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One of the biggest problems in this area is that most companies in Israel who
file a motion for a SoP do so at too late a stage, when they no longer have any
funds and are already ensconced in a serious cash flow crisis.
Code, for example, Israeli legislation governing SoP is scant and the rules governing
the proceedings have largely developed through case law. This situation is likely to
change as long as the bill that will be discussed below receives authorization.
In contrast to liquidation, the objective of the SoP process is for the company to be
rehabilitated and to rearrange its debts without ceasing its activity. Accordingly, while in
a liquidation scenario secured debtors may act to realize their security, in a SoP scenario
it is fundamentally forbidden to begin proceedings against the company. The main
consideration taken into account by the Court in granting a SoP order is the extent to
which the Court considers that the company’s operation during the interimperiod,while
the SoP order is in force, will not be prejudicial. Accordingly, the company usually has
to include a financing entity in its motion for a SoP, which will make it possible for the
company to operate during the suspension period in a non-prejudicial manner.
Although the company itselfwould ideally propose an arrangement for its rehabilitation
in the context of its motion for a SoP, with such arrangement including a detailed plan
for rearranging its debts to be brought to the Court for approval, in practice, most
companies first file the motion for the SoP and only afterward do they formulate the
kind of detailed debt arrangement mentioned above.
One of the biggest problems in this area is that most companies in Israel who file a
motion for a SoP do so at too late a stage, when they no longer have any funds and
are already ensconced in a serious cash flow crisis. Accordingly, in many cases it is
clear that the company will not be able to be rehabilitated by its own measures and
that, in practice, it will be necessary to sell the operations or assets of the company.
As a result, the outcome of many SoP processes is similar, in practice, to that of a
liquidation, namely the sale of the company’s assets to third parties.
Recent Legislative Updates
Draft Legislation on Insolvency and Economic Rehabilitation, 2016, was published
in March 2016. This Bill's objective is the full and comprehensive codification of
insolvency laws in Israel. The Bill seeks to codify insolvency laws and to fully and
comprehensively organize all personal and corporate insolvency laws into one new
consolidating act.
In the context of the Bill, it is proposed to define insolvency as “an economic state of
a debtor wherein the debtor is unable to pay its debts as they fall due.” This definition
adopts the cash flow test but abandons the balance sheet test mentioned above.
In addition, the Bill proposes to establish a new method of commencing insolvency
proceedings against corporations,whereby, after the proceedings have begun and the
company in question has been deemed to be insolvent, the Court decides on the best
way of dealing with the company’s insolvency – by way of rehabilitation proceedings
or liquidation proceedings. The current situation is that rehabilitation proceedings
and liquidation proceedings are governed by different legislative provisions so that
the decision of the party filing the motion at Court to commence rehabilitation or
recovery proceedings is likely to have a great impact on the way in which the insolvent
company is dealt with.