Israel. Zellermayer, Pelossof & Co

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1 Israel Ofer Shapira, Partner The Israeli legislation on insolvent companies is principally set out in: Zellermayer, Pelossof & Co the Companies Ordinance (New Version) 1983; the Bankruptcy Ordinance 1980; the Companies Law 1999; and Tzur Fenigstein certain regulations introduced on the basis of these laws. PricewaterhouseCoopers Official English translations of this legislation are available. However, the vast majority of insolvency-related matters have been established by case law and court precedent. Israeli law recognises three main ways of dealing with insolvent companies: a voluntary arrangement between the debtor and its creditors; liquidation; and receivership. According to established practice, a voluntary arrangement is designed to rescue the debtor company, while liquidation and receivership are intended to secure the best price from realisation of company assets for the repayment of creditors. The law stipulates that in order to facilitate the conclusion of an arrangement between the debtor and its creditors, the court may stay proceedings against the debtor for a certain period of time and appoint a trustee to supervise the debtor' business. The trustee will act on the instruction of the court. The trustee is usually appointed on the nomination of the debtor. This often serves as a defence for the debtor against its creditors while pursuing a voluntary arrangement. Liquidation and receivership are usually initiated by the creditors. In some cases, however, the boundaries blur between the three insolvency proceedings. The Israeli courts tend to view optimal debt repayment as the main objective of insolvency proceedings. Accordingly, the courts treat all three approaches as essentially designed to protect the interests of creditors, giving them priority over the interests of the debtor or any third parties such as employees, suppliers or customers. A stay of proceedings and a scheme of arrangement between an insolvent company and its creditors will therefore be allowed only if this course of action can reasonably be expected to favour the creditors. On the other hand, if The European Restructuring and Insolvency Guide 2005/2006 1

2 Israel Zellermayer, Pelossof & Co and PricewaterhouseCoopers the creditors would collect more from the company as a going concern, the courts will not hesitate to order that the company be operated as a going concern within the framework of liquidation or receivership proceedings. All three of the insolvency procedures constitute collective proceedings that are conducted under court supervision and guidance, with particular attention to the priorities established by law, including the principle of equality between creditors of any given class. The lack of a comprehensive regulatory framework for the recovery of insolvent companies constitutes a major disadvantage, resulting in uncertainty for the various parties involved. In some cases, however, the absence of legislation turns out to be an advantage, as it allows the courts to apply their own judgement and structure arrangements tailored to the specific circumstances and to market conditions. 1 The legal framework and the effectiveness of court processes/ legal remedies 1.1 Describe the nature and the effectiveness of the following: (a) Debt recovery remedies where the creditor has no security An unsecured creditor of an insolvent company has various legal options available in order to recover a debt, including the following: Where available, a creditor can implement contractual remedies such as provisions on residual ownership, set-off and so on. These are simple, cheap and highly effective measures for recovering a debt. A creditor holding a bill (eg, a cheque) can collect the debt directly through the Execution Office by way of a procedure between the creditor and the debtor. The main advantage of this method is that the creditor acts independently of the other creditors, which may not yet have commenced proceedings against the debtor. However, disadvantages arise where a significant number of creditors are seeking to recover from the debtor through the Executive Office. In such case liquidation proceedings are preferable for both the debtor and its creditors - not least because the district courts, which have jurisdiction over liquidations, have extensive experience in such matters and better legal tools are available for applying collective proceedings against the debtor. A creditor can file an ordinary suit with the competent court, whose ruling will be enforced by the Execution Office. In the event of an undisputed debt, a creditor can file a petition for liquidation of the debtor. This launches a collective procedure that applies to all creditors, which will be bound by the procedure and repaid according to priorities established by law. The main disadvantage of this approach is that an insolvent company will not be in a position to meet all of its obligations towards its unsecured creditors; it is thus clear that the petitioner will recover only part of the debt. (b) The enforcement of security A secured creditor seeking to recover a debt from an insolvent company may apply all of the above measures available to unsecured creditors. It may also realise the security in one of the following ways: If the security is a pledge over a right, the creditor can realise the right in the same manner as the debtor could. The creditor can do so even if the period for realisation of the right precedes the maturity of the secured debt, unless the pledge agreement provides otherwise. The creditor can realise the security through the Execution Office in a proceeding between the creditor and the debtor. This is an effective, uncomplicated approach that enables the official in charge to concentrate on the realisation of the 2 The European Restructuring and Insolvency Guide 2005/2006

3 Zellermayer, Pelossof & Co and PricewaterhouseCoopers Israel security without being distracted by matters related to the operation of the debtor. The creditor can realise the security through the court by filing a petition for realisation of the security (an option available under law, but rarely exercised). If the security is a floating charge, it can be realised by filing a petition with the district court with jurisdiction over the debtor. In such case the court will appoint a receiver for the assets that are subject to the floating charge, who will handle the realisation of such assets. A receiver that is appointed for all of the debtor s assets will usually replace the debtor s management and most powers of the company organs will be transferred to the receiver. In the event of a charge on a movable, tangible asset or securities deposited with a creditor that is a bank, realisation can be carried out directly by the bank (this approach, which imposes special responsibility on the creditor bank, is rarely used). (c) Corporate bankruptcy/ liquidation processes An unsecured creditor can initiate liquidation proceedings against a debtor in order to realise its assets, recovering jointly with other creditors of the same class. The law allows any creditor to approach the court with a petition for a stay of proceedings as a preliminary measure, prior to the conclusion of an arrangement between the debtor and its creditors. In practice, however, creditors do not pursue this option without the debtor s cooperation. Like an unsecured creditor, a secured creditor can initiate liquidation proceedings against the debtor; a secured creditor with a floating charge over the entire assets and property of the debtor can also initiate receivership proceedings against the debtor. This procedure involves the realisation of all assets included under the floating charge and distribution of the proceeds among the creditors according to the priorities established by law. Receivership is considered a friendly and efficient approach for secured creditors. Unsurprisingly, it is the preferred approach for protecting the rights of creditor banks with floating charges against outstanding credit. (d) Formal corporate rescue processes Section 350 of the Companies Act provides that where an arrangement is proposed between the debtor and its creditors or shareholders, or between the debtor and a given class of creditors or shareholders, the court may order that a meeting be held with such creditors or shareholders in a manner determined by the court. The proposal must be approved by a majority of participants at the meeting with voting rights, representing at least 75 per cent of the value represented at the meeting. If the proposal is adopted, the draft arrangement will be submitted to the court for approval. Thereafter, the arrangement becomes binding on the debtor and all creditors or shareholders or any class thereof, as the case may be. The draft arrangement is usually companied by a petition to the court for a stay of proceedings (if this has not already been granted). If the court is satisfied that a stay of proceedings would help facilitate the preparation or approval of a recovery plan, it may issue an order staying all proceedings against the debtor for a period of up to nine months. (In practice, however, the courts have ordered stays of over nine months). Israeli case law shows that under certain circumstances, the court may order a stay even in the absence of a specific draft arrangement, in order to allow for the formulation of such an arrangement. Voluntary arrangement and stay of proceedings constitute an efficient means of protecting the debtor and continuing its business. In practice, it is the debtor itself, rather than its creditors, that initiates such proceedings. In the past, use was made of so-called operational liquidation a creation of case law whereby the legal instruments intended for liquidation were utilised to put the debtor on the road to recovery, under court supervision. The European Restructuring and Insolvency Guide 2005/2006 3

4 Israel Zellermayer, Pelossof & Co and PricewaterhouseCoopers (e) Informal corporate rescue processes The legal provisions on insolvent companies do not prevent a debtor from settling some of its debts through bilateral agreements with certain creditors, provided this does not give those creditors preferential treatment. Such agreements are not subject to court approval; they involve no collective obligations and cannot prevent a creditor that has been left out of the agreement from instituting liquidation proceedings. An out-of-court agreement is usually suitable for debtors with only a limited number of creditors, where a settlement would permit the continued existence of the company as a going concern without any need to resolve matters with other creditors. 1.2 What are the formal processes to effect a liquidation of the company s assets? the debtor s business. A temporary liquidator is only rarely allowed to dispose of company assets, unless this is necessitated by the nature of the assets. Once the liquidation petition is filed, the court will set a date for hearing the case, following which the court will decide whether to issue a liquidation order. At least 14 days prior to the scheduled hearing, the petitioner must publish notice of the hearing in a daily newspaper and in the Official Gazette. Anyone that notifies the petitioner at least seven days in advance of the hearing of its intention to participate may join the hearing. A party that intends to oppose the liquidation must file an opposition, accompanied by an affidavit, at least seven days in advance of the hearing. The court has discretion to decide whether to accept the liquidation petition. In reaching its decision, it will consider, among other things, whether: A company can be liquidated in one of the following ways: liquidation by the court; voluntary liquidation; or liquidation under court supervision. the company disputes in good faith the existence of the debt; the creditor has an interest in the liquidation; other creditors oppose the liquidation; and the company has already started voluntary winding-up proceedings. A creditor seeking to recover its claim through liquidation will proceed according to the legal provisions on liquidation by the court. This is the method most commonly used to liquidate insolvent companies in Israel. It begins with the filing of a liquidation petition with the district court with jurisdiction over the debtor s registered office or main place of business. The petition may be filed by the debtor, a shareholder or a creditor. In some cases notably, where there is risk of the illegal disposal of company assets before the liquidation order is issued - the petitioner will also request the appointment of a temporary liquidator, in order to preserve the status quo and prevent damage to the petitioner pending the issue of the liquidation order. The duties of the temporary liquidator may include the continued operation of The court is also entitled to take account of public considerations such as the number of company employees. 1.3 What is the effect on debt collection and the enforcement of security of: (a) An adjudication of corporate bankruptcy/liquidation? A liquidation order triggers a collective process for the repayment of debts due to all creditors by way of liquidation. The law stipulates that the issue of a liquidation order or the appointment of a temporary liquidator precludes any further proceedings against the debtor, except with the permission of, and on instruction by, the court. As a rule, the liquidator will dispose of all of the debtor s assets according to court 4 The European Restructuring and Insolvency Guide 2005/2006

5 Zellermayer, Pelossof & Co and PricewaterhouseCoopers Israel instructions and will distribute the proceeds among the creditors according to the priorities established by law. An unsecured creditor that has instituted legal proceedings against the debtor - and even a creditor that has begun execution proceedings against the debtor - is prevented from continuing them. These proceedings will be stayed and the creditor must sue within the framework of liquidation proceedings, except in extraordinary cases established in case law. As a rule, the court will allow a secured creditor to institute or continue proceedings for the realisation of security, unless the creditor has been guaranteed adequate protection of its rights. The liquidator may take possession of encumbered assets against payment of their value to the secured creditor. Identical rules on the priority of claims apply in liquidation proceedings as apply in other insolvency proceedings, such as receivership for the realisation of a floating charge on all of the debtor s assets. However, Israeli law does not provide for a stay of proceedings in the event of the issue of a receivership order; therefore, a receivership order causes no automatic stay or cessation of proceedings against the debtor. (b) The commencement of a formal corporate rescue process? A proposal for an arrangement between the debtor and its creditors does not lead to an automatic stay of proceedings, unless a petition is submitted for a stay of proceedings in order to facilitate recovery. Once the court has ordered a stay of proceedings against the debtor, proceedings against the debtor may not be opened or continued, except with court approval and subject to court instruction. Even after a stay of proceedings has been granted, the court may authorise a secured creditor to realise its security - including the realisation of a floating charge on company assets - where the court is satisfied that the creditor has not been guaranteed adequate protection from the encumbered assets or that nothing in the exercise of the security will impair the prospects of corporate recovery. (c) The initiation of an informal corporate rescue process? A specific arrangement between a debtor and certain creditor has no binding effect on third parties that are not party to the agreement; nor does such arrangement affect the rights of other creditors to recover from the debtor in the various ways provided for by law. 1.4 Are insolvency procedures started in another jurisdiction in respect of a corporation incorporated in your jurisdiction recognised? According to Israeli law, the Israeli courts have jurisdiction over cases involving the insolvency of an Israeli company operating and located in the state of Israel. The recognition of insolvency proceedings instituted in another country - including proceedings under Chapter 11 of the US Bankruptcy Code - is subject to the provisions of private international law as applied in Israel, and the Israeli courts can recognise foreign proceedings concerning a company incorporated in Israel with regard to its assets located within that foreign jurisdiction, or in cases where the rulings of the foreign court do not contradict Israeli insolvency law. The Israeli courts consider themselves bound to protect the domestic provisions on priority and the interests of Israeli creditors - even with regard to companies incorporated outside Israel, and especially where the foreign company has assets in Israel and/or is also registered in Israel. In such cases the Israeli court may recognise a secondary liquidation proceeding applicable to assets located in Israel and with regard to Israeli creditors of the foreign company, despite any stay of proceedings ordered by the foreign court. The European Restructuring and Insolvency Guide 2005/2006 5

6 Israel Zellermayer, Pelossof & Co and PricewaterhouseCoopers 1.5 In what circumstances would the directors or officers of a company in financial difficulties face potential personal liability for continuing to trade? The rule on the separate legal status of a company with regard to its shareholders and officers also applies where the company enters into liquidation. The courts usually avoid piercing the corporate veil and/or imposing personal liability on officers in connection with the company s business: under the business judgement rule, a court will not retroactively judge the correctness of decisions made by company officers as long as they applied reasonable judgement at the time. However, in case of insolvency, a number of causes of action are available where company officers are found to have failed to exercise their duties properly. According to Section 373 of the Companies Ordinance, if it becomes evident during liquidation that the company s business was managed in a manner intended to deceive its own or other creditors, or for any fraudulent purpose, the court may, at the request of the official receiver, the liquidator, a creditor or a shareholder, order that any director who knowingly participated in the management of the business bear unlimited personal liability for all or part of the company s debts, as instructed by the court. The court may also impose criminal sanctions on that director, and even disqualify him from serving as company director or being directly or indirectly involved in the management of a company without court permission. For such purposes, the term director also covers a person who has not served as a formal director, if in practice the directors acted on that person s instructions or guidelines. According to Section 374 of the Companies Ordinance, if it becomes clear in the course of liquidation that an officer made improper use of money or assets of the company, or committed an improper or illegal act in a negotiation related to the company, the court may, among other things, investigate the behaviour of that officer and order him to return the money or asset, in full or in part, or to compensate the company for his actions. Sections 375 to 378 of the Companies Ordinance allow for the imposition of criminal liability for certain acts committed by a company officer, such as: forging documents for fraudulent purposes; inducing third parties to extend credit to the company on fraudulent grounds or through any other deception; gifting, transferring or charging a company asset in order to deceive creditors; concealing company assets before or after a court ruling ordering payment of a debt; and obtaining an asset on credit by falsely claiming that business is continuing as usual. These specific causes of action do not prejudice the liquidator s power to sue an officer on the company s behalf on the basis of general causes of action admissible under law, such as breach of fiduciary duties and/or breach of the duty of care owed to the company. 2 What are the advantages and disadvantages of triggering a formal procedure? A creditor that institutes liquidation proceedings is not entitled to preferential treatment over other creditors in the proceedings, because: an established order of priority applies for distribution of the proceeds from the sale of the debtor s assets; and a fundamental principle governing the proceedings is equality between creditors of the same class. From the perspective of unsecured creditors, one advantage of liquidation is the possibility to impose personal liability on company officers in certain circumstances established by law. As unsecured creditors are last on the list of dividend 6 The European Restructuring and Insolvency Guide 2005/2006

7 Zellermayer, Pelossof & Co and PricewaterhouseCoopers Israel recipients upon liquidation, they usually suffer as a result. From the perspective of corporate management, liquidation is a means of terminating the company s business in an orderly manner, while protecting the directors from liability for fraudulent management. However, if the management is convinced that it can keep the business going in spite of the company s financial difficulties, it will prefer to approach the court with a petition for a stay of proceedings and seek to conclude an arrangement with the creditors. If the court accepts the petition for a stay of proceedings or for the appointment of a trustee to facilitate the conclusion of an arrangement, it will also tend to accept the company s nomination of trustee. A secured creditor that institutes proceedings for the enforcement of a debenture through the appointment of a receiver may gain a technical advantage by triggering the formal receivership procedure, in that the receiver is appointed on its nomination. In the case of enforcement of a floating charge on all of the company s assets, the receivership order places all of the company s assets under the control of the receiver a procedure that usually remains in effect even if the company has entered into liquidation proceedings. In case of liquidation and receivership, the incumbent management loses control of the debtor s assets and business. These powers are assumed by an officer of the court, who will conduct the business in favour of the creditors according to court instructions, preventing any concealment of assets. According to Israeli law, where a formal liquidation order is issued, the debtor s employees can approach the National Insurance Institution and obtain amounts due to them as a result of termination of their employment. However, this benefit is not available in case of an order for the stay of proceedings and/or receivership. This is why a considerable number of liquidation petitions are filed by employees. 3 What are the practical options for out-ofcourt restructuring? Israeli law contains no specific provisions on outof-court agreements. Where a debtor concludes an agreement with its creditors, this will be subject to the provisions of general law. An agreement reached outside the framework outlined in Section 350 of the Company Act is binding on the contracting parties in accordance with contract law, but has no binding effect on third parties not covered by the agreement. One main disadvantage of an out-of-court agreement is that its provisions cannot be enforced on an opposing minority. However, where there are few material creditors, an out-of-court agreement is a cheap and effective alternative that can also help to preserve the goodwill of the debtor because of the lack of publicity surrounding such agreements. 4 What is the effect on the management of a company of: (a) An adjudication of corporate bankruptcy/liquidation? Where a liquidation order is issued and a liquidator is appointed, the debtor s management loses its powers, including powers of agency. Before the order becomes absolute, the management still has the power to institute legal proceedings seeking cancellation of the liquidator s appointment (temporary or permanent, as the case may be), and to initiate proceedings on behalf of the company in order to appeal against the liquidation order. There is no legislation on the effect on management of a receivership order. However, the Israeli courts have ruled that in case of a receivership order over all of a company s assets as part of the realisation of a floating charge, the management s powers are suspended and transferred to the receiver, who exercises them under court supervision. The suspension of managers from office does not release them from duties such as the obligation to sign the financial statements until the The European Restructuring and Insolvency Guide 2005/2006 7

8 Israel Zellermayer, Pelossof & Co and PricewaterhouseCoopers receiver has been appointed, or fiduciary duties towards the company. Moreover, case law stipulates that upon his appointment, an operating receiver takes the place of all company organs. Upon the termination or expiry of his appointment, the powers of management revert to the company managers (unless a liquidator is appointed). (b) The commencement of a formal corporate rescue process? Arrangement proceedings pursuant to Section 350 of the Company Act do not automatically impair the powers or status of the debtor s management, and are thus regarded as friendly to the incumbent management. Israeli law contains no provisions on the powers of management in the course of arrangement proceedings: this is left to the discretion of the court. The appointment of a trustee restricts the powers of the current management as set forth in the relevant court order. In the past, recovery arrangements have also been concluded within the framework of temporary or permanent liquidation. Such cases are subject to the usual rules on temporary or permanent liquidation with regards to the powers and status of management. (c ) The initiation of an informal corporate rescue process? As Israeli law contains no provisions on out-ofcourt arrangements, these are subject to the general law. There are no direct legal provisions that alter the powers or status of managers in connection with an out-of-court arrangement. In any event, the creditors are entitled to seek changes to management as part of a scheme of arrangement. 5 Parties in interest/key players 5.1 Who is responsible for the case management control and administration of: (a) A corporate bankruptcy/ liquidation? In case of temporary liquidation (before a liquidation order is granted), it is the applicant (ie, a creditor, the shareholders or the debtor) that takes the decision to begin formal insolvency proceedings and selects the officer of the court. Once the liquidation order is granted, the official receiver is automatically appointed as temporary liquidator. The official receiver will usually request the appointment of a special manager who will work together with the official receiver and assist him with the liquidation proceedings. The special manager is generally the individual formerly appointed as the temporary liquidator. Once the liquidation order has been granted, the official receiver will convene meetings of the creditors and shareholders in order to nominate the (permanent) liquidator. The liquidator will then be appointed by the court, usually according to the decision of the majority of the creditors and on the recommendation of the official receiver. In receivership, it is a creditor that usually takes the decision to begin formal insolvency proceedings and selects the officer of the court, sometimes with the consent and cooperation of the debtor. In a voluntary arrangement between the debtor and its creditors, it is usually the debtor that takes the decision to begin formal insolvency proceedings and selects the officer of the court, generally with the prior consent of the secured creditors. Where the chances of a liquidation or receivership motion are good, the debt is undisputed and there is a risk of illegal disposal of company assets, the court will usually appoint a temporary liquidator/receiver. In all procedures, the appointee usually has executive control over the business, unless the court orders otherwise. 8 The European Restructuring and Insolvency Guide 2005/2006

9 Zellermayer, Pelossof & Co and PricewaterhouseCoopers Israel (b) A formal rescue? The debtor itself usually takes the decision to begin formal rescue proceedings according to Section 350 of the Companies Act and selects the officer of the court. However, the court has discretion to accept or reject the debtor s nomination. (c) An informal rescue? An out-of-court agreement is usually initiated by the debtor in order to settle some of its debts through bilateral agreements with certain creditors - provided this does not give those creditors preferential treatment. Such agreements are not subject to court approval. As part of an informal arrangement, secured creditors will often demand the appointment of an examiner (usually an accountant) to monitor the debtor s compliance with the terms of the agreement. 5.2 Who is responsible for preparing the restructuring plan in a formal or informal rescue? Responsibility for preparing a restructuring plan in a formal rescue rests with the appointed trustee, who will usually prepare the plan in cooperation with the debtor. In an out-of-court agreement, the debtor will prepare the restructuring plan. 5.3 Who are the key players? What are their roles and responsibilities? In general, only lawyers or accountants can be appointed as receivers or liquidators. However, the court may exceptionally appoint an individual with different skills where it considers this necessary and the official receiver recommends such an appointment. Any experienced person can be appointed as a special manager. The main responsibility of the officer of the court is to act in the best interests of all creditors and maximise the realisation of the debtor s assets. 6 What financial information is available to creditors? In general, each company in Israel must prepare annual financial statements and attach these to the company reports submitted to the tax authorities. The financial statements are prepared according to Israeli Generally Accepted Accounting Principles (GAAP), which are based on international GAAP. Publicly traded companies are also required to issue more comprehensive financial statements, still based on Israel GAAP but containing additional information. A new regulation in the pipeline will require such companies to provide enhanced reporting of their business prospects (similar to what is required in the United States). A couple of agencies also provide financial stability evaluation services, and there are two rating companies that work in affiliation with Standard & Poor s and Moody s. In addition, banks can - and in many cases do - require that the companies they lend to provide additional financial data, budgets and business plans. Secured creditors play a key role in most proceedings. Receivership is initiated by the secured creditors and their nomination of receiver is usually accepted. The secured creditors will also be heard before any substantial direction of the court during the receivership proceedings. Secured creditors and other major creditors will also have a significant role in voluntary arrangements and in liquidation proceedings. The European Restructuring and Insolvency Guide 2005/2006 9

10 Israel Zellermayer, Pelossof & Co and PricewaterhouseCoopers 7 Common questions 7.2 Ranking of creditors 7.1 Funding and the priority given to new money In what order are creditors paid in a corporate bankruptcy/liquidation? (a) If an insolvent corporation requires urgent working capital funding, what difficulties are likely to be encountered in the provision of such funding? (b) Are lenders providing new money, or debtor-in-possession financing, given any statutory priority? The law affords no automatic priority to anyone that provides working capital to an insolvent company. Moreover, according to law, anyone that provides unsecured credit to a company cannot recover from the company ahead of other creditors of the same rank, since this may be construed as preferential treatment. The main ways of granting priority to a person that provides credit are as follows: If the funding is to be used to acquire a certain asset or to finance a certain project, the asset or project can be encumbered up to its full value or up to the amount of credit granted for the acquisition, whichever is smaller. In the course of insolvency proceedings liquidation, receivership or scheme of arrangement the insolvency practitioner (liquidator, receiver or trustee) can petition the court for leave to obtain new credit and to categorise the new credit as a liquidation or receivership expense, thus establishing priority for its repayment. According to case law, establishing priority over the rights of a secured creditor is subject to the express consent of that creditor, unless the priority stems from a legally acceptable arrangement. The claims of a company in liquidation or receivership will be satisfied as follows: certain taxes relating to land disposed of within the framework of the liquidation or receivership, under Section 11A(1) of the Tax Ordinance (Collection); claims of a contractor holding a lien on an asset where the contractor has carried out repair or renovation works, up to the amount of the payment for the last repair or renovation; claims of secured creditors holding a fixed charge, up to the amount of the security (payment to such creditors will be preceded by payment of the expenses incurred in disposing of the secured asset or the secured creditor s share in the expenses incurred in its favour); expenses of the liquidation or receivership (including the liquidator or receiver s fee); claims of priority creditors (wages up to a certain limit; income tax deductions for wages; municipal taxes due in the year preceding the liquidation; certain state taxes; rent for up to one year before the liquidation date); claims of creditors holding a floating charge, up to the value of the assets included in the floating charge; and claims of unsecured creditors. Under the equality principle, creditors in a given class will be repaid pari passu in proportion to the value of their respective claims. 10 The European Restructuring and Insolvency Guide 2005/2006

11 Zellermayer, Pelossof & Co and PricewaterhouseCoopers Israel 7.3 Avoidance of antecedent transactions Are there any legal provisions that might operate to invalidate the creation of security, the disposal of an asset or the payment of a creditor by a company in financial difficulties? Prior to liquidation: Israeli company law provides that certain transactions concluded prior to the commencement of liquidation may be cancelled where the following conditions are satisfied: The company has entered into liquidation; The relevant transaction was effected in the three months preceding the date of filing for liquidation; At the time, the company was not in a position to repay its debts; and The transaction was effected in order to grant priority to a given creditor or was entered into through illegal constraint. The establishment of a charge in favour of a creditor close to the liquidation date, outside the ordinary course of business and without any countervalue, will likewise be regarded as illegal preference. According to Section 359 of the Companies Ordinance, a floating charge made in the six months prior to the date of filing for liquidation will be valid only with regard to the sum paid in cash to the company at the time of creation of the charge or thereafter (plus interest), unless it can be proved that the company was solvent immediately after the creation of the charge. The law stipulates further that general assignments of rights established by the company prior to the commencement of liquidation proceedings will be cancelled, subject to certain conditions. Under certain conditions, the court can further direct and allow the liquidator or receiver to dispose of an aggravating asset or transaction if it is disadvantageous to the company and there is no other way of minimising the financial damage to the company and its creditors. During liquidation: According to Section 268 of the Companies Ordinance, any transaction effected using company assets after a liquidation petition has been filed (if a liquidation order is eventually issued) is void, unless the court directs otherwise. 7.4 Cram-downs What is the position of both unsecured and secured creditors who vote against, do not agree with or do not consent to either a formal or informal rescue plan? As there are no legislative provisions on out-ofcourt agreements, these are subject to general law. As a rule, there is no way to compel a creditor to accept an out-of-court agreement. However, given the inferior status of unsecured creditors in liquidation proceedings, in certain circumstances they be persuaded to accept an out-of-court agreement rather than resort to liquidation. According to the law, the court will approve an arrangement between the debtor and its creditors if the arrangement is approved by each meeting of the creditors and shareholders, by a majority of participants representing 75 per cent of the value represented in the vote at each meeting. Section 350 of the Companies Act, which sets out the procedure for creditor arrangements, contains no cram-down provision. As a result, the court is left with broad discretion to decide whether to accept a proposed arrangement in spite of opposition or disagreement on the part of certain creditors. 7.5 Creditor protection What actions can creditors take if they are not satisfied with the conduct of either a formal rescue procedure or a corporate bankruptcy/liquidation? The most natural way for a creditor to voice its opinion on an arrangement is to express its view at a meeting of creditors of the same class and attempt to join forces with other creditors that share its The European Restructuring and Insolvency Guide 2005/

12 Israel Zellermayer, Pelossof & Co and PricewaterhouseCoopers view. An objecting creditor can also express its opposition to the arrangement in court as part of the proceedings conducted pursuant to Section 350 of the Companies Law. A creditor seeking to express dissatisfaction with the conduct of a liquidator, receiver or trustee may, under certain conditions, approach the competent court and request it to issue instructions to the insolvency practitioner. Under certain circumstances, creditors may also decide in the course of liquidation proceedings to set up an audit committee that will function alongside the liquidator and supervise his work, with reference to the powers and duties established by law for this committee. 12 The European Restructuring and Insolvency Guide 2005/2006

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