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Client Update | The Insolvency and Rehabilitation Law, 2018

19 March 2018

Dear Clients and Colleagues,
On March 5, 2018 the Israeli parliament passed the Insolvency and Rehabilitation Law, 2018 (the “Law”). The Law establishes, for the first time, a modern and consolidated set of insolvency laws for individuals and corporations in Israel. In addition to the codification and consolidation of existing insolvency and rehabilitation rules from multiple sources, the Law makes a number of changes to these existing rules in Israel.
Set out below are some of the key elements of this important new Law.


Guiding Principles

According to the Law, the new rules are aimed at regulating how debtors who either are insolvent or who are close to being insolvent repay their debts, with a view to the financial rehabilitation of the debtor, maximizing payments to creditors and, for individuals, reintroducing them back into the fabric of economic life.


Start Date

  •  The Law will come into effect on September 15, 2019 (i.e., 18 months after its publication) (“Start Date”) and will apply to insolvency proceedings commenced aftersuch date.
  • The existing insolvency regime will continue to apply to liquidations, schemes of arrangement in which stay of proceedings orders have been granted, and bankruptcy proceedings that have commenced prior to the Start Date.


Definition of Insolvency

The Law sets out two alternative tests for insolvency:

  • The debtor is unable to pay its debts when due, whether or not their maturity date has arrived (cash flow test); or
  • The debtor’s obligations, including its future and conditional obligations, exceed the value of its assets (balance sheet test).


Floating Charges

One of the main changes in the Law is the imposition of a new limit on the rights of floating charge holders in the case of insolvency of a debtor. The Law provides that, in an insolvency  situation, a creditor secured by a floating charge will be entitled to only 75% of the proceeds of realization of the assets subject to the floating charge (the “Upper Limit”).

  • If the entire debt of the creditor secured by a floating charge is not repaid by such proceeds, the excess amount will be regarded as unsecured debt.
  • The proceeds of the realization in excess of the Upper Limit will be used to repay unsecured debt.


In essence, this provision transfers 25% of the proceeds of the realization of the assets subject to the floating charge to unsecured creditors of the debtor. However, in order to balance somewhat the damage to creditors secured by a floating charge, the Law limits the scope of preferred debts which currently take priority over a floating charge (see below).
The Upper Limit will not apply to a floating charge registered prior to the Start Date, and in such circumstances the existing priority regime will continue to apply to the extent one of the following conditions is met:

  • The floating charge was granted as security for the payment of debts incurred prior to the Start Date, and no change is made after the Start Date to the repayment date or interest rate; or
  • Insolvency proceedings are commenced within 18 months from the Start Date.


International Insolvency Proceedings

  • For the first time, the Law sets out rules concerning international aspects of insolvency laws, taking into account the increasingly common situation of debtors with assets in multiple jurisdictions.
  • The Law expressly states that the standing of foreign creditors and their rights to initiate and participate in insolvency proceedings in Israel will be identical to those of Israeli creditors.
  • The Law permits insolvency officers appointed under insolvency proceedings outside of Israel to apply for commencement of insolvency proceedings in Israel in accordance with Israeli law.
  • The Law also sets out the principles for cooperating with foreign authorities and insolvency officers, with the aim of reducing bureaucracy and permitting direct dealings between Israeli and non-Israeli parties.
  • In situations where there are parallel insolvency proceedings both in Israel and abroad, the guiding principle provides that commencement of insolvency proceedings in Israel will not prevent or revoke the recognition of foreign proceedings. However, the Law maintains the preference of insolvency proceedings in Israel over foreign proceedings without setting a precise ranking among them.


Secured Debts

The Law provides that debts secured by a fixed or floating charge will continue to accrue interest and linkage differentials in accordance with their terms until their repayment. However, once a “commencement of insolvency proceedings order” is granted, any default interest that accrues on such debts will be deemed to be unsecured debt.


Preferred Debts

The Law reduces the scope of indebtedness preferred by operation of law (which takes priority over a floating charge), by limiting the priority enjoyed by certain payments due to the Israeli authorities.


Set-Off Rights

Similar to the existing regime, under the Law it is possible to exercise set-off rights in relation to past debts. Additionally, the Law provides that set-off rights can also be applied to conditional debt. This is meant to discourage creditors from attempting to accelerate conditions in order for their conditional debts to become unconditional.


Appointment of Insolvency Trustee

The Law establishes that the court will appoint insolvency trustees from an approved list prepared by a public committee. Under the existing regime, insolvency trustees are usually appointed by the court on recommendation of interested parties. The changes are meant to distance insolvency trustees from the pressures of interested parties, and to permit new
players to enter into this field. Under the Law, in any insolvency proceedings the administrator in charge of insolvency and rehabilitation proceedings (the “Administrator”) will recommend to the court between three to five candidates out of the approved list. The debtor corporation and each creditor will be permitted to recommend additional candidates out of the approved list; however if the court appoints a trustee not recommended by the Administrator, the court will need to address this in its decision.

Additionally, the court is permitted to appoint an officer of the debtor corporation as a trustee even if such person is not included in the approved list, if the court believes, after giving the creditors an opportunity to present their position, that such appointment will assist the insolvency proceedings and will not harm the creditors. If a corporate officer is appointed as trustee, the court will appoint an additional trustee out of the approved list.


Directors’ and CEO’s Liability

The Law imposes liability on the directors and the CEO of a debtor corporation to the extent they knew or should have known that the corporation is insolvent, and did not take reasonable steps to limit the harm to creditors. This is meant to provide additional protection to creditors during the period known as the insolvency zone.

Under the Law, the court may now determine that the directors and the CEO will be liable tothe debtor corporation for damages caused to the creditors by virtue of their failures; however to the extent the directors and CEO can show their reasonable good faith reliance on information that the corporation is not insolvent, they will not be liable.


Protected Negotiations

The Law permits a public company, a bond company or a public limited partnership (each, a “Reporting Corporation”) to enjoy certain protections, to enable it to conduct negotiations for a creditors’ arrangement prior to formal insolvency.
The protections will be given only if the board of directors of the Reporting Corporation confirms that the Reporting Corporation does not have debts that are due and which remain unpaid (except such that are under dispute in good faith) and there is no genuine concern that the Reporting Corporation will not be able to repay its debts which are set to mature during the following nine months.

During the protected negotiations period, the Reporting Corporation will enjoy the following
protections from each creditor which the Reporting Corporation notifies of the protected

  • Such creditor will not be permitted to petition the court to bring a creditors’ arrangement proposed by it for the approval of the creditors or members of the Reporting Corporation;
  • Such creditor will not be permitted to accelerate its debt; and
  • Such creditor will not be permitted to apply for a commencement of insolvency proceedings order.


The protected negotiations period may not exceed six months.


Non-Profit Organizations and Public Benefit Corporations

Insolvency for non-profit organizations and public benefit corporations will continue to be subject to the existing regime for a period of five years from the Start Date.

Should you require any further information or clarification regarding the issues discussed,
please do not hesitate to contact us.

Herzog Fox & Neeman

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