David (Dudi) Cohen

A deposited pledge is an arrangement enabling lenders to receive efficient, inexpensive, and readily available collateral from borrowers to secure credit. However, the current legislative arrangement in Israel differentiates between an Israeli banking corporation and a foreign banking corporation abroad when it comes to exercising collateral. While a foreign banking corporation abroad must exercise a deposited pledge through a public authority (via proceedings in court or the Execution Office), an Israeli banking corporation enjoys a fast track allowing it to self-exercise the pledge without any need to initiate proceedings. This seeming discrimination lacks any economic logic or justification, and essentially harms competition in the credit market.

Deposited Pledge

One of the readily available and accepted forms of collateral in the bank credit field is the legal institution of a deposited pledge. The Israeli Pledge Laws anchors this institution. It prescribes that in relation to “movable assets and securities in respect whereof no other law contains special provisions applicable to the matter,” a lender may obtain the status of pledge holder for the assets deposited with it (or with a custodian on its behalf) and that remained deposited with it. With this type of pledge, the lender’s status as pledge holder derives from the very depositing of the asset in its possession and there is no need to register the pledge in a public register.

It is for good reason the institution of deposited pledges is preferred in the institutional lending market, used mainly when borrowers are able to provide collateral in the form of securities they own. For a foreign banking corporation with no activity or branches in Israel, securities are often nearly the only option for it to receive collateral. This is because accepting real estate or a vehicle as collateral usually demands knowledge of Israeli law and the Israeli business environment, which, by its nature, requires having local activities in Israel. 

The provisions of the Pledges Law further prescribe that, with regard to a banking corporation (or other institutional entity), the holder of the deposited pledge may recover the debt secured by the pledge by way of self-exercise. In other words, it can recover the debt through a unilateral exercise of the pledge without having to institute legal proceedings through a public authority (court or Execution Office). In this way, self-exercise of the deposited pledge becomes a readily available, fast, inexpensive, and convenient debt recovery tool, not subject to the public authority’s restrictions or procedures.

Discrimination

Paradoxically, the right to self-exercise of collateral, which should be particularly appealing to foreign lenders abroad considering its characteristics, is unavailable to such banking corporations. Israeli law is actually discriminatory and grants this option solely to banking corporations (or other institutional entities) holding a bank license from the Governor of the Bank of Israel.

Clearly, under normal circumstances, a foreign bank will not undertake a special and lengthy process of obtaining an appropriate license in Israel merely to execute credit transactions and obtain the right to self-exercise collateral. Consequently, foreign banks abroad have no realistic way of fulfilling the requisite criteria for self-exercising collateral.

As a result, the requirement of a bank license in Israel, which should not be relevant at all to the lender’s mode of exercising collateral (the deposited pledge) or to the business-commercial relations between the parties, creates discrimination against foreign banks attempting to recover debts by exercising pledges deposited as collateral.

Major Advantage

In order to illustrate the discrimination created by the aforesaid arrangement, we present the following example. A company wants to obtain credit from various entities, some of which are international entities with no credit activities in Israel (and, therefore, they in any case do not need to obtain the status of “foreign bank” in Israel). The company holds shares of a publicly traded company that it wants to provide as collateral. If the company engages with an Israeli bank, it can deposit the collateral in the Israeli bank, and the Israeli bank will be able to exercise the shares, if necessary, by way of self-exercise, without having to refer to the courts or the Execution Office. Conversely, a foreign bank wanting to rely on the shares as collateral not only must register the collateral with the Registrar of Pledges in Israel, but also institute a legal proceeding in an Israeli court to exercise the collateral.

Under these circumstances, Israeli banks possess a major advantage over their foreign counterparts, thereby creating a bias against foreign banks and harming competition in the credit market. Additionally, the ability to swiftly exercise securities pledged as collateral becomes extremely important if the securities are traded on the stock exchange. Therefore, the fact foreign banks must exercise collateral through the Israeli courts may materially lower the attractiveness of engaging in credit transactions with Israelis.

We also note that, even if denying foreign banks abroad any real ability to self-exercise collateral does not completely quash credit transactions, the increased risk imposed on foreign banks when exercising the collateral and the costs of registering the pledge will be reflected in the interest rate charged for the credit.

Deposited Pledges and Insolvency

Debt recovery by way of the self-exercise of pledges is of particular importance in situations when the borrower is embroiled in insolvency proceedings. During an insolvency event, a lender has precedence over other creditors in debt recovery only through collateral over which it obtained proprietary status. Therefore, a pledge holder has precedence over other creditors in recovering the borrower’s debt to it, and the mode of its exercise is also important (whether as a self-help remedy or as a course of action approved by the insolvency court).

In instances when the pledge holder may self-exercise the collateral, it avoids the need to resort to the complicated, uncertain, and arduous procedure of obtaining an insolvency court’s approval to exercise the deposited pledge and subject to the restrictive conditions prescribed in the Insolvency Law, which could impede its right to recover the debt from the deposited pledge.

Regulatory Solutions

To grant equal status to banks in Israel and foreign banks in terms of the possibility of self-exercising deposited pledges, and to ensure fair competition in the credit market in this regard, regulators should determine the applicability of the self-exercise arrangement not only for institutional entities but also for foreign banks licensed in a foreign country.

The Israeli regulatory authority’s paternalistic desire to protect credit recipients by regulating credit services under a license from the Governor of the Bank of Israel has very little weight when it comes to the self-exercise mechanism. There is no material difference between an Israeli bank and a foreign bank in this regard. Moreover, any borrower capable of applying to a foreign bank in a distant country to obtain a loan using collateral in the form of shares in Israel is likely a sophisticated borrower who knows how to protect his affairs. This is as opposed to “ordinary” citizens who may unwittingly become embroiled in undesirable situations and need the regulatory authority’s protection and supervision.

If the legislature nevertheless wants to protect the Israeli business obtaining credit abroad, it should not do so by prescribing a sweeping denial of foreign banks’ right to self-exercise collateral. Rather, it should make the right of self-exercise subject to fundamental criteria anchored in regulation, including the requirement that the foreign bank hold an appropriate license in its country of origin and/or defining particular countries in which only banks operating and/or with a license to operate may self-exercise pledges deposited as collateral.

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Adv. Dudi Cohen is the head of Barnea Jaffa Lande's Finance and Public Corporations Department.

Adv. Idan Miller leads the office's Insolvency practice.