A Reform in Israel’s Insolvency Laws

The Knesset recently passed the Law of Insolvency and Economic Rehabilitation, which is aimed at updating the laws on insolvency currently in effect in Israel.

The insolvency laws in place today are regulated under archaic legislation, in addition to being outdated and disorganized. This has been detrimental for debtors, creditors, and the entire economy alike. The new Law is designed to rectify the situation and provide the Israeli economy with modern legislation with respect to insolvency.

The Law has three primary objectives:

1. to promote the debtor’s economic rehabilitation as a primary concern;
2. to maximize the debt repayment to creditors and to divide the debtor’s pool of assets in a more equitable manner between the secured and unsecured creditors;
3. to increase the certainty and stability of the law by streamlining processes and reducing the bureaucratic burden.

The key principles of the Law are as follows:

A clear and simple definition of insolvency – An entity shall be deemed insolvent if it cannot actively pay its debts. By adopting this new definition of insolvency, the Law abandoned, de facto, the current balance-sheet test. According to the Law, a creditor is entitled to file an application for a court order to open insolvency proceedings only when a debt has not been paid to said creditor on time. According to this, creditors may not file applications preemptively.

Reducing the bureaucratic burden and streamlining the structure of the authorities mandated with the implementation of the law – The material jurisdiction to conduct insolvency proceedings in relation to corporations will remain the district court. However, a significant share of the proceedings being conducted can be decided by administrative authorities and thus do not require court rulings. The Law transfers the administrative aspects of insolvency proceedings to the Official Receiver or, under his proposed name, the “Administrator in Charge of Insolvency Proceedings and Economic Rehabilitation.”

Uniformity in the opening of proceedings – The Law seeks to create a uniform and orderly procedure for opening proceedings against a corporation facing insolvency, and without the legal procedure for handling it being dictated by the technical manner through which the application was filed. The Law prescribes that the court shall decide whether a corporation is insolvent and, only subsequently, determine the most appropriate procedure for handling that corporation on the basis of data submitted to the court.

Creditors’ debt repayment order and distribution of funds – According to the Law, some of the debt repayments will be carved out from the sums owed to the State and to the strong secured creditors (i.e. banks). They will then be distributed among the general unsecured creditors holding no collateral whatsoever. In the majority of cases, these general creditors (usually suppliers, customers, and employees) receive only a tiny portion, if any, of the debtor’s pool of assets. Within this context, the Law prescribes, inter alia, that 25% of the assets pledged under a floating lien (to differentiate from a specific lien on a specific asset) be carved out in favor of the debtor’s general unsecured creditors. It further determines that the volume of assets used to repay the holder of the floating lien be reduced. The Law also reduces the preferential right given to the State (mainly when it comes to debts to the tax authorities) when dividing up the debtor’s assets.

Minimizing damages – The Law imposes an obligation on the board of directors of the debtor corporation to take all reasonable measures to minimize the extent of the insolvency during the period prior to the opening of insolvency proceedings.

The Law will take effect in 18 months.