56 / 120
/56/
Another substantive point arising out of the above Bill is a change in the order of
priorities of repayments of debts when a corporation goes insolvent. Today, a large
proportion of the debts that are defined as “preferential debts” in the case of an
insolvency are tax debts owed to the State. The Bill proposes to revoke the preferential
rights attaching to a significant proportion of these debts. In addition, it is proposed
that holders of floating charges over the assets of the corporation should be limited
to repayment of an amount equal to 75% of the value of the assets subject to the
floating charge.
At the time of writing (November 2016), the abovementioned Bill has not yet been
accepted into law.
Review of a Particular Proceedings
In 2013 a motion for the approval of a creditors’ arrangement was filed at the Tel Aviv
District Court in relation to the IDB Group, one of the largest corporate groups in the
Israeli market at the time. Further to this, trustees responsible for the performance of
the creditors’ arrangement were appointed over IDB Holding Corporation Ltd – the
top company in the IDB group structure – who retained the various rights of action
which had arisen in connection with the collapse of the group.
Further to this, the trustees for the performance of the creditors’ arrangement
decided to issue a claim against the previous shareholders and directors of the
company in relation to allegedly prohibited dividend payments of a total amount of
NIS 1.8 billion. The claim is the biggest of its type ever to be brought in Israel and our
office is representing the non-executive directors who were in office at the relevant
time.
Under Israeli law, a company wishing to distribute dividends must meet two cumulative
conditions: the profit test and the solvency test. The IDB case revolves around the
solvency test, under which it is necessary to determine whether the distribution of the
dividend will prejudice the ability of the company to meets its existing and anticipated
liabilities.
The above dispute focuses on whether 10 dividend distributions effected during
2008-2010 met the solvency test or not. In this regard the trustees of the creditors’
arrangement claim that, given that the group eventually collapsed, this ought to
have been foreseen and the dividends not distributed, whereas the directors claim
that all of the data before them indicated that there were large surpluses and that
the collapse of the group happened as a result of other external and unforeseeable
factors, not as a result of the dividend payments, and that there was therefore no
obstacle to authorizing the distributions.
Today, a large proportion of the debts that are defined as “preferential debts”
in the case of an insolvency are tax debts owed to the State. The Bill proposes
to revoke the preferential rights attaching to a significant proportion of these
debts.