Intro
Welcome to the fifth installment in our series of articles providing an overview of the various aspects relating to the venture lending industry in Israel, including some of the legal, commercial and regulatory factors that should be taken into consideration by anyone looking to enter into this realm. The main goal of this series is to equip readers with valuable knowledge and understanding of the venture lending landscape in Israel, helping them navigate and capitalize on the unique opportunities it presents, particularly for those looking to become stakeholders in the Israeli startup ecosystem. In our fifth installment below, we provide a high-level overview of the normative framework governing the insolvency of an Israeli debtor, which has undergone significant changes in recent years. We will also provide an overview of the general enforcement process in Israel with respect to enforcing lender protections.
The Israeli Insolvency Law
The Israeli Insolvency and Economic Rehabilitation Law, 5779-2018 (the “Insolvency Law”) introduced a consolidated set of insolvency laws for individuals and corporations in Israel. The three primary purposes of the Insolvency Law, as stated therein, are: (i) to engender the economic rehabilitation of the debtor (individual or corporate), for the benefit of the creditors and for advancing additional social values, (ii) to increase the percentage of the debt repaid to creditors, and (iii) to advance the reintegration of an individual debtor into the fabric of economic life. The Insolvency Law also contains provisions pertaining to international insolvency proceedings and establishes the rights and status of foreign creditors in insolvency proceedings. In the context of secured lending, the Insolvency Law specifically changed the treatment of floating charges, specifically their seniority, while having less impact on fixed charges. That said, there are certain exceptions to the priority of secured lenders, including certain real property taxes, possessory liens on movable assets, certain liquidation expenses incurred in connection with the realization of the assets and in the case of fraudulent conveyance, as set forth below.
For further information regarding the differences between fixed charges and floating charges, as well as the risks of recharacterization of a security interest, due to recent case law, please refer to our previous installment.
Setting Aside Security Interests Granted During the Pre-Insolvency Period
The Insolvency Law expanded the protections afforded to creditors generally by setting forth three pre-insolvency ‘suspect periods’ in which transactions may potentially be nullified under different conditions:
- Three Month Period
A court may order the nullification of a transaction or action performed during the three month period preceding the filing of the insolvency application, that led to the repayment of debt to a creditor or to its advancement in the priority order, which took place prior to the issuance of a proceedings commencement order, including a collection action, a transfer of title in an asset or the creation of a security interest, if: (i) at the time of the performance of the transaction or action, the corporation was insolvent; and (ii) as a result of the transaction, the creditor received a larger portion of its debt than the portion that it was entitled to according to the priority order.
The Insolvency Law includes several exemptions for the nullification of such transactions, including: (i) circumstances in which the insolvent corporation received adequate consideration from the creditor for the transaction (the repayment of the creditor’s debt, per se, is not to be considered adequate consideration), and (ii) if relevant action and the repayment of the debt were in the ordinary course of business of the debtor. - Two Year Period
A court may order the nullification of a transaction which reduced the pool of assets available to the creditors during the two year period preceding the filing of the insolvency application, if: (i) the transaction was performed without consideration or with inadequate consideration under the circumstances, and (ii) at the time of execution of the transaction, the debtor was insolvent or the performance of the transaction led to the insolvency. - Seven Year Period
If the action that reduced the pool of assets available for the creditors was done for the purpose of extracting the asset from the pool, it can be nullified even if it was conducted during the seven-year period preceding the filing of the insolvency application and even if the debtor was not insolvent at such time.
Enforcement of a Pledge
Typically, the enforcement of a security interest over Israeli assets must be done by exercising the pledges through the Israeli court system, subject to certain exceptions which are likely not relevant in the context of a venture lending transaction. There is generally no self-enforcement in Israel for foreign lenders. A debtor may not waive the requirement for a court order prior to realization before the debt becomes due – an earlier waiver may be held to be invalid. In such court proceedings, the creditor is required to describe and provide reasons for the realization of the pledge(s) – i.e., the court motion should state that there was an event of default and provide an explanation as to such statement – and the burden of proof rests with the creditor. Once such a motion is filed, the debtor has an opportunity to file an opposition claim. A receiver must be appointed by the court and typically the court will appoint the receiver requested by the secured creditor. Such receiver is effectively an agent of the court.
In the case of insolvency, the process is typically quicker, since it is clear that the debtor cannot repay its debt, though enforcement is still subject to the court’s approval. The sale of a debtor’s assets will generally require the receiver to auction the pledged assets and accept the highest bid. Such auction would be open to any bidder, including the creditor. Following the auction, the receiver will request the court to approve the sale. In certain cases, the court may request that the receiver provide a valuation estimate of the asset being sold, and the court may review such estimate.
With respect to timing, in the case of a corporation whose main asset is intellectual property and has very little cash and physical assets, assuming there is no third-party challenges and/or Israeli Innovation Authority involvement, typically the enforcement process can take between 2-3 months. That said, each case has its own set of specific circumstances, and more complicated cases may take much longer. For further information regarding the Israeli Innovation Authority, please refer to our first installment.
Possible Impediments to Enforcement
The Insolvency Law provides that the court, upon receipt of a request for an order to initiate insolvency proceedings in a corporation(an “Insolvency Proceedings Order”), may choose between the commencement of two potential insolvency proceedings:
- Rehabilitation proceedings – the court will order the commencement of rehabilitation proceedings if: (i) there is a reasonable prospect of the economic rehabilitation of a corporation, (ii) there is no reasonable concern that the rehabilitation proceedings will prejudice the creditors’ interests, and (iii) there are adequate sources to finance the expenses of the rehabilitation proceedings; or
- Liquidation proceedings – if one or more of the conditions of the rehabilitation proceedings are not met, the court will order the commencement of liquidation proceedings, in which the corporation’s assets are realized, and the proceeds distributed among creditors in order of priority.
As the main objective of the Insolvency Law focuses on the rehabilitation of corporations, the court would tend to prefer ordering rehabilitation proceedings over liquidation proceedings, where applicable and appropriate at the court’s discretion.
The Insolvency Law also regulates a stay period once an Insolvency Proceedings Order is issued, and provides that upon the issuance of such an order: (i) the assets of the corporation will serve solely for the repayment of the corporation’s past debts and the expenses of the Insolvency Proceedings, (ii) that the repayment of the corporation’s past debts will be made in accordance with the provisions of the Insolvency Law, and (iii) all proceedings against the corporation shall be suspended.
Conclusions
Insolvency proceedings for Israeli debtors in venture lending transactions are quite rare in Israel. Such proceedings, when they do occur, are sometimes complicated by proceedings in multiple jurisdictions, as often venture backed borrowing entities have global operations with assets in different jurisdictions. In our experience, most lenders will do everything possible to work with their portfolio companies to avoid insolvency proceedings and, in extreme cases, often will work to help the debtor sell their assets outside of court and prior to entering into insolvency proceedings.
About Us
Arnon, Tadmor-Levy proudly stands among Israel’s most prominent law firms, with one of the largest and most respected banking and financial services departments. We have extensive experience in cross-border and other complex financing transactions, representing both lenders and borrowers. Our trusted reputation spans a vast clientele, including leading Israeli and international banks and other financial institutions.
Our venture lending and private credit team is led by Simon Weintraub, Avi Anouchi and Idan Adar, whose details are included below. Also, please feel free to reach out to our insolvency team: Yuval Bargil.
The above content is a summary provided for informational purposes only and does not constitute legal advice. It should not be relied upon without obtaining further professional legal counsel.
