reorganisation and insolvencies, and includes procedures with respect to the commencement of liquidation procedures, appointment of trustees, stay of proceedings, receivership of assets, debt-claim filing and approval, creditors' meetings, submission and approval of arrangement proposal, foreclosure of collaterals, etc.
The New Insolvency Law also deals with recovery arrangements – a court-run settlement between a company and its creditors and shareholders, similar in essence to US Chapter 11 proceedings – allowing the continuance of the company's operations, including the ability to raise new debt secured by existing pledged assets or using such assets in another manner, as required for the company's operation; or imposing obligations on certain essential suppliers and third parties to continue providing services, or to abstain from cancelling the contract due to the insolvency even if they are contractually entitled to do so.
In most insolvency cases, a court officer is appointed in order to manage the insolvency proceedings. Where the operation of the company requires a professional team, the court officer may engage such management or continue the engagement of the existing management.
However, in recent recovery cases, such as the case of Africa Investments (Israel) Ltd ILS3 billion debt arrangement, the creditors skipped the appointment of a court officer and receipt of a stay of proceeding order, maintained a close supervision and involvement in the company's affairs, and negotiated independently the terms of the debt arrangement, leading to significant increase of recovery.
Insolvency proceedings can take from a few months in very straightforward debt-restructuring cases, up to one to two years and more in more complicated liquidation or assets' foreclosure cases.
The new Insolvency Law introduces a new chapter dealing with possible debt arrangement without any court order for the commencement of recovery or rearrangement proceedings, as is already done in practice.
See 2.1 Overview of Laws and Statutory Regimes and 2.4 Procedural Options.
In addition, with respect to receivership – a receiver may be appointed in accordance with the Collection System Law, 1967, under the supervision of the Collection System Authority, or by an insolvency court. A receiver may be required to deposit a guarantee to secure performance of his or her duties.
The new Insolvency Law imposes specific liability on directors and officers who knew or should have known that the company was insolvent and did not take reasonable measures to reduce its scope. A presumption of taking reasonable measures exists where those directors and officers acted in order to obtain a consultation from insolvency experts, negotiated a debt arrangement with the company creditors or commenced insolvency proceedings.
Furthermore, such obligations may be derived from existing case law and practice, whereas in distressed circumstances the officers of the company are required to act in favour of the company creditors, and to take all precautionary measures for that purpose.
Insolvency proceedings may take any one or more of the following forms:
Under the existing legislation, while it was clear that creditors could commence certain insolvency proceedings, such as receivership and liquidation, it was not clear whether creditors might initiate a recovery plan in the framework of reorganisation proceedings.
In Liquidation Case 36681-04-13 IDB Development Company Ltd v Hermetic Trust (1975) Ltd Series 7 and 9 Bond Trustee, the Israeli court specifically ruled that creditors may initiate and approve a recovery plan, notwithstanding the lack of consent of the company in the framework of recovery and reorganisation proceedings.
The new Insolvency Law adopted this principle and specifically set forth that a creditor may initiate a recovery plan as long as the company is insolvent, as defined under the new Insolvency Law.
However, a creditor of a debt which is not yet due may initiate insolvency proceedings if the corporation is not able to repay the debt, and only if the debt is due within six months of the motion to initiate proceedings. The creditor may also commence insolvency proceedings if fraudulent transfers or convenience are taking place.
The new Insolvency Law adopts the two tests of insolvency recognised under the case law (which did not explicitly choose one over the other) and sets forth some factual presumptions of insolvency:
The Israeli restructuring and insolvency regimes and the new Insolvency Law do not include any special treatment of particular sectors, financial institutions, etc.
In Israel, usage of restructuring frameworks such as the INSOL Principles is not customary. However, it is customary that the company execute a 'standstill' commitment relating to non-disposition of assets, not taking any action that is not in the ordinary course of business and providing information in the term of the negotiations. Such a standstill undertaking may include also commitment to bear the costs of the bondholders during the negotiation period.
As the concept of self-realisation of pledge applies only in very limited circumstances, secured creditors will prefer in many cases to negotiate an arrangement outside of court rather than appointing a receiver. In insolvency situations the concern with respect to making any kind of preference will usually result in some type of proceedings being initiated.
Out-of-court restructuring in the event of traded bonds is very limited, in light of the provisions of the New Insolvency Law (adopting the existing Companies Law), instructing the bond trustee (or the company in the absence of a trustee), to seek the appointment of a court expert once a negotiation between the company and the bondholders with respect to a material debt arrangement is being conducted. This reflects a change from existing legislation requiring such an appointment upon commencing the negotiations, in order to allow some flexibility.
A greater flexibility is customary in private debt arrangement, and financial institution will generally try to avoid a court restructuring when possible (eg, where there are no other creditors, no stay order is required, etc).
Transparency and full disclosure and co-operation of borrower companies experiencing financial difficulties may in many cases lead to out-of-court solutions, extension of periods, reorganisation of debt and securities etc.
The newly introduced out-of-court "Protected Negotiation" chapter includes built-in creditors' protections, such as the appointment of a creditors' representative to conduct negotiations and to be present at the board of directors meetings and who shall be entitled to information regarding the corporation other than with respect to the Protected Negotiation.
The creditors' representative shall report to the creditors with respect to any action of the corporation which is not for the benefit of the corporation or which may cause damage to the creditors, with its recommendation of the possible actions to be taken by the creditors.
Furthermore, a court may deny any of the protections prescribed under the law at the request of a creditor if there are real concerns the corporation is trying to deceive its creditors, transfer an asset illegally, make improper use of the protections granted or if there is a real concern of damage to the value of an asset charged in favour of a creditor.
Under the New Insolvency Law, a public corporation may commence a process of "Protected Negotiation" as long as it is not breaching its payment obligations and can fulfil those obligations for an additional nine months. Such process does not require a court process and provide protection from immediate repayment and freezing orders for six months.
This is not a mandatory pre-statutory process, but a means to encourage any such corporation to commence negotiations at earlier stages in order to increase their chances of recovery.
For timelines for Protected Negotiation" see 3.1 Restructuring Market Participants. The negotiations with the company will usually begin at least a few months prior to the actual default, especially if the relevant default is failure to repay its debt; in public companies, such information will be publicly available.
In the framework of proceedings related to traded bonds, it is customary to postpone the scheduled repayments dates during the negotiations in order to allow the trade of the bonds to continue.
See 3.1Restructuring Market Participants with respect to standstill commitments.
For an appointment of a creditors' representative in "Protected Negotiation" process, see 3.1Restructuring Market Participants.
The new Insolvency Law introduces the concept of a creditors' committee that the court is entitled to appoint, comprising different types of creditors other than the unsecured creditors. The creditors' committee may present its position in different matters, but does not have a decisive role.
Under existing practice, it is not common for different types of creditors to form creditors' committees. However, it is very common that Israeli-traded bondholders from one or more series of bonds form a representative body, which includes representatives of three or four of the major bondholders, or a professional representative chosen by the majority of the bondholders.
The representative body is considered an adviser of the bondholders' trustee, who is nominated according to the Securities Law 1968. The representative body, together with the trustee, usually handles the negotiations with the company and the investor/controlling shareholder and is capable of providing an initial insight or guidelines as to the terms agreeable by the bondholders.
As all powers of the bondholders are asserted to the bondholders' trustee, the Israeli law does not set any provisions regarding the power or responsibilities of the representative body, but the establishment, treatment of information, conflict of interest, etc, of the representative body are regulated by the Israeli Securities Authority guidelines and instructions.
The representative body generally retains financial and legal advisers, the costs of which are born by the company, either by virtue of the deed of trust allowing the bond trustee to engage consultants at the company's expense, or by virtue of a standstill commitment, which some companies undertake upon commencement of negotiations with the bondholders.
In addition to the possible representative body, Israeli law demands that court will nominate an expert to escrow any debt arrangement processes that involve publicly traded bonds. The expert furnishes his or her professional opinion to the bondholders and other creditors, with respect to the fairness of the suggested arrangement, comparison to possible outcome of liquidation process and to possible legal proceedings against controlling shareholders, directors and officers.
The information provided will usually include details of the negotiations conducted with respect to the recovery or realisation of assets/shares of the company, as well of material information with respect to the business or main assets of the company, which has an influence on the insolvency process. In the event of traded companies, disclosure of such information shall be made only to parties who do not trade the bonds, such as the bond trustee or the representative body.
The rights of the various stakeholders will usually be decided through a claim process conducted by the appointed court officer and dealt with in the framework of the proposed plan of arrangement, which will have to be approved by the required majority of each class of creditors and in some cases by the shareholders as well. In the absence of such an arrangement, or in liquidation cases, such rights will have to be addressed by the appointed court officer and decided by the court.
The court may allow the court officer to lend new money required for the operation of the company. The court may also allow to charge the company's assets in charges that may be in a rank that is inferior, equal or even in priority to existing charges, in order to enable the receiving of new credit, which is essential for the operation of the company.
The creation of such charges is subject to the court's approval and ensuring "proper protection" to the existing secured creditors. This "proper protection" means preserving the value of the debt secured by the charge. The value of debt relates to the sum that would have been repaid from the sale of the charged asset independently from the recovery process – ie, the reference point is not the original value but the expected current realisation value.
Repayment of any such new credit shall be treated as recovery expenses and therefore as a priority creditor, unless otherwise determined by the court.
In spite of the favourable terms allowing the court officer to obtain this credit, there is no record of any substantial usage made in this provision.
Pursuant to the Companies Law, as well as the new Insolvency Law, a creditor or shareholders must use their voting rights with respect to a proposed plan of arrangement in good faith and must not misuse their power.
In practice, the courts will tend to apply such provisions to the shareholders, and only in exceptional cases – such as illegitimate interests or clear bad faith – will the courts interfere with an approval of the creditors.
An informal process will usually refer to circumstances where there are few creditors or shareholders and not to a full-scale process requiring the consent of multiple creditors of different classes. As specified in 3.2 Consensual Restructuring and Workout Processes, in the case of traded bonds, a court process is mandatory in any event.
Terms permitting a majority or super-majority of lenders to bind dissenting lenders to changed credit-agreement terms will usually be part of consortium or inter-creditor agreements and shall not apply to other relationships of creditors from different types/classes.
Under the New Insolvency Law the court can approve an arrangement even in the absence of the required approval of each class of creditors, provided it is approved by over 50% of the entire debt and that if the arrangement is not approved a liquidation will occur and the recovery for the dissenting class of creditors will be lower than under the arrangement.
With respect to a secured creditor dissenting to the arrangement, there is also a requirement of payment or securing payment of the value of the secure debt (and if charged by a floating charge after affecting a deduction of 25% of the value of the pledged asset).
Another condition for the cram-down is lack of consideration for shareholders without full repayment of past debts.
The court can consider additional factors such as the interest of the company's employees or public interests.
Although a very similar provision exists in the Companies Law it was not widely used.
The Pledge Law, 1967 is the general legislation governing the creation and perfection of pledge of property and rights under the Israeli law, and it is subject to the specific provisions of various other laws relating to the creation of collaterals on specific assets or with respect to certain types of debtors.
The provisions relating to the creation of collaterals with respect to assets of companies are regulated under the Companies Ordinance [New Version], 1984, allowing for the creation of a floating charge. Therefore, a floating charge can be created and registered only with respect to the assets of companies and not with respect to assets of individuals or partnerships.
A mortgage can be registered only on immovable properties that are registered in the Land Registry, in accordance with the provisions of the Land Law, 1969. Collaterals with respect to rights in immovable properties unregistered with the Land Registry are governed by the provisions of the Pledge Law.
There are several other laws setting forth specific instructions with respect to specific properties, such as the Patent Law, 1967, with respect to the creating and perfection of pledge of patents, and certain instruction with respect to pledge of vehicles.
Self-foreclosure of collaterals is permitted under the Israeli law in very limited circumstances, only by Israeli banks or financial institutions, and only with respect to certain tangible assets and traded securities, deposited with such institutions.
Any other foreclosure of collaterals will be reported and supervised by the court, execution office or court officer, depending on the type of proceedings.
Generally, where the value of the collateral is lower than the secured debt the court will abstain from involvement, and the creditor may realise the pledged asset. Where the value of the collateral exceeds the debt, the foreclosure process will be performed by a court officer in order to protect the residual value of the collateral – for example, where the creditor makes a "fire sale" that may generate lower values.
The new Insolvency Law generally maintains the previously mentioned principles but limits the consideration from foreclosure of the floating charge to a 75% limit of recovery in favour of the secured creditor. To the extent that there is any debt remaining, it shall be treated as unsecured debt.
A secured creditor's rights and remedies will be subject to contractual inter-creditor covenants.
For a secured creditor's ability to block a court process, see 3.5 Out-of-court Financial Restructuring or Workout.
An enforcement process under insolvency proceedings may be lengthy as the court is entitled to delay, prevent or demand supervision of the process, as set forth in 4.2 Rights and Remedies.
Certain traded securities collaterals held by Israeli institutional lenders may be self-foreclosed.
The New Insolvency Law specifically states that foreign creditors shall have the same rights and standing as Israeli creditors.
See 4.2 Rights and Remedies.
The priority order between the stakeholders is generally as follows:
a) insolvency proceedings fee and expenses;
b) certain amounts of unpaid wages to employees or loans granted to the company for the payment of wages up to certain amounts;
c) amounts deducted from wages and not yet paid to the income tax assessor;
d) certain alimony payments;
e) certain taxes due prior to the commencement of insolvency proceedings to the state;
In addition, the obligor and its creditor can agree among themselves, usually through inter-creditor agreements, the order of repayment of debt or ranking of collaterals and may give public disclosure and possessory protection to such ranking through registration in the appropriate registry.
No special treatment is granted to unsecured trade creditors. However, in many restructuring cases the corporation continues to pay its ongoing obligations, including trade payables.
See Section 6 Statutory Restructurings, Rehabilitations and Reorganisations. A stay will be automatically imposed in the case of a recovery proceeding.
Pre-judgment attachments will not be allowed and will be dismissed (other than certain tax-related attachments) if imposed prior to the opening of the proceedings.
Enforcement of a secured claim is dependent on the progress of the insolvency case, and therefore may take anything between a few months and a few years.
There is priority over general unsecured debts and secured claims secured by floating charge to one-year rental payments.
There are currently no special provisions with respect to foreign creditors.
However, the new Insolvency Law sets forth specific provisions, based on the UNCITRAL Model Law on Cross-Border Insolvency, and international standards, for recognition of foreign proceedings. Such provisions relate to the information and access rights of foreign creditors to Israeli proceedings. It is also specifically determined that the rights and standing of the foreign creditors will be identical to those of Israeli creditors.
See 5.1 Differing Rights and Priorities. Following the creditors' waterfall as described therein comes the residual right of the shareholders, who may only be entitled by virtue of their shareholdings to the residual value left after repayment of all debt.
In addition, the obligor and its creditor can agree among themselves, usually through inter-creditor agreements, of the order of repayment of debt or ranking of collaterals, and may give public disclosure and possessory protection to such ranking through registration in the appropriate registry.
Other than the priorities set forth above in 5.1 Differing Rights and Priorities with respect to certain taxes and employees claims, new credit in arrangement and court officers' fees may be paid from the assets, pursuant to an order of priority determined by the court.
The proceedings' expenses, including new credit and officers' fees, may have priority over a floating charge, if the unsecured assets are not enough for their repayment. New money may also have priority over secured claims if so authorised by the court.
The approval of a restructuring plan requires the approval of 75% of the debt voting in each meeting of the creditors of the shareholders (to the extent applicable). Such meetings are held separately for each type of creditors or shareholders, based on their material specific interest as it differs from the other creditors/shareholders.
Under the new Insolvency Law, as well as the prior Israeli court's ruling, the shareholders have very little effect on the approval of a creditor's arrangement, and only to the extent they demonstrated that residual value will remain after repayment of all debts. The new Insolvency Law specifically determines that the shareholders' meeting shall only be asked to approve the arrangement if the company's assets allow for the full repayment of all past debts.
For cram-down of dissenting minorities, see 3.5 Out-of-court Financial Restructuring or Workout.
The nature and scope of a recovery plan is very wide and can range from the rearrangement of the company's debt, sale of its shares or assets and/or investment by the controlling shareholder or third-party investor.
Re-prioritisation of claims will usually not be permitted in the absence of specific approval of the Israeli court, or consent of all classes of relevant creditors.
The new Insolvency Law determines that a corporation may file for insolvency proceedings if it is insolvent or that such proceedings may assist in preventing its insolvency, and its debts exceed ILS25,000.
As set forth above, such proceedings may also be initiated in order to avoid insolvency.
"Protected Negotiation", as set forth in 3.1 Restructuring Market Participants, may be handled outside of court as long as there is no outstanding unpaid debt and the company is not insolvent.
An arrangement proceeding is usually commenced by filing a recovery motion. In practice, in the case of traded bonds, the first motion will be for the appointment of a court expert in order to assist the bondholders in their negotiations with the company.
The new Insolvency Law imposes an automatic stay (freezing) order, with respect to any insolvency proceeding.
A creditor's claim is recognised through a debt claim process conducted by an appointed officer of the court, or through a plan of arrangement setting forth the rights of the different creditors.
Contingent claims will generally be vindicated through a debt claim, which will be conditioned in the results of the relevant proceeding. In certain cases, a reserve shall be set aside, but in cases of preliminary proceedings, very large claims, and/or where additional dividends are expected, the court may allow not setting a reserve for this purpose provided the conditional claim will receive priority in future distribution.
Where duly conducted and published in accordance with the law, arrangement proceedings shall also bind "unknown" or contingent creditors. However, pursuant to the new Insolvency Law, this shall not exempt the corporation from penalties, debts occurred through criminal offences, and alimony payments approved by court.
A statutory court-supervised process will not be confidential and will require extensive disclosures to the stakeholders as to the financial condition of the corporation and the proposed arrangement, including key economic terms.
Means for challenging an arrangement can relate to the classification of the various class of creditors, which will affect the veto rights of the various classes as well as the ability to use the cram-down mechanism.
Additional challenges can relate to the effect of the arrangement provisions on third parties, such as class or derivative plaintiffs, which may be influenced by exemption clauses or assignment of claims or rights clauses in the arrangement.
Procedural means include filing of objections to the arrangement and appealing a resolution with respect to a debt claim.
The creditors' approval should be obtained by each class of creditors (or shareholders, if applicable), which has an interest distinct from the interest of other creditors. The required majority is the majority of the participants holding at least 75% of the value represented in the vote. The value distribution shall be performed in accordance with the provisions of the plan.
Under the new Insolvency Law, a formal restructuring process includes an automatic stay ("freezing") order and/or the appointment of a court officer.
A stay order itself will also not prevent the company's use of or sale of its assets, but only certain proceedings taken with respect to the company or its assets.
A court officer appointed to a company to which a stay order was issued, may use or sell the company's assets, including any asset pledged or under a reservation of title, unless the court is convinced that such use or sale is not required for the recovery of the company, or that the secured creditor or holder of reservation of title were not assured proper protection.
See also 6.7 Restrictions on the Company's Use of or Sale of Its Assets.
In most insolvency cases, a court officer is appointed in order to manage the insolvency proceedings. This appointment becomes mandatory under the new Insolvency Law. Where the operation of the company requires a professional team, the court officer may engage that management or continue the engagement of the existing management.
In recent recovery cases, such as the case of Africa Investments (Israel) Ltd ILS3 billion debt arrangement, the creditors skipped the appointment of a court officer and receipt of a stay of proceeding order, maintained a close supervision and involvement in the company's affairs, and negotiated independently the terms of the debt arrangement, leading to a significant increase of recovery.
A court officer may charge the company's assets in charges that may be in a rank that is inferior, equal or even in priority to existing charges, in order to enable the receipt of new credit, which is essential for the operation of the company.
The creation of such charges is subject to the court's approval and ensuring "proper protection" to the existing secured creditors. This "proper protection" means preserving the value of the debt secured by the charge. The value of debt relates to the sum that would have been repaid from the sale of the charged asset independently from the insolvency proceedings at the time of the motion.
Repayment of the new credit shall be treated as recovery expenses and therefore as a priority creditor, unless otherwise determined by the court.
The creditors are divided into classes based on an interest distinct from the interest of other creditors. The Israeli court ruling tends to avoid over-classification in order to avoid granting veto rights as to the approval of the arrangement to certain creditors.
The new Insolvency Law introduces the concept of a creditors' committee the court is entitled to appoint, comprised of different types of creditors from the unsecured creditors. The creditors' committee may present its position in different matters, but does not have a decisive role.
It is also very common that Israeli-traded bondholders from one or more series of bonds form a representative body, which includes representatives of three or four of the major bondholders, or a professional representative chosen by the majority of the bondholders.
The representative body is considered as an adviser of the bondholders' trustee who is nominated according to the Securities Law, 1968. The representative body, together with the trustee, usually handles the negotiations with the company and the investor/controlling shareholder and is capable of providing an initial insight or guidelines as to the terms to be agreed by the bondholders.
As all powers of the bondholders are asserted to the bondholders' trustee, Israeli law does not set any provisions regarding the power or responsibilities of the representative body, but the establishment, treatment of information, conflict of interest, etc, of the representative body are regulated by the Israeli Securities Authority guidelines and instructions.
The representative body generally retains financial and legal advisers, the costs of which are born by the company, either by virtue of the deed of trust allowing the bond trustee to engage consultants at the company's expense, or by virtue of a separate commitment, which some companies undertake upon commencement of negotiations with the bondholders. Where the company does not bear such expenses, there is usually an indemnification right towards the bondholders.
Israeli insolvency regulations include extensive disclosure with respect to the corporation, its assets and obligations, as well as with respect to the proposed arrangement and its effect on the various stakeholders, tax consequences etc.
See 3.5 Out-of-court Financial Restructuring or Workout and 6.1 Statutory Process for a Financial Restructuring/Reorganisation.
There is no general limitation of trading rights; rather, in the case of traded bonds, the bondholders will usually grant extensions for repayment in order for the bonds to continue to trade at the stock exchange.
However, special rights of the parties to the assignments may not be recognised by the court.
The corporate group concept is not recognised and each company has to operate in favour of its own stakeholders. Therefore, an arrangement with respect to a group of companies shall be subject to a separate verification of rights with respect to each company and creditors.
After the commencement of restructuring proceedings, the operation of the company will be handled by a court officer and supervised by the court. The order of restructuring proceedings will allow the operation of the company for a period of nine months, which can be extended by a three-month period, as determined by the court to be required for the recovery.
The court approval will not be required for operations in the ordinary course of business but will be required for raising new money, including pledging assets for such purpose (see 3.3 New Money), setting aside certain obligations or imposing obligations on certain essential suppliers and third parties to continue providing services, or abstaining from cancelling the contract due to the insolvency even if they are contractually entitled to do so.
If a court officer is appointed to manage the company's affairs, it will execute the sale. If not, the directors of the company will have to approve the sale.
Under the new Insolvency law, a court officer must be appointed at the commencement of formal insolvency proceedings.
The nature of the rights purchased will be settled in the plan of arrangement, and there is no automatic exemption of claims, etc. However, in practice, the purchaser will require a court order protecting from claims, including contingent claims. Such an order may be granted if the company is in clear insolvency and its recognised creditors may be adversely affected by denying that order.
Creditors do not have any special rights for credit-bidding or acting as a stalking horse, but may participate in any bidding process. There are no specific rules with respect to credit bids.
Sales and similar transactions that have been pre-negotiated prior to the restructuring proceeding will be effectuated subject to the required approvals under the restructuring proceeding.
Rights of secured creditors and owners of assets under reservation of title may be released by the court approval as required for the operation or recovery of the company, and subject to the assurance of proper protection to the rights of such secured creditors and owners of assets under reservation of title.
See 3.3 New Money.
The value of claims will be determined through a debt-claims process, and will be reviewed by the court officer and/or by the court expert in certain types of proceedings.
Under the new Insolvency Law, when approving an arrangement, the court may consider the fairness of the process, the public interest or the interest of the company's employees.
In practice, the approval of the stakeholders is generally the relevant consideration when the court approves an arrangement.
The court will generally not interfere with the economic considerations, or profitability of an arrangement. Any such interference will occur only in exceptional cases if the court finds the arrangement is illegal, if the votes were not made in good faith, etc.
Only when the court approval replaces the required majority (75% of the value represented) may the court consider additional considerations such as alternative value in liquidation and the interests of the company's employees. An existing contract may be continued (notwithstanding the existence of a cause for termination) or dismissed by the appointed court officer, to the extent such an act is required for the recovery of the company and with the approval of the court. The expenses under an existing contract adopted by the company shall have the status of recovery expenses, and any damage to the other contract party shall be deemed as a debt recoverable in the arrangement proceedings.
The other party may terminate an existing contract only with the approval of the court officer or the court. A termination cause relating to the occurrence of insolvency proceedings will not be enforced.
Set-off provisions with respect to mutual business between the parties will usually be enforced. Such set-off rights may be suspended if this suspension is explicitly set forth in the stay order.
Set-off in framework agreements with respect to derivatives, or repo transactions such as ISDA agreements, will be enforced by virtue of the Financial Assets Agreements Law, 2006.
The implications of the company/creditor failing to observe the terms of an agreed restructuring plan/agreement are the same as failing to observe a court order.
Equity owners can retain rights if so agreed by the creditors, usually in return for some contribution by them.
The court will not approve a cram-down of an arrangement if a consideration is being provided to equity owners without the past creditors being fully repaid.
For an overview of the different types of statutory proceedings and their distinguishing features, including the pros and cons of each proceeding and how each of these procedures is to be commenced, see 2.1 Overview of Lawsand Statutory Regimes and 2.4 Procedural Options.
A plan of arrangement can be proposed even if the company is not insolvent. Liquidation is commenced only in the event of insolvency, and a presumption of insolvency exists wherever there is an unpaid debt. The new Insolvency Law determines a unified test allowing a creditor to commence proceedings only when actual insolvency exists, and the company may also initiate proceedings where the proposed proceedings may prevent insolvency. There is a presumption of insolvency due to the existence of an unpaid debt of ILS75,000 (approximately USD20,000).
To determine how a creditor’s claim is recognised, how and by whom and specifically whether contingent claims can be included, see 6.1 Statutory Process for a Financial Restructuring/Reorganisation.
The new Insolvency Law determines that a corporation may file for insolvency proceedings if it is insolvent or if such proceedings may assist in preventing its insolvency, and its debts exceed ILS25,000.
As to whether claims can be traded, see 6.5 Trading of Claims Against a Company.
To determine whether there is a moratorium or a “stay” on the continuation of legal proceedings or enforcement actions against the company, or whether the company and its ordinary course management and directors continues its business and the restructuring process, or an office holder or restructuring professional is appointed and if so, what the powers of any such office holder will be, see 6.2 Position of the Company.
For whether the company or an office holder can reject or disclaim contracts in such a proceeding, how this is achieved and with what effect on the parties, see 6.7 Restrictions on a Company’s Use of or Sale of Its Assets.
To determine whether creditors may exercise rights of set-off, off-set or netting, at what specific point in time such rights are exercised in each case, and whether such set-off rights can be suspended temporarily or terminated, see 6.14 Rights of Set-off. Set-off rights will not be terminated in the absence of special circumstances such as fraudulent transfer.
For information available to creditors as part of statutory proceedings, see 3.2 Consensual Restructuring and Workout Processes and 6.3 Roles of Creditors.
In arrangement proceedings, value will be distributed in accordance with the plan of arrangement. In the event of liquidation, value may be distributed in stages upon receipt of consideration of the sold assets.
In terms of distressed disposals as part of insolvency/liquidation proceedings, if a court officer is appointed, he or she is to conduct the sale of assets or the business. However, a sale of an insolvent company's assets will usually require the approval of the creditors if it relates to a significant asset.
For details of whether a purchaser acquires good title in a sale of assets in such a procedure, and whether that title is "free and clear" of claims and liabilities asserted against the company, see 6.8 Asset Disposition and Related Procedures.
For stalking horse or credit bids, see 6.8 Asset Disposition and Related Procedures.
It is possible to effectuate pre-negotiated sales transactions following the commencement of a statutory procedure, subject to all the required approvals under the relevant process.
The implications of the company or a creditor failing to observe the terms of an agreed or statutory plan are the same as failure to comply with a law or court order.
For whether priority new money can be invested or loaned during the statutory process, and whether such advances can be secured by liens/security on assets of the company, see 3.3New Money.
For insolvency proceedings that can be utilised to liquidate a corporate group on a combined basis or under related proceedings for administrative efficiency, see 6.6 Use of a Restructuring Procedure to Reorganise a Corporate Group.
See 3.2Consensual Restructuring and Workout Processes for the organisation of creditors and, if committees are formed, how their members are selected, what powers they have and whether their expenses are reimbursed.
For conditions applied to a company’s use of or sale of its assets during insolvency proceedings, see 6.7 Restrictions on a Company's Use of or Sale of its Assets.
The new Insolvency Law sets forth specific provisions, based on the UNCITRAL Model Law on Cross-Border Insolvency, and international standards, for recognition of foreign proceedings. Under such provisions, the court will recognise a foreign main proceeding or a secondary foreign proceeding, if the foreign proceeding is an insolvency proceeding supervised by a foreign-authorised authority and the foreign office-holder files an application together with evidence for the opening or conduct of the insolvency proceeding in the foreign jurisdiction.
Protocols between foreign courts are not customary.
In the recent case of Urbancorp Inc, a Canadian company which raised funds in Israel and collapsed, a protocol was signed between the Canadian court officers appointed to manage the Canadian subsidiaries to Adv. Gissin, as the Israeli court officer and the foreign representative of the foreign company, and the Israeli proceedings were recognised as main proceedings. The protocol was approved by the Israeli and the Canadian courts.
The new Insolvency Law adopts the COMI (centre of main interest) test, and the presumption of COMI as the place of registration of the company.
There are currently no special provisions with respect to foreign creditors.
However, the new Insolvency Law sets forth specific provisions, based on the UNCITRAL Model Law on Cross-Border Insolvency, and international standards, for recognition of foreign proceedings. Such provisions relate to the information and access rights of foreign creditors to Israeli proceedings. It is also specifically determined that the rights and standing of the foreign creditors will be identical to those of Israeli creditors.
Under the new Insolvency Law, a trustee will be appointed to conduct insolvency proceedings upon the commencement of the proceedings.
In the event that such an appointment is not possible, a temporary trustee will be appointed.
A trustee will be appointed from a list of trustees, which includes lawyers and accountants with five years' seniority and a person with special expertise or proven experience in the management of insolvent companies. The Official Receiver will recommend five nominees and the court will have to explain the choice of any candidate other than those proposed trustees.
A receiver is appointed to foreclose the pledge.
See 2.1 Overview of Laws and Statutory Regimes.
Court officers are usually authorised, subject to the court's approval, to file claims or defend on behalf of the company, to run the company, to compromise, to pay certain classes of creditors, to sell the company’s assets, to run or supervise the management of the company, to conduct a debt-claim process, to convene a creditors' meeting, etc.
All officers of court, including a receiver appointed by a certain creditor, owe duties to the court, and therefore to all of the creditors, and must try to maximise value for the interest of all of them. In some recovery cases, such duties may also be towards other stakeholders, such as shareholders, if there is a residual value in the company.
The statutory officer reports to the court, as well as to the Israeli Official Receiver, which is a party to all insolvency files.
See 9.1Types of Statutory Officers above. The court may remove a trustee on its own initiative or pursuant to the request of a stakeholder if the trustee does not operate properly or ceases to maintain the requirements for serving as a trustee.
In most cases, the statutory officer will actually replace the existing management. Therefore, any remaining management will usually work in co-operation with the statutory officer, or provide him or her with information, and will not actually manage or make decisions.
However, a court officer may be appointed in addition to a court officer who was a manager in the company, in which case they will handle the legal aspects and formalities of the insolvency process.
For details of who can or cannot serve as a statutory officer, see 9.1Types of Statutory Officers. The court will not appoint anyone who may have, or a relative of whom may have, a personal interest.
A member of the company's management may be appointed in addition to another professional trustee.
For details of which professionals may serve as statutory officers, see Section 9.1 Types of Statutory Officers.
A standard team will usually include the court officer (usually a lawyer or an accountant), a financial expert (which is mandatory in the case of traded bonds), and – in the case of traded bonds – also the bond trustee and a representative body.
Investment bankers will be retained only in exceptional cases.
A court approval is required for the employment of professional advisers.
The costs of the professionals is a process expense and shall have priority over all other debts except secured debts.
See 10.1 Typical Advisers Employed.
Professional advisers owe the same duties and responsibilities as the court officer; see 9.2 Statutory Roles, Rights and Responsibilities of Officers.
Mediation and arbitration are very common in other fields of law, but will not usually be used in insolvency cases.
We have not encountered an order for mandatory arbitration or mediation in a judicially supervised insolvency or restructuring proceeding in Israel.
Pre-insolvency agreements to arbitrate disputes are not enforceable in statutory proceedings.
The Arbitration Law, 1968, governs arbitrations and mediations.
In the absence of an agreement on the appointment of an arbitrator, the court may make the appointment.
Under the Companies Law, the officers and directors of a company have a fiduciary duty and duty of loyalty towards the company. In a situation of insolvency and distress, such duties apply under the Israeli practice and ruling to the creditors, becoming the most significant stakeholders of the company.
The new Insolvency Law imposes specific liabilities on directors and officers that knew or should have known that the company is insolvent and did not take reasonable measures to reduce the scope of insolvency. A presumption of taking reasonable measures exists where such directors and officers acted in order to get consultation from insolvency experts, negotiated debt arrangements with the company creditors or commenced insolvency proceedings.
For measures applied to determine financial distress or insolvency, see 2.3 Obligation to Commence Formal Insolvency Proceedings.
Pursuant to the new Insolvency Law, a creditor will use voting rights with good faith and in the customary manner and will avoid abusing its position.
Under the Companies Law, the consequences of breach of the duty of care by directors and officers is treated as a tort claim, whereas the breach of the duty of loyalty is treated as a breach of agreement with the company.
The court may order the "piercing of the corporate veil" and attribute the debt of the company to its shareholders if it is found they used the company in order to deceive any person or discriminate a creditor in a way which is harmful to the company's purpose, or by unreasonable risk to its ability to repay its debt. An example of such behaviour is the use of unreasonable financial leveraging.
The court may determine that any officer or director of an insolvent company that was involved in fraudulent conduct shall be personally liable for any damages caused by such conduct and may disqualify him or her from serving as an officer in any corporation for a period of up to five years.
The claims will usually be asserted by or through an insolvency court officer, and a plan of arrangement will usually include an assignment of rights of claim provision. However, certain claims such as class actions could still exist separately from the officer of court's claims.
The appointment of Chief Restructuring Officers (CRO) is not common in Israel and usually is part of the job of the ordinary officer nominated by court, who replaces the BOD and takes all of its powers and authorities. Nevertheless, with regard to large Israeli Holding entities, the court does occasionally nominate an Officer as an "Observer" with limited authorities, to supervise the actions of the BOD in order to protect the rights of the creditors and support possible Schemes of Restructuring. One such observer played a main part in the restructuring of IDB Holdings during 2013. In the recent case of Brookland Upreal BVI, a company incorporated in the BVI with assets in the US which raised bonds and Israel and collapsed, a CRO was appointed by the bondholders to restructure the US subsidiaries, under the supervision of a Debtor in Possession nominated by the Israeli court to the parent BVI entity.
A shadow director is subject to all the duties and potential liabilities of a regular director. The determination of the status of a shadow director is connected to its level of influence, and a creditor can be considered a shadow director.
In the recent case of Urbancorp Inc, the functionary claimed that a Canadian creditor was in fact acting as a shadow director and initiated a process of raising funds in Israel. The claim was settled out of court.
Section 6 of the Companies Law provides the terms for piercing the corporate veil, implementing liabilities towards creditors, on shareholders. Furthermore, as mentioned in 12.1 Duties of Directors, sections 288-289 of the new Insolvency Laws (replaced sections 373-374 of the Companies Ordinance), details the Duties of Officers and Directors of a Financially Distressed or Insolvent Company, to narrow the scope of insolvency of the Company.
Any transaction taking place three months prior to the commencement of the insolvency proceedings (and one year if made with a relative), can be challenged, and revoked if found that it was intended to create a preference of any creditor, or made out of illegal constraint or pressure. Actions shall not be revoked if a proper consideration was received or if made and the debt was created in the ordinary course of business.
Additionally, conveyance of property may be invalid if performed within two years of the insolvency proceedings (or four years if made to a relative), unless the conveyance beneficiary proves the person was solvent at such time without the property conveyed or that a proper consideration was received.
This will not affect, however, the rights of a person who purchased an asset in good faith and at an appropriate value from a creditor.
Ongoing actions may be set aside even if begun seven years prior to the insolvency proceedings if made in order to transfer an asset illegally.
See 13.1 Historical Transactions.
Claims to set aside or annul transactions may be asserted by the office-holders. Pursuant to a court approval, creditors can assert such claims themselves.
Such claims may be brought in both restructuring and insolvency proceedings.
The valuation obtained in insolvency proceedings will usually refer to the value of a proposed arrangement to the various creditors, and vis-à-vis the liquidation option.
A valuation is not required in every process, and will mainly be provided in the case of traded bonds arrangements where a court expert must be appointed and provide an opinion with respect to the proposed arrangement, the distribution between the different creditors, value of the proposed arrangement as opposed to liquidation etc.
This opinion will also be necessary for the purpose of a cram-down mechanism.
This is an evolving market since the wave of insolvencies cases in 2008 and the amendment of the laws relating to arrangements in 2013, introducing, inter alia, the obligation to appoint a court expert with respect to traded bonds.
In practice, a few local valuation experts are used in most arrangements.
A court expert will be appointed in a traded bond arrangement.
A NAV valuation and cash-flow valuation are typically used.
In some cases the officer of court has to evaluate the assets in order to decide what the best course of action is. As a matter of practice the actual bids submitted will suffice and an opinion will not be necessary.
Some sort of competitive bidding process will usually take place in order to justify the proposed values.
Liquidation values are the sole value comparator only when trying to enforce the cram-down mechanism on dissenting creditors.