On 30 September 2021, Judge H Kabub of the economic division of the Tel Aviv District Court rejected an attempt by the bankruptcy trustee of Africa Israel Industries Ltd (the Company) to prevent the directors and officers from using the company's directors and officials (D&O) insurance policy for the settlement of a motion to certify a class action that had been filed against it.
In 2015, a motion to certify a class action was filed against two public companies in the Africa Israel Investments Group and their D&O, based on allegations of a breach of the Securities Laws, which led to the restatement of the companies' financial reports.
The parties to the class action entered into a long and complex mediation proceeding, during which both companies became subject to insolvency proceedings. The mediation continued between the plaintiffs, the D&O and the insurers of the D&O, and eventually the parties were able to reach a settlement agreement, which included a payment of 5 million Israeli shekels by the insurers of the D&O of Africa Israel Industries Ltd. The Company, which was under insolvency proceedings, was not a party to the settlement.
On 7 December 2020, the parties filed a motion with the Court to approve the settlement agreement concluded between them. In response, the bankruptcy trustee of Africa Israel Industries (the Trustee) submitted a notification to the Court in which he claimed that the D&O Policy was an asset of the bankruptcy estate and, therefore, could not be used for the settlement of a claim against the D&O. The Trustee further claimed that he had investigated the events described in the class action, which prima facie constituted a breach of the duties of the D&O to the Company. Therefore, he alleged that he was considering whether to file a claim against the D&O and that the D&O were not entitled to reduce the outstanding policy limit by settling the class action against them.
In its ruling, the Tel Aviv District Court rejected the Trustee's allegations and ruled that, under the circumstances, the Trustee could not limit the ability of the D&O to use the Policy for the settlement of the class action proceedings.
The Court analysed the Policy and distinguished between the various coverages available:
- side A coverage for the D&O;
- side B coverage for the Company in cases where it indemnified its D&O; and
- side C coverage providing entity coverage to the Company for securities claims.
According to the Court, the Trustee's allegations regarding the Company's rights under the Policy did not arise from the Company's position as a potential insured under the Policy (under side B or side C coverage), but rather as a potential plaintiff. As such, the Trustee was competing over the insurance benefits against the class action plaintiffs, and the priority rights should be determined according to the "first come, first served" principle. As the class action proceedings had been initiated six years prior, and the Trustee had still not filed a potential claim, the Trustee could not prevent the parties from using the D&O Policy for the settlement of the class action proceedings.
The Court emphasised that the Trustee's rights in this case were no different than the rights of any potential third-party plaintiff, and the fact that the Company was a beneficiary under the side B and side C coverages did not provide it with any priority rights when seeking coverage to the Trustee's potential claim against the D&O.
Nevertheless, the Court ruled that there was scope for extraordinary circumstances in which a court could be convinced that a class action settlement agreement was reached in bad faith. In such a case, the court could decide not to approve a settlement agreement concluded between the parties. However, the Tel Aviv District Court stated that such a decision did not apply to the circumstances of this case.
The Court further ruled that the Trustee also had no right to object to the settlement agreement based on the Company's capacity as a potential insured under side B and side C coverages. The Court referred to the term of the order of payment provision, according to which payment under the Policy should be first made for loss covered under side A coverage before the same is made for side B and, finally, for side C (if any amount remains). Therefore, the Company's rights as a beneficiary under the Policy are secondary to the rights of the D&O under side A coverage.
Further, the Court emphasised the fact that the settlement amount exhausts only a small share of the Policy limit – a factor that also reinforced the Court's conclusion.
In addition, the Court referred to public policy considerations and ruled that the Company, or the Trustee as the Company's representative, should not be entitled to deprive the D&O from their rights under the Policy.
The Court stated that:
the purpose of the Policy is not to assist the company to collect its debts, but rather to enable the directors to execute their job without fear. This is part of the employment and service terms of directors, and it is an essential term required to preserve this institution.
The judge also noted that:
accepting the trustee's position, according to which during liquidations the D&Os rights under the policy are revoked, and they become dependent upon the Trustee's good will - contradicts the essence of the policy, and is not founded on any basis or on any legal provisions.
The Court noted that accepting the Trustee's objection to the agreement may increase the exposure of the insurers and of the D&O without any good reason, especially as the Trustee was unwilling to bear the risk involved by continuing the proceedings.
In view of the above, the Court approved the settlement agreement and rejected all of the Trustee's allegations.
An appeal of this judgment is yet be submitted.
For further information on this topic please contact Moshe Abady or Yael Navon at Levitan, Sharon & Co by telephone (+972 3 688 6768), fax (+972 3 688 6769) or email ([email protected] or [email protected]). The Levitan, Sharon & Co website can be accessed at www.israelinsurancelaw.com.