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 empirical research made by Baum, Gindes and Gafni (Restructuring or Dissolution? Determinants of Corporate Bankruptcy Proceedings in Israel, 51 MISHPATIM-HEBREW UNIV. L. REV. (December 2021)) using a sample of 172 corporate stay of proceeding orders granted by Israeli courts between 2015 and 2018, it was found that on average the court approved 34.5 companies per year for a rehabilitation process (rather than liquidation). These companies had an average employee number of 117. Seniority of these companies was 18 years, average. Debt was 379% of the yearly turnover, and average. Secured debt was 28% of all debt.
50% of these rehabilitation processes were eventually unsuccessful (ended in the dissolution and liquidation), 17% ended by being rehabilitated through a creditor arrangement, and 33% ended with rehabilitation by selling the business activity as a "going concern" while liquidation of the original legal entity.
Pursuant to the above research made by the Bank of Israel, 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 was found to have a negative effect on the anticipated recovery rate.
On 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.
Amendments to Insolvency Law
On March 2021 an amendment to the New Insolvency Law (Amendment number 4 – Temporary Provisions – the New Coronavirus) 2021, was published ("The Corona Amendment" or the "Temporary Provisions"). The Temporary Provisions were in force for a 12-month period and were extended for another 12-month period (until March 2022) and their continued validity will be re-examined in March 2023. Despite the name of the Temporary Provisions, and despite the fact that they were installed following the events of the Coronavirus crisis, several rulings of the Israeli courts stated that the Temporary Provisions will apply to corporations that ran into difficulties not necessarily related to the Corona crisis. As will be detailed below, the Temporary Provisions give the corporation a route to carry out a creditor arrangement procedure without taking control from the existing company management, while receiving remedies from the court to protect against the corporation's creditors. Many refer to the temporary orders as "the Israeli Chapter 11".
The Corona amendment provided a new route for corporations to apply for "stay of proceeding" for the purposes of arranging and approving a Debt Arrangement with its creditors, without appointing a court-appointed trustee who usually replaces the existing management of the company and takes control of the company's business operation. According to the Corona amendment the company may apply to the court for a stay of proceedings for a three-month period (with one-month optional extension). During that period a "Settlement Manager" will be appointed, an office holder who has more limited powers than an ordinary court-appointed "insolvency trustee". His main role is to ensure the proper management of the process, the preservation of the corporation’s assets and to assist in formulating the Debt Arrangement. The main powers of the Manager are supervision powers. He is entitled to participate in meetings of the board of directors, to receive financial information regarding the monthly income and expenses of the company and about transactions that require court approval. The corporation must report to the manager on an ongoing basis regarding its activities in accordance with the operating plan, and the manager has the authority to apply to the court and the stakeholders if he believes that the corporation intends to take action that harms the corporation or the stakeholders, or in the event that he finds that one of the conditions for issuing the stay of proceedings order has ceased to be operative.
Awaiting Approval From the Court
During the stay of proceedings period the corporation will continue to operate by way of the normal course of business until a Debt Arrangement is formulated in accordance with an operating plan approved by the court. During such period the corporation is not allowed to carry out exceptional transactions or transactions that require special approvals or to distribute a dividend without the approval of the court.
In order to allow the corporation to continue operating during the stay of the proceeding period, the law gives the corporation the option, subject to certain conditions, to enforce against third parties the continued existence of contracts entered into with the corporation, even if such contracts were breached by the corporation prior to the stay of proceedings. In addition, the law allows a corporation to obtain credit required for its activities during the stay period and such credit will be given special priority: insolvency proceeding expenses.
The New Insolvency Law effectively replaces the pre-existing provisions of the various laws relating to reorganisation and insolvencies, and include 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, or sometimes extend into years 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, which is current practice.
Also,as mentioned in 1.1 Market Trends and Changes, the Corona Amendment opened a new route for formulating a debt arrangement which allows the company to apply for provisional remedies, such as stay of proceeding, while not replacing the current management by a court-appointed trustee.
See 1.1 Market Trends and Changes and 2.1 Overviews of Laws and Statutory Regimes.
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 their duties.
The New Insolvency Law imposes specific liability on directors and officers that knew, or should have known, that the company is insolvent and did not take reasonable measures to reduce its scope. A presumption of taking reasonable measures exists where such directors and officers acted to get consultation from insolvency experts, negotiated a debt arrangement with the company creditors or commenced insolvency proceedings. The New Insolvency Law does not specify certain periods of time to perform the actions required of the directors. 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 such purpose.
Under the legislation prior to the New Insolvency Law, 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 so long as the company is insolvent, as defined under the New Insolvency Law.
The New Insolvency Law adopts the two tests of insolvency recognised under the case law and sets forth some factual presumptions of insolvency:
A "future creditor", whose debt repayment date has not yet arrived, may also commence an involuntary proceeding provided that the debt repayment date falls within six months from the date of submission of the creditor's insolvency application, or the corporation acts with the aim of defrauding its creditors.
A corporation may commence proceedings according to the Corona amendment, even if it is solvent.
The Israeli restructuring and insolvency regimes and the New Insolvency Law do not include any special treatment of particular sectors, financial institutions, etc.
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 older legislation, which required such 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).
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.
Protection of Creditors
The newly introduced out-of-court "Protected Negotiation" chapter includes a built-in creditors' protection, such as appointment of a creditor's representative to conduct negotiations and be present at the board of directors' meetings, and 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.
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, illegally transfer an asset, make improper use of the protections granted or 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 such obligations for an additional nine months. Such process does not require a court process and provides protection from immediate repayment and freezing orders for six months.
This is not a mandatory pre-statutory process, but a means to encourage such corporation to commence negotiations at earlier stages in order to increase their recovery chances.
As for timelines for protected negotiation, see 3.1 Consensual and Other Out-of-Court Workouts and Restructurings. 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 repayment dates during the negotiations in order to allow the trade of the bonds to continue.
It is also 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 commitment to bear the costs of the bondholders during the negotiation period.
For an appointment of a creditor's representative in the protected negotiation process, see section 3.1 Consensual and Other Out-of-Court Workouts and Restructurings.
Creditors' Committees and Other Representatives
The New Insolvency Law introduces the concept of a creditors' committee the court is entitled to appoint, comprising of different types of creditors other than the secured 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 initial insights 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 borne by the company, either by virtue of the deed of trust allowing the bond trustee to engage consultants on 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, the New Insolvency Law demands that the court will nominate an expert to escrow debt arrangement process that involves public traded bonds. The expert furnishes his 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 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 receiving 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. Such proper protection means preserving the value of the debt secured by the charge. Such 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 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 such credit, there is little evidence of any substantial usage made by such provision.
Pursuant to the Companies Law, as well as the New Insolvency Law, a creditor or shareholder must use their voting rights with respect to a proposed plan of arrangement in good faith and not to misuse their power.
In practice, the courts will tend to apply such provision in exceptional cases – eg, in cases where objecting to proposed debt arrangement is based on illegitimate interests or clear bad faith, especially when the objector is not expected to receive a greater economic return in the liquidation alternative, compared to the arrangement alternative.
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 3.1 Consensual and Other Out-of-court Workouts and Restructurings, in the instance of traded bonds, a court process is mandatory in any event.
Terms Contained in Credit Agreements
Terms permitting a majority or super-majority of lenders to bind dissenting lenders to changed credit agreement terms will usually be part of a consortium or inter-creditors agreement 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 was approved by over 50% of the entire debt, and that if the arrangement is not approved a liquidation will occur and the recovery for such 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 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 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 right 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, and in relation to the creation and perfection of pledge of patents, and certain instructions regarding pledges 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 even while there is a collective insolvency proceeding being held in parallel. Where the value of the collateral exceeds the debt, the foreclosure process will be performed by a court officer in the collective insolvency proceeding in order to protect the residual value of the collateral – for example, where the creditor makes a "fire sale" that may generate lower values.
In Liquidation proceedings a creditor is entitled to foreclose his pledge independently from the insolvency proceeding, subject to appropriate notices to the debtor trustee or the liquidation court. In Recovery and Reorganisation proceedings a stay order prevents a secured creditor from realising its pledge and he must apply to the court in order to seek approval to realise an asset charged in its favour. The court shall permit such realisation if: (i) it is satisfied that the creditor's rights in the asset have not been properly protected; or (ii) the realisation of the charged asset is not likely to have an adverse effect on the possible recovery of the company. Furthermore, a court may, under certain circumstances, allow the trustee to create additional pledges in any rank of seniority including on pledged assets, or even to sell such pledged assets without the secured creditor's consent, all provided that such creditor's rights are properly secured and that such action is essential for the arrangement proceedings.
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 there is any debt remaining, it shall be treated as unsecured debt.
A secured creditor's rights and remedies will be subject to contractual intercreditor covenants.
For a secured creditor's ability to block a court process, see 3.5 Consensual, Agreed Out-of-court Financial Restructuring or Workout.
For information on secured creditors and their rights in statutory insolvency, see 4.2 Rights and Remedies.
The priority order between the stakeholder is generally as follows.
First, ranking tax charges: the tax authorities may have first priority charges, mainly with respect to real estate, requiring repayment prior to distribution of the proceeds of a sale.
Secured creditors and owners of retention of title assets: a secured creditor may be able to foreclose its collateral independently from the insolvency proceedings, as set forth in Section 2 Statutory Regimes Governing Restructurings, Reorganisations, Insolvencies and Liquidations. The same provisions apply in recovery and rearrangement proceedings to owners of assets under retention of title agreements. However, a floating charge will be subject to payment to priory creditors, as set forth below, and shall only grant priority with respect to 75% of its value.
Priority creditors: certain debts and creditors will have priority, as follows:
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 continue to pay its ongoing obligations, including trade payables.
In relation to matters regarding rights and remedies of unsecured creditors, see Section 6.1 Statutory Process for a Financial Restructuring/Reorganisation. A stay will be automatically imposed in 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.
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 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 or the shareholders (to the extent applicable). Such meetings are held separately for each type of creditor or shareholder based on their material specific interest as it differs from the other creditors/shareholders.
Effects of Shareholders
Under the New Insolvency Law the shareholders have very little effect on the approval of a creditor's arrangement, and only to the extent they demonstrate 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.
As set forth above, such proceedings may also be initiated in order to avoid insolvency.
Other Procedures Affecting Restructuring Financial Plans
"Protected Negotiation", as set forth in 3.1 Consensual and Other Out-of-Court Workouts and Restructurings, may be handled outside of court so long as there is no outstanding unpaid debt and the company is not insolvent.
A debt arrangement according to the Corona amendment is a court-supervised process as described in 1.1 Market Trends and Changes.
Arrangement proceeding is usually commenced by filing a recovery motion. Practically, in case of traded bonds, the first motion will be for appointment of a court expert in order to assist the bondholders in their negotiations with the company.
The New Insolvency Law imposes automatic stay (freezing) order with respect to any insolvency proceeding.
Regarding debt arrangement according to the Corona amendment, see 1.1 Market Trends and Changes.
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 shall receive priority in future distribution.
Where duly conducted and published in accordance with the law, arrangement proceedings shall bind also "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.
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 debt claim.
The creditor's 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 such vote. The value distribution shall be performed in accordance with the provisions of the plan.
Details of Procedures
Proceedings according to the Corona amendment will not necessarily require stay of the proceeding order. The company may apply for such order, but it is not automatic.
A stay order itself will also not prevent the company's use 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.
Regarding the corona amendment, which allows the existing management of the company to stay at its role, see 1.1 Market Trends and Changes.
See also 6.7 Restrictions on the Company's Use of or Sale of Its Assets During a Formal Restructuring Process. In most insolvency cases, a court officer is appointed in order to manage the insolvency proceedings. Such appointment becomes mandatory under the new Insolvency Law (excluding the Corona amendment provisions). 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.
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.
According to the provisions of the New Insolvency Law, normally a trustee in insolvency proceedings will be appointed by a court from a list of five trustees that will be submitted to the court by the official receiver. Regarding the corona amendment, see 1.1 Market Trends and Changes.
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 receiving 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. Such proper protection means preserving the value of the debt secured by the charge. Such 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 such 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.
Regarding creditors' committees, see 3.2 Consensual Restructuring and Workout Processes.
The Israeli insolvency regulations includes 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.
For information regarding the modification of claims of dissenting creditors, see sections 3.5 Out of Court Financial Restructuring and Workout, and 6.1 Statutory Process for a Financial Restructuring/Reorganisation.
There is no general limitation of trading rights, rather, in cases 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.
In general, 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. In special cases, the court may allow a corporate group to have a restructuring procedure if the court will find that prior to the proceeding the group conducted without a clear separation between the assets of the group's individuals. Also, the court may authorise a debt arrangement of Corporate Group according to the corona amendment, if there is a creditors' majority consent to ignore entity separation.
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 company to operate 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.
Regarding restrictions during stay of proceeding period according to the Corona amendment, see 1.1 Market Trends and Changes.
The Formal Restructuring Process
If a court officer is appointed to manage the company's affairs, they 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 as of the commencement of formal insolvency proceedings, not including a procedure commenced according to the Corona amendment: see 1.1 Market Trends and Changes.
The nature of the rights purchased will be settled in the plan of arrangement, and there is no automatic exemption of claims. However, in practice the purchaser will require a court order protecting from claims, including contingent claims. Such order may be granted if the company is in clear insolvency and its recognised creditors may be adversely affected by denying such 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 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's 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.
For information regarding new-money investments and loans, see 3.3 New Money.
The value of claims will be determined through a debt claim 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. 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) the court may consider additional considerations such as alternative value in liquidation and the interests of the company's employees.
Powers of a Statutory Office
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 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 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 pros and cons of each proceeding and how each procedure is to be commenced, see 2.1 Overview of the Laws and Statutory Regimes and 3.2 Consensual Restructuring and Workout Process.
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). For more information, see 3.2Consensual Restructuring and Workout Process, 6.1 Statutory Process for a Financial Restructuring/Reorganisation, 6.2 Position of the Company, 6.13 Non-debtor Parties and 6.14 Rights of Set-Off.
Set-off rights will not be terminated in the absence of special circumstances such as fraudulent transfer.
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, they shall conduct sale of assets or the business. However, sale of an insolvent company's assets will usually be brought to the approval of the creditors if it relates to a significant asset: see also 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.
For stalking horse or credit bids, again see 6.8 Asset Disposition and Related Procedures.
For details regarding the organisation of creditors, see 3.2 Typical Consensual Restructuring and Workout Processes.
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 court.
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.
Recognition of Foreign Rulings
There is a distinction between recognition of a foreign insolvency proceeding, and the existence of a foreign official, and the "recognition" or "enforcement" of a foreign judgment given by a court in a foreign proceeding against a debtor (in insolvency proceeding or other). As mentioned in 8.1 Recognition or Relief in Connection with Overseas Proceedings, the Insolvency Law grants authority to the Israeli insolvency court to "recognise" the existence of the foreign procedure and the existence of a foreign office holder. The request is based on technical aspects, without reference to issues of authority and due process. After the "recognition" is given of the existence of the foreign insolvency procedure and the foreign office holder, the court may grant many powers and equip the incumbent with a variety of tools and powers under Israeli law, according to the Insolvency Law. However, the Insolvency Law does not grant authority to an insolvency court to grant "recognition" or "enforcement" of a foreign judgment given as part of that foreign proceeding. In order to receive "recognition" of the content of a foreign judgment or to "enforce" the charges stipulated in it, one must act according to the "Enforcement of Foreign Judgments Law-1958".
Under the new Insolvency Law a statutory officer named "Trustee" will be appointed to conduct insolvency proceedings upon the commencement of the proceedings.
In the event such 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 such proposed trustees.
A receiver is appointed to foreclose pledge.
Regarding "Settlement Manager" appointed according to the Corona Amendment, see 1.1 Market Trends and Changes.
Regarding "Receiver" appointed in accordance with the Collection System Law, 1967, see 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership.
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, compromise, pay a certain class of creditors, sell the company’s assets, to run or supervise the management of the company, conduct a debt claim process, 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 have to 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, in the event 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 also 2.1 Overview of the Laws and Statutory Regimes.
The court may remove a trustee at 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 shall not actually manage or make decisions. However, according to the new Insolvency Law, the insolvency court may appoint an existing officer of the corporation as a statutory trustee, but if doing so, the court shall appoint another trustee from the list of trustees.
The court will not appoint anyone who may have, or a relative who may have, a personal interest. A member of the company's management may be appointed beside another professional trustee.
See also 9.1 Types of Statutory Officers.
Obligations to Company Creditors
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.
Pursuant to the New Insolvency Law, a creditor will use voting rights with good faith and customary manner and will avoid abusing its position.
Under the Companies Law, the consequence 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 them from serving as an officer in any corporation for a period of up to five years.
For more information on such matters, see 2.3 Obligation to Commence Formal Insolvency Proceedings.
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.
Any transaction taking place three months prior to the commencement of the insolvency proceedings (or 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 from 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 with 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 and made in order to illegally transfer an asset.
For information on look-back periods, see 11.3 Claims to Set Aside or Annul Transactions.
Claims to set aside or annul transactions may be asserted by the officeholders. Pursuant to a court approval, a creditor can assert such claims themselves.
Such claims may be brought in both restructuring and insolvency proceedings.