[BANKRUPTCY, INSOLVENCY & REHABILITATION PROCEEDINGS IN ISRAEL] 40
corporation facing insolvency. 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. The main procedures for corporations are Liquidation processes and Recovery procedures. 6. 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 strong secured creditors (i.e., banks and tax authorities). 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. To counter this to a degree, the Law prescribes, inter alia, that 25% of the assets pledged under a floating charge (to differentiate from a fixed charge 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 charge be reduced. The Law also reduces the preferential right given to the tax authorities when dividing up the debtor’s assets. Under the former law, the tax authority was entitled to be treated as a preferred creditor in respect of one tax year of its choice. The new Insolvency 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. 7. 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. 8. Raising new debt Section 65 of the new Insolvency Law provides the ability to raise new debt secured by existing pledged assets or using such assets in another manner, as required for the corporate operation or imposing obligations on certain essential suppliers and third parties to continue providing services, or to abstain from cancelling contracts due to the insolvency even if they are
contractually entitled to do so. Proceedings for corporations
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 condition 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. The court may choose to manage the corporate entity with a view to achieving its economic rehabilitation. In such a case, a stay of proceedings will 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 corporate assets. The Law creates a new mechanism of “protective negotiations”. 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
ILN Restructuring & Insolvency Group – Bankruptcy, Insolvency & Rehabilitation Series
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