Israel has seen an upsurge in the number of debt settlements in recent years including the involvement of the movers and shakers in the Israeli market such as the IDB Group, one of Israel’s prominent business groups, holding a diversified network of leading corporations in key business sectors. Without satisfactory and comprehensive regulation of Israeli corporations entering into debt settlements, the confidence of savers and depositors within the developed credit market in Israel will be low and creditors will likely be exposed to the risks and detrimental effects of companies falling into financial difficulty and being unable to pay its debts.
In light of this, on May 27, 2015, the Israeli Ministry of Finance published the proposed Debt Settlements (Amendments to Legislation) Law, 2015 ("the Proposed DS Law"). The Proposed DS Law amends existing legislation and is designed to implement the final recommendations of the Committee Examining the Procedure for Debt Settlement Implementation in Israel, which was published in November 2014. This committee, headed by the Director General of the Ministry of Finance, Yael Andorn, was set up, among other reasons, to resolve the subject of debt settlements in Israel in order for the credit market to develop in a proper manner.
The Two-Stage Outline
The Proposed DS Law recommends that two different stages of a company encountering financial difficulties be regulated. Each stage is designed to accommodate the severity of the financial difficulties faced by the company.
The proposed first stage relates to companies that are able to pay their debts to the bond holders, but nonetheless are in financial difficulty either based on the provisions of the bonds issued by them or according to a company resolution passed at its own initiative. In such circumstances, it is proposed that a special representative on behalf of the said bond holders be appointed. The special representative may, among other things, engage in negotiations with the company, sit as an observer on the board and the company's committees and notify the bond holders if the company intends to take steps which may detrimentally affect them such as the distribution of dividends or the company engaging in unusual transactions.
Notably, if the company resolves to enter into the first stage at its own initiative, the company may be given certain protections during the debt settlement negotiations such as only the company is entitled to propose a debt settlement or arrangement and the bond holders are not permitted to demand that the debt be paid immediately or to realize securities in accordance with the Israeli Securities Law. The purpose of such protections is to encourage companies to begin negotiations for debt settlement already at an early stage when encountering financial difficulties.
The proposed second stage relates to companies that fail to make their 'financial debt' payments to their creditors within 45 days from the due date for payment. Financial debt is defined as a debt to a licensed Israeli insurer, a company managing a provident fund, a banking corporation or a joint investment trust fund, provided that at least one of the creditors has a debt owing in excess of NIS 50 million pursuant to a loan agreement and also includes debts owing to bond holders of "bond companies" (private companies that issue bonds to the public but do not issue shares).
Under the Proposed DS Law, failure to pay the financial debt within the foregoing 45-day period creates a presumption that the company is insolvent. In such a case, the creditors may apply to the court seeking an order to stay proceedings and appoint an administrator or an order to wind up the company. This mechanism gives creditors certainty with respect to the legal consequences of companies failing to pay financial debts on time. The court may, however, postpone the giving of such orders if it determines that based on clear evidence the company is solvent and failure to pay is, for instance, due to a temporary cash crisis, or there are special circumstances in which commencing proceedings will detrimentally affect the administration of the company or the appointment of a liquidator will not be favorable to the creditors.
The Debt Settlement Process
The Proposed DS Law also proposes a host of other regulations regarding the debt settlement process and the management of credit. Among other things, it:
- prevents creditors of a company from stopping other creditors of the company whose date for payment is almost due from taking action to collect their debt, unless a stay of proceedings has been given. This will hopefully enable better pricing of the debt in relation to the repayment term and the characteristics of the different creditors as well as provide creditors with certainty regarding their rights at the creation of the debt stage and the debt arrangement stage;
- provides that a trustee of a series of bonds, terms of which contain a provision that entitles the bond holder to demand immediate payment of the bond or to realize securities in the event of a breach, is obligated to convene a meeting of bond holders within 45 days from the date of such breach, at which the bond holders need to take a decision as to how to proceed. Such a decision given within a certain timeframe provides bond holders with the opportunity to formulate an informed policy regarding the course of action that will best serve their interests;
- gives a creditor the right to make an application to the court for a debt settlement or debt arrangement, even without obtaining the consent of the company, if the company is deemed to be insolvent pursuant to the Israeli Companies Ordinance;
- establishes a mechanism for improving cooperation between bond holders – the company issuing bonds will appoint a trustee that will represent all the bond holders in the various proceedings until the company commences negotiations for a debt settlement; and
- places limitations on the amount of credit to be granted to commercial groups.
All in all, the Proposed DS Law is intended to bring about fundamental change to the Israeli credit market by guaranteeing a more efficient allocation of credit, more accurate debt pricing, an improved manner of monitoring and safe-keeping of the public’s funds deposited and managed in financial entities and improve public confidence in these financial structures. It is not known, however, exactly when and if the Proposed DS Law will be enacted and what will be its final formulation.