The Insolvency and Economic Rehabilitation Law- 2018 is the primary legislation governing insolvency in Israel. The law came into effect in September 2019, which is relatively recent in legal terms. This legislation consolidates all aspects of insolvency and reflects a significant conceptual shift in the field: the main objective set by the Israeli legislator is no longer solely the maximization of debt repayment to creditors, but rather the economic rehabilitation of the insolvent company and its return to normal business activity where possible.
This article focuses on what happens when an Order for the Opening of Proceedings is issued, which serves as the starting point for most insolvency proceedings conducted in Israel. As detailed below, the Order for the Opening of Proceedings fundamentally changes the balance of rights and interests between the parties, shifting from a relationship based solely on contractual grounds to one influenced by the insolvency process, and particularly by the company’s rehabilitation proceedings.
We will first explain what an Order for the Opening of Proceedings is and then focus on two key issues that are essential to know to protect your rights: how to file a proof of debt and the fate of the contract you entered with the debtor company.
An Order for the Opening of Proceedings is the cornerstone of Israeli insolvency law, marking the official commencement of legal proceedings intended to resolve the financial situation of the debtor company.
Upon submission of an application for an Order for the Opening of Proceedings- whether initiated by the insolvent company or by its creditors- the court is empowered, if it deems appropriate, to order a “stay of proceedings,” a temporary moratorium that prevents creditors from taking independent action to collect their debts. At the end of this period, after a thorough examination of the company’s financial situation, the court will decide whether to continue its operations under rehabilitation proceedings or to order its liquidation.
Once an Order for the Opening of Proceedings is issued, the court will order a stay of proceedings and appoint a trustee for the company. The trustee steps into the shoes of the previous management and is granted the authority to operate the company and take legal and financial actions on its behalf. It is important to note that the trustee manages the corporation’s assets and resources, which are to be used for the repayment of the company’s debts. That’s right- even though you did not contract with the trustee, they are now responsible both for the repayment of your debt and for the continuation of your engagement with the company. Some of these powers are detailed below.
Whether the debtor company is headed for liquidation or rehabilitation, your “gateway” as a creditor or stakeholder to the insolvency process is the filing of a proof of debt. Only in exceptional cases will it be permitted to file a claim outside the centralized proceeding. Therefore, filing proof of debt is considered a necessary and mandatory step- a creditor who fails to do so (for example, assuming they can realize their rights through other channels, outside the insolvency process) may find themselves excluded from the proceedings and lose their rights. The Supreme Court addressed the options available to a creditor for realizing their rights in one of its leading decisions in the field:
“Once a liquidation order is issued, the company’s creditors are required to act to realize their rights and take the necessary steps within the timeframes set by law. At this point, creditors have the option to file a proof of debt with the liquidator-this is the rule; the option to apply to the liquidation court for permission to pursue a separate action before a competent court- this is the exception to the rule; or the option to waive the debt and refrain from filing a claim at all.”
(Supreme Court Civil Appeal 7033/20 Residents for Mevo Beitar Association v. Or Mevot Yerushalayim Ltd. (11.11.2020))
In accordance with these principles, in another case, the Supreme Court dismissed an appeal against a decision that rejected a creditor’s request- who had not filed a proof of debt- to recognize a monetary claim filed outside the insolvency process as proof of debt. The court emphasized that creditors bear a legal responsibility to realize their rights by filing proof of debt, and that ignoring this obligation may lead to the loss of their rights in the insolvency process:
“Clearly, the trustee is not required to ‘chase’ creditors to submit a proof of debt. When a creditor is aware of the existence of a creditors’ arrangement proceeding, they have the choice whether to submit proof of debt or not. […] The applicant, for her own reasons, did not follow the path set by the creditors’ arrangement and did not submit proof of debt. Therefore, the District Court was correct in rejecting her request for directions.”
(Supreme Court Civil Appeal 10999/08 Orthopedics Biro Ltd. v. Adv. Yunger as Trustee for Creditors’ Arrangement (16.4.2009)).
Note: If you believe the debtor company owes you a debt, it is recommended to seek legal advice from a qualified professional in Israel as soon as possible. Delay in filing a proof of debt, or failure to file, may result in the loss of your rights and prevent you from raising claims regarding the debt at a later stage.
With respect to proofs of debt, it is worth noting that this is a structured process: the appointed trustee is responsible for collecting and consolidating proofs of debt from all creditors, usually within a period of six months from the date the Order for the Opening of Proceedings is issued. After completing the assessment of the company’s assets, the trustee will examine each proof of debt on its merits and decide on it. Creditors whose proofs of debt are approved will receive their proportional share of the assets collected, according to their ranking in the order of priority set by law.
It is important to ensure in advance that your debt is secured. This can be done, for example, through pledges, bank guarantees, non-revocable promissory notes, or registration of other proprietary rights. This way, you can realize your rights through these securities. If you remain unsecure, you may find yourself at the bottom of the ladder and receive only a small portion (if any) of the debt owed to you.
The trustee’s role does not end with deciding on proofs of debt, and they are authorized to exercise their powers also in the context of the debtor company’s rehabilitation. A key power in this context is the decision whether a particular contract with a third party will continue or be terminated. In both cases, the trustee can decide this even compulsorily, including in contracts with foreign parties. In addition, the law allows for the assignment of obligations to a third-party external to your original relationship. The rationale behind granting these powers to the trustee is to enable effective rehabilitation of the company, even if this requires deviation from standard contract law principles. The possible scenarios are detailed below.
Contrary to classical contract law, the court may approve the assignment of obligations the company owes to you to another party. In other words: you may be compelled to engage with a party you never expected to be contractually bound to.
For example, if you serve as a supplier to the debtor company, and the court approves the company’s acquisition by another party for the purpose of its rehabilitation, with the continuation and assignment of your contract to the acquiring company, this decision will have binding legal effect.
It should be emphasized that the power to assign obligations to another party is conditional in your rights not being harmed. For instance, case law has established that in situations where there is a problematic relationship between you and the party to whom the rights are assigned, you may request an exception and release from the agreement accordingly.
If you find yourself in any of these situations, contact a lawyer who is well-versed in Israeli insolvency law as soon as possible. The lawyer will maintain ongoing contact with the trustee, whether for the purpose of filing proof of debt or reaching agreements regarding your engagement with the debtor company.
For example, a lawyer can ensure that even if you are compelled to continue or terminate your engagement with the debtor company, you will still realize your rights regarding damage caused to you due to breach or termination. In addition, you can ensure that you do not suffer further harm from the continued performance or termination of the contract.
Many contracts include a foreign jurisdiction clause, but when a foreign company enters insolvency proceedings in Israel, sometimes the Israeli court has jurisdiction to hear the relevant claims, even if the contract includes a different jurisdiction clause.
In other words, you may find yourself litigating against the insolvent company in Israeli insolvency proceedings, even though you previously agreed that disputes would be heard in a foreign forum.
Having represented hundreds of clients in Israel and abroad over decades, the main insight is that regardless of which firm you turn to, the “golden rule” when doing business with Israeli parties-especially in long-term agreements- is early legal planning. Consulting with a lawyer specializing in contract and insolvency law in Israel can make the difference between a total loss and a significant recovery.
Understanding the regulatory environment, proper contract drafting, using appropriate protective tools, and familiarity with the “rules of the game”- all these can change the picture in the event your Israeli partner enters insolvency proceedings.
The Israeli process does indeed grant significant powers to the trustee and the court, but it also opens the door to opportunities. Those who understand the legal dynamics can act proactively and turn insolvency into a business lever- not a downfall.
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Advs. Ehud Arzi and Ran Feldman are partners in the firm’s Insolvency and Reconstruction practice. Adv. Dor Mana is an associate in the practice. You are welcome to contact them with questions regarding Incolvency proceedings in Israel.
