The Israeli parliament passed the Insolvency and Rehabilitation Law, 2018 (the law) on March 5, 2018, and it will come into force on September 15, 2019. The law offers a comprehensive reform and provides Israel with modern insolvency legislation dealing with both individual and corporate insolvency.
Aims
For individuals, the law promotes the economic rehabilitation of the individual as the fundamental goal of the insolvency proceedings, emphasising effective reintroduction into the economy.
For corporate insolvency, the focus, where possible, is also on rehabilitation.
Another principal objective of the law is to increase the amount to be repaid to creditors, with additional emphasis on the amount to be paid to unsecured creditors.
Proceedings for corporations
Under the law, a creditor or a debtor wishing to initiate insolvency proceedings must file a standard application to obtain a commencement of insolvency proceedings order. The court will determine whether to channel the corporate entity into a course of rehabilitation or winding up. This decision depends on the economic status of the entity and is independent of the manner in which the application has been drafted.
Upon issue of the order by the court for the initiation of insolvency proceedings, an automatic stay of proceedings will apply. If the court chooses to operate the corporate entity with a view to its economic rehabilitation, a stay of proceedings will also apply against the secured creditors, subject to adequate protection in order to safeguard the value of their security.
Simultaneously with the issue of the order, the court will appoint a trustee to be entrusted with full control of the company’s assets.
As part of the legislative processes, certain parties proposed that a corporation’s assets remain in place and the insolvency process resemble the United States’ debtor in possession (DIP) mechanism, but this was ultimately vetoed by the Knesset.
Nevertheless, the law does create a new mechanism entitled protective negotiations, with traits not dissimilar to the DIP, although this is a temporary provision to be in effect for four years. This mechanism allows a public company to initiate out-of-court protective negotiations with its creditors while allowing it to remain active and without appointment of a trustee. During the period of the protective negotiations, a complete stay of proceedings shall not apply but the creditors may not file an application for an initiation of insolvency proceedings order against the corporation and may not call for the immediate repayment of debt.
Proceedings for individuals
Under the updated law, a substantial part of the administration of insolvency proceedings relative to individuals passes from the court to administrative authorities.
Insolvency proceedings below NIS150,000 will be administered entirely by the Enforcement and Collection Authority.
Insolvency proceedings above NIS150,000 will be conducted before the official receiver (the Insolvency Commissioner) and, if relevant, before the court with respect to further, more specific matters.
Simultaneously, with the issue of the order for the commencement of insolvency proceedings, the Insolvency Commissioner shall appoint a trustee for the debtor and an audit will be carried out, in which the debtor’s economic capability and his conduct will be examined (lasting approximately 12 months).
At the end of this audit a payment plan is established, at the end of which the debtor will receive a discharge. The default scenario is a payment period of three years, however, the court reserves the right to increase or decrease the period depending upon the circumstances of the case. If the debtor has no proven financial ability to pay the creditors, he may be granted an immediate discharge.
Order of Repayment
Under Israeli law, generally speaking the order of repayment in insolvency proceedings is as follows:
- Creditors secured by a fixed charge
- Expenses of insolvency proceedings
- Preferred creditors
- Creditors with a floating charge
- Ordinary creditors
- Deferred creditors and shareholders
The new law does not modify the repayment order but makes changes in relation to each of the groups. The following explains the principal changes:
Fixed charge secured creditors
A creditor secured by a fixed charge is required to submit a debt claim. In cases whereby the value of the charged asset is clearly higher than the debt, the asset will be realised by the trustee.
In addition, late-payment interest accrued on the debt after the date of the issue of the commencement of proceedings order cannot be collected from the charged assets.
Floating charge creditors
The law provides that a creditor secured by a floating charge shall be entitled to only 75% of the proceeds of realisation of the assets subject to the floating charge. Thus, the law transfers 25% of the value of the floating charge to ordinary creditors (subject to a transitional provision prescribed with respect to existing charges).
Preferred creditors taxes
The law substantially reduces the scope of the preference accorded to the tax authorities. Under existing law, the tax authority was entitled to be treated as a preferred creditor in respect of one tax year of its choice. The new law restricts the preference of the tax authority only to debts pursuant to voluntary debt settlements with the debtor regarding tax arrears. The preference for such debts is restricted to a maximum of three tax years.
Directors’ and CEO’s liabilities
The law allows the court to impose liability on a director or general manager that knew, or ought to have known, that the corporate entity was insolvent and did not take reasonable steps to reduce potential impact.
However, the law creates a presumption that a director or general manager took reasonable steps to reduce the extent of the insolvency, if measures were taken to evaluate the economic position of the corporation and acted to ensure that the corporation take one of the following measures:
- Receipt of assistance from a corporate rehabilitation specialist;
- Negotiations for debt settlement;
- Commencement of insolvency proceedings
International insolvency proceedings
The law adopts the model formulated by the United Nations’ UNCITRAL commission and prescribes a designated track for the recognition of foreign insolvency proceedings.
