New Amendment to the Israeli Insolvency Law – grant of the option for a stay of proceedings against a corporation for the purpose of approving a debt arrangement without the appointment of an external officeholder to replace the company’s management

Dear Clients and Friends, 

On 4 March 2021, an amendment to the Israeli Insolvency and Rehabilitation Law (Amendment number 4 – Temporary Provisions – the New Coronavirus) 2021  (“Temporary Provisions”) was published. This Temporary Provisions will become effective on 18 March 2021.

The Temporary Provisions provides a special route for corporations and individuals to apply to the court for a stay of proceedings against them for a period of up to three months (with the possibility of an additional one month extension), for the purposes of approving a scheme of arrangement with their creditors (“Debt Arrangement”).  This is without the appointment of an external officeholder to replace the current management of the company.

This new route provides a number of benefits to corporations (and individuals) finding themselves in financial difficulties, giving them the “breathing space”, to put in place a Debt Arrangement. At the same time, this Temporary Provisions presents challenges for creditors- financial institutions and service providers to these corporations.

This Temporary Provisions will remain in effect for one year with the possibility of it being extended for two additional periods of up to a further six months each time (“Effective Period”).

The main provisions in the Temporary Provisions relating to the stay of proceedings against corporations are broadly as follows:

• A corporation may apply to the court, during the Effective Period, for an application for a stay of proceedings for the purposes of arranging and approving a Debt Arrangement, for a period of up to three months. The court may extend the stay period by an additional period of up to an additional month.

• The application should include, amongst other things, a detailed business plan describing the way the corporation will operate during the stay period (including expected income and expenses, business planning and the actions necessary to operate the corporation), a preliminary outline of the Debt Arrangement and details of the means for financing the expenses and operations of the corporation.

• The stay of proceedings is not conditional on the corporation’s financial difficulties arising from the COVID-19 epidemic, but the corporation must attach to the application for the stay of proceedings, its audited financial statements for the year 2019 (if any). The financial reports are intended to show the state of the corporation prior to the corona outbreak and the court will give weight to this in its decision.

• The court will order a stay of proceedings if it finds that it is necessary for the putting into place of the Debt Arrangement, that there is no risk that the continued operation of the corporation will harm creditors and that there are means to finance the operations of the corporation until the Debt Arrangement is approved.

• Upon approval of the stay of proceedings application: (a) the corporation may not repay any of its debts from the assets of the corporation, (b) all legal proceedings, foreclosure proceedings and collection proceedings against the corporation will be stayed, including any enforcement of pledged assets of the corporation (subject to adequate protection), (c) the corporation may not dispose of any of its assets, sell them or change their condition except as part of its ordinary course of business or other than with the authorization of the court.

• During the stay period, the powers of the corporation’s organisations will remain in place, without the replacement of the management with an external officeholder. 

• In exceptional circumstances, the court is also authorised to stay proceedings against third parties, such as controlling shareholders and officers of a corporation. 

• Upon the issuance of the stay of proceedings order, a Debt Arrangement manager (“Manager”) will be appointed to the corporation, whose role is to ensure the proper management of the process, the preservation of the corporation’s assets and assist in formulating the Debt Arrangement. The main powers of the Manager are control and supervision powers, as follows:
  1. The Manager will, generally, participate in all meetings of the board of directors of the corporation and its committees and is entitled to receive all information that a member of the board of directors is entitled to receive.
  2. The corporation must provide the Manager with prior information about all actions or transactions that require the approval of the court, and attach the position of the manager to the application to the court.
  3. The corporation must report to the Manager on a monthly basis on the expenses and income incurred and/or received in that month and on the expenses and income that are expected to be incurred and/or received in the following month.
  4. The corporation must report to the Manager on an ongoing basis on its activities in accordance with the operating plan and on any material change or deviation from it.
  5. The Manager has the authority to apply in a report to the court and the stakeholders in the event that he believes that the corporation intends to take action that harms the corporation or the stakeholders in the Debt Arrangement or in the event that one of the conditions for issuing a stay of proceedings has ceased to exist.

• During the stay of proceedings period, the corporation will continue to operate by way of the normal course of business only, so as to allow its continued existence as an active business until a Debt Arrangement is formulated, and in accordance with the operating plan approved by the court. The corporation is not allowed to carry out exceptional transactions or transactions that require special approvals or to distribute a dividend – without the approval of the court.

• In order to allow the corporation to continue operating during the stay period, the law gives the corporation the option, subject to certain conditions, to enforce against third parties the continued existence of contracts entered into with the corporation, even if such contracts were breached by the corporation prior to the stay of proceedings. In addition, the law allows a corporation to obtain credit required for its activities during the stay period and such credit will be given special priority as the expenses of an insolvency proceeding.

• During the stay period, the corporation must write by its name in any publication that concerns an offer to the public to purchase its products or services the words “under a stay of proceedings during a state of emergency period due to the coronavirus”.

• If an order to initiate insolvency proceedings against the corporation is issued by way of an application submitted prior to the cessation of the stay of proceedings, the date of the decision to implement a stay of proceedings will be considered the date of the order to initiate insolvency proceedings and all costs of the stay of proceedings will be granted priority debt status and considered as an expense of the insolvency proceedings.

Similar provisions to those stated above were established with respect to insolvency proceedings of individuals, with the relevant adaptions to the particular features of insolvency proceedings of individuals.

The Temporary Provisions substantially change the current balance in the relationship between creditors and the debtor corporation and allows the debtor to receive protection from creditors, without the “price tag” of losing control of the company. As stated above, the Temporary Provisions provide a unique window of opportunity for companies in difficulty, but on the other hand, also pose a significant challenge and risk for the credit providers and other creditors of a corporation.

We would be happy to assist you with any additional information or inquiry you may have in this respect.

Herzog Fox & Neeman