Israel: Restructuring & Insolvency

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This country-specific Q&A provides an overview of the legal framework and key issues surrounding restructuring and insolvency in Israel.

This Q&A is part of the global guide to Restructuring & Insolvency.

For a full list of jurisdictional Q&As visit

  1. What forms of security can be granted over immovable and movable property? What formalities are required and what is the impact if such formalities are not complied with?

    Immovable property:

    • Mortgage. Can only be granted over property that is registered with the Land Registry.
    • Pledge. This right relates only to assets that are not registered in the Land Registry. Pursuant to Israeli law this is a contractual right, and therefore liens on mobile property are considered and registered as pledges. (see below, Pledge) A “pledge” and a “fixed charge” are interchangeable terms.

    Mortgages and pledges are similar in most of their legal characteristics. The main differences are in the registration procedure (see below, Formalities).

    • Floating charge. A company can grant a floating charge over any or all of its immovable property. A floating charge is governed by the Companies Ordinance (New Version) 1983 (the “Companies Ordinance”).

    A floating charge ranks lower in priority than a pledge.

    Movable property:

    • Pledge. Pledges are the most common form of security interest over movable property. Pledges are governed primarily by the Pledge Law 1967 (Pledge Law), which defines a pledge as a charge over an asset to secure repayment of a debt. A pledge entitles the lender to be repaid out of the proceeds of the sale of the pledged asset if the debt is not repaid.
    • Floating charge. Companies can grant a floating charge over all or part of their assets (see above, Immovable property: Floating charge).

    Formalities and impact:
    Perfection of a security interest implies making the security interest effective against third parties. Perfection, or any defect in perfection, does not affect the relationship between the debtor and the secured creditor. Pursuant to the Pledge Law, a security interest that is not duly perfected is not effective against the debtor's other creditors, except for creditors who knew or should have known about the creation of the security interest. In particular, a security interest that was not duly perfected has no force and effect, and will be deemed invalid by a liquidator or administrator in case of insolvency.

    The primary method of perfecting a security interest is by registration with the applicable registrar:

    • Pursuant to the Companies Ordinance, security interests over corporate assets are registered with the Registrar of Companies. Documents must be filed within 21 days of creation of the security interest. If filed within this period, the security interest is retroactively valid against third parties from the date it was initially created. This also applies to floating charges.
    • Security interests over assets of individuals, partnerships and companies incorporated outside of Israel may be registered with the Registrar of Pledges at any time following creation of the security interest, and are valid against third parties from the date of registration.

    Additional formalities may apply, depending on the type of asset and type of security. For example:

    • A mortgage over immovable property must be registered with the Land Registry.
    • A pledge or floating charge over an asset of a company, or over immovable property, must be evidenced by a written instrument.

    For tangible movable assets and for certain securities and commercial instruments, an alternative method of perfection is to physically deposit the assets with the secured creditor or a custodian on its behalf.

  2. What practical issues do secured creditors face in enforcing their security (e.g. timing issues, requirement for court involvement)?

    In general, a creditor seeking to exercise a pledge must first petition the appropriate judicial forum (execution office or court). However, certain types of creditors such as banks and institutional investors, may exercise pledges directly, without petitioning the court, under the circumstances specified in Article 258 of the Pledge Law.

    The procedure before the judicial forum takes time and requires granting the debtor the right to defend.

    In recovery proceedings, the court may delay the exercise of a fixed charge, if the property is critical for the recovery plan.

  3. What is the test for insolvency? Is there any obligation on directors or officers of the debtor to open insolvency procedures upon the debtor becoming distressed or insolvent? Are there any consequences for failure to do so?

    Article 258 of the Companies Ordinance provides as follows: “The court will deem a insolvent upon any of the following: (i) a creditor to whom the company owes an amount that exceeds NIS 5 at the time payment thereof falls due, delivers to the company, at its registered office, a notice signed by the creditor requesting payment of the debt, and during a period of three weeks following such notice, the company fails to pay the debt, does not furnish a guarantee and fails to reach an arrangement to the reasonable satisfaction of the creditor; (ii) an execution order or some other legal process issued pursuant to a court judgment or court order granted in favor of a creditor of a company, is not satisfied in whole or in part; or (iii) it has been proven, to the satisfaction of the court, after taking into account the company’s conditional and future liabilities, that the company is unable to pay its debts.

    There are no specific obligations imposed on directors or officers of the debtor to open insolvency procedures when the debtor becomes distressed or insolvent.

  4. What insolvency procedures are available in the jurisdiction? Does management continue to operate the business and / or is the debtor subject to supervision? What roles do the court and other stakeholders play? How long does the process usually take to complete?

    Insolvency procedures:
    The primary legal source regulating a company’s liquidation is the Companies Ordinance.

    Liquidation process under Israeli law involves receivership of the company’s assets, consolidation of its debt, and transfer of the company’s rights to the various eligible parties (generally, the company’s creditors, unless there are more assets than obligations, in which case the remaining assets are distributed among the shareholders), after which the company is liquidated and ceases to exist, unless an arrangement enabling the company to continue to exist is reached as part of the liquidation process.

    Alongside insolvency procedures, there are also alternate procedures relating to companies in financial distress, including debt arrangements, restructuring and recovery procedures (as set forth primarily in Articles 350 and 351 of the Companies Law, 1999 (the “Companies Law”)). The purpose of these procedures is to help the company recover and continue operating as a going concern (similarly to the procedures set forth in the US “Chapter 11”). These procedures can be used even when a company is not insolvent. Article 350 of the Companies Law provides that the company, a creditor, a shareholder or a liquidator of the company may file a motion requesting the court to convene a meeting of the creditors or shareholders in order to consider a proposal for a settlement or an arrangement. In order to facilitate the restructuring process, the court is authorized to issue a "stay of proceedings" order against the company’s creditors for a up to nine months, and appoint an officer of the court to continue running the company as a "going concern" during this period.

    In a case concerning IDB Holdings, the court ruled that when a company becomes insolvent, the creditors can force a debt arrangement scheme on the company, and consent of the board or shareholders of the company is not required. The court held that the creditors are entitled to choose the course of action (liquidation, reorganization, new investor, etc.) that will, in their opinion, maximize the amount that they can recover, except in special cases, where the court will not honor such decision.

    In a later case, concerning the Israel Postal Company, in which the creditors of a company that was on the verge of insolvency opened a reorganization process, the court also held that the farther the company was along the "insolvency axis", and the greater the scope of its insolvency, the more the court would be inclined to allow creditors to propose a debt arrangement scheme.

    Operating the business:
    When a company is in insolvency proceedings, the court appoints an administrator to manage the company. Although the administrator has the power to retain some of the old management team, this does not happen in most cases.

    Process duration:
    There is no fixed timetable for these procedures, since they depend on the amount of the company's assets, number of creditors, and the availability of the court. Appointing an administrator does not take long, but the length of the insolvency procedure from start to finish, varies from case to case.

  5. How do creditors and other stakeholders rank on an insolvency of a debtor? Do any stakeholders enjoy particular priority (e.g. employees, pension liabilities)? Could the claims of any class of creditor be subordinated (e.g. equitable subordination)?

    The priority among creditors and stakeholders upon insolvency of a company is as follows:

    • Liquidation and/or receivership costs. Liquidation and receivership costs are deducted first from the proceeds of the debtor's assets.
    • First-ranking tax charges. The tax authorities has, by statute, a first-ranking charge over certain assets, in order to secure the collection of certain tax debts, mainly with regard to real estate transactions.
    • Holders of Fixed charges. If there is more than one duly-perfected security interest over the same asset, they rank according to their date of registration or creation (see Question 1, Formalities).
    • Statutory preference creditors. The following creditors are prioritized by statute (Article 354 of the Companies Ordinance):

      employees, with respect to unpaid wages up to a certain amount; tax authorities, with respect to tax debts other than first-ranking tax charges (see above, First-ranking tax charges) that became due in the one-year period immediately prior to start of the insolvency proceedings; and landlords, with respect to certain rent payments, as well as other creditors that are prioritized by law. [NOTE: consider: “as well as other creditors that are prioritized by the Companies Ordinance” or “by the Companies Ordinance and other statutes” – as applicable]
    • Floating charge holders. If a floating charge crystallises and becomes a fixed charge before the start of the insolvency proceedings, the creditor is considered a fixed charge holder with respect to the assets caught by the floating charge, and is treated accordingly (see above, Fixed charge holders).
    • Unsecured creditors. All unsecured creditors rank equally. Any remaining funds are distributed pro rata according to their respective debts.
    • Shareholders. If a company is in debt to its shareholders, the court can, under certain circumstances, decide that the shareholder creditors rank last, after unsecured creditors. Absent such court decision, shareholders are considered unsecured creditors, unless they have a duly perfected security interest, in which case they are secured creditors.
  6. Can a debtor’s pre-insolvency transactions be challenged? If so, by whom, when and on what grounds? What is the effect of a successful challenge and how are the rights of third parties impacted?

    Any transaction carried out in the three months immediately prior to the liquidation order, which prefers one creditor over the others (Article 355, Companies Ordinance), can be challenged. So as not to undermine the company's ability to conduct its business in the period leading up to the liquidation order, these provisions apply only to transactions outside the company's ordinary course of business. Such transactions fall into two categories: (i) transactions that are exceptionally large in scope or significance; and (ii) transactions where the value of the services or assets received from the creditor is inconsistent with the consideration paid by the company.

  7. What restructuring and rescue procedures are available in the jurisdiction, what are the entry requirements and how is a restructuring plan approved and implemented? Does management continue to operate the business and/or is the debtor subject to supervision? What roles do the court and other stakeholders play?

    The common recovery procedures are the following: recovery by selling the company, restructuring the company’s debt, a combination of the two options mentioned above, recruiting an investor to invest in the company, and any other method decided by the court. An application must be submitted to the court with a basic recovery plan. When the court accepts the application, an administrator is appointed and he/she may work with the existing management team or replace it in whole or in part (see above, question 4).

  8. Can a debtor in restructuring proceedings obtain new financing and are any special priorities afforded to such financing (if available)?

    Pursuant to Article 350(L) of the Companies Law, the court has the authority to grant permission to the company to receive new credit even after insolvency proceedings have commenced, and to approve the collateral required collateral for this credit.

    Any new credit taken by the company is treated as an expense in the hands of the company. Unless the court decides differently, such credit debt receives priority over other debts.

  9. How are existing contracts treated in restructuring and insolvency processes? Are the parties obliged to continue to perform their obligations? Will termination, retention of title and set-off provisions in these contracts remain enforceable? Is there any an ability for either party to disclaim the contract?

    Article 350(H)(c) of the Companies Law stipulates that an existing contract can be continued even if it was breached, and cannot be terminated by the other party without the consent of the administrator or the court. Article 350(H)(d) of the Companies Law provides that the court will not allow such contract to continue, unless the company convinces the court that it will satisfy its obligations pursuant to the contract as of the date on which the court authorizes such continuation. Article 350(H)(b) of the Companies Law provides that a contract that includes a termination-in-case-of-insolvency provision will not terminate in case of insolvency, despite the contractual provision to this effect.

    Articles 360-361 of the Companies Ordinance stipulate that the liquidator may, subject to leave by the Court, disclaim onerous assets, including unprofitable contracts.

  10. What conditions apply to the sale of assets/the entire business in a restructuring or insolvency process? Does the purchaser acquire the assets “free and clear” of claims and liabilities? Can security be released without creditor consent? Is credit bidding permitted?

    There aren’t any specific provisions in the law regarding the method of sale. In most cases, the official in charge (receiver/administrator) will invite people to bid for the asset under conditions stipulated by such official.

    As compared to a purchase from a solvent company, when buying from an administrator, the buyer will generally be required to acknowledge that it is entering into the agreement without reliance on any warranties or representations.

    The purchase agreement is subject to the approval of the court, and creditor consent is not necessary. Any liens on the asset will transfer to the rights received for the sale of the asset.

    Credit bidding is permitted. It will be up to the administrator to decide whether a particular deal is in the best interest of the creditors and should therefore be carried out.

  11. What duties and liabilities should directors and officers be mindful of when managing a distressed debtor? What are the consequences of breach of duty?

    Under the Companies Law, and regardless of the company’s financial situation, officers (including directors) owe a duty of care and a fiduciary duty to the company, and not to shareholders or third parties, such as creditors. However, because of these duties, officers are permitted to also take into account the impact on shareholders and creditors. The law specifically stipulates that the duties toward the company do not limit an officer's duty of care toward "other persons", which may include employees, creditors, customers and the public, in accordance with the general torts principles.

    The fiduciary duty consists primarily of the duty to act in good faith and in only the best interest of the company. Consequently, an officer must:

    • Refrain from any action that creates a conflict of interest between performance of the officer's function in the company and the officer's personal interests;
    • Refrain from any activity that competes with the business of the company;
    • Refrain from exploiting a business opportunity of the company in order to obtain a benefit for himself or another person;
    • Disclose to the company any information that the officer received due to his position with the company.

    With respect to the duty of care, officers are required to exercise the level of skill that a "reasonable officer" in the same capacity and circumstances would exercise. As part of such duty, an officer must, after taking into account the circumstances of the case, take reasonable measures to obtain all required information related to the decision he is to take, including information regarding the credit risks of an action that is submitted to his approval.

    Consequences of breach of duty:
    Directors may, under certain circumstances, be held liable for breach of duty (see below, question 12).

  12. Is there any scope for other parties (e.g. director, partner, parent entity, lender) to incur liability for the debts of an insolvent debtor?

    There are several circumstances in which a third party can be held liable for the debts of an insolvent company.

    Piercing the corporate veil
    The general rule is that a company has a legal personality, separate from its shareholders. However, the court can pierce the corporate veil, in which case the company's debts are attributed directly to one or more of its shareholders, and creditors can collect directly from these shareholders rather than from the company. The court will pierce the corporate veil if the shareholders abused the company's separate legal personality. This might happen, for example, if the shareholders defrauded a person, unlawfully favored certain creditors over others, or acted such as to undermine the purposes of the company, while assuming unreasonable risks with respect to the company's ability to repay its debts (Article 6, Companies Law).

    If the company is being liquidated:

    • If officers of the company are shown to have managed the company with an intent to deceive (Article 373, Companies Ordinance), they can be held liable. There is no need to prove causation between the deceitful act and the company's liquidation.
    • If officers of the company unlawfully used the company's money or assets, the court can require them to return this money or assets together with interest fixed by the court, or pay compensation (Article 374, Companies Ordinance).

    Civil wrongs
    In case of a financially distressed company, personal liability may also be imposed on its officers pursuant to the civil wrong of negligence, based on the officer's fiduciary duty and duty of care. (Torts Ordinance (New Version) 1968).

    To file a tortious claim against a company officer, the plaintiff must prove that:

    • The officer owed a duty of care to the plaintiff (in addition to his duty of care toward the company);
    • This duty was breached;
    • The breach of this duty caused damage to the plaintiff (regardless of any damage caused to the company);
    • A reasonable person would have anticipated that the breach would cause the damage to accrue.

    If an executive or shareholder of the company acts fraudulently toward any of the company's creditors, he/she can be charged with fraud or deception and be liable in tort.

  13. Do restructuring or insolvency proceedings have the effect of releasing directors and other stakeholders from liability for previous actions and decisions?

    Neither restructuring nor insolvency proceedings release directors, executives or other stakeholders from liability.

  14. Will a local court recognise concurrent foreign restructuring or insolvency proceedings over a local debtor? What is the process and test for achieving such recognition?

    The court has no obligation to recognize insolvency proceedings conducted and approved abroad. However, in an attempt to harmonize between different jurisdictions and as a gesture of respect, the court may approve decisions entered by foreign jurisdictions.

  15. Can debtors incorporated elsewhere enter into restructuring or insolvency proceedings in the jurisdiction?

    Recovery and liquidation proceedings may be commenced for companies that have assets in Israel, even if they are not registered (organized) in Israel (Article 380, Companies Ordinance).

  16. How are groups of companies treated on the restructuring or insolvency of one of more members of that group? Is there scope for cooperation between office holders?

    When insolvency proceedings commence against a company, it is treated as an independent legal entity, and the other parts of a group are therefore not affected by the insolvency. However, if it is proven that the separation between the group companies was artificial and the companies were functioning as a single company, the court may pierce the corporate veil (see above, Piercing the corporate veil).

  17. Is it a debtor or creditor friendly jurisdiction?

    The Israeli legal system cannot be said to be friendlier to either creditors or debtors. That said, in insolvency proceedings, the courts assign much importance to the rights of employees and debenture holders from the public.

  18. Do sociopolitical factors give additional influence to certain stakeholders in restructurings or insolvencies in the jurisdiction (e.g. pressure around employees or pensions)? What role does the state play in relation to a distressed business (e.g. availability of state support)?

    As mentioned, in insolvencies, and especially in recovery and reorganization proceedings, the courts focus very much on limiting the adverse effect on employees. The courts are also granting increasing weight to protection of publicly-traded debentures, which are usually held by pension and mutual funds. The Companies Law includes special provisions with regard to the latter, prescribing an increased level of supervision with respect to debt restructuring of companies that have such debentures.

  19. What are the greatest barriers to efficient and effective restructurings and insolvencies in the jurisdiction? Are there any proposals for reform to counter any such barriers?

    The court has very broad discretion, and this creates uncertainty about the outcome of the process. There is an initiative to amend the insolvency legislation. Such amendment is also intended to create more certainty with regard to the point in time in which a company will be deemed insolvent, and with regard to the outcome of an insolvency process.