The directors of Mizrahi Tefahot Bank could be exposed to legal action by shareholders if the Bank of Israel doesn't rescind allegations laid out in a scathing audit report on Mizrahi's corporate governance.

A draft of the report, to which the board members were given 30 days to respond, blasts a number of directors for breach of trust by putting their own interests above those of the bank.

A board meeting will be held to discuss their legal liability, say directors, and the central bank will be urged to remove the allegations in its final report in order to reduce the threat of personal legal exposure. The board will formulate a response to the draft, but some Mizrahi directors have already begun consulting with lawyers about furnishing individual responses as well.

Mizrahi has a directors' insurance policy providing up to $120 million in total coverage. By law, this only covers cases where directors acted in good faith so, if it turns out they hadn't, they could find themselves without coverage.

The draft is confidential and therefore can't be used by minority shareholders to initiate any legal claims. Mizrahi will be required, however, to outline the main points of the final report in a bulletin to the stock exchange and the board therefore considers it urgent that the assertions be removed.

On Tuesday Mizrahi's board confirmed that the matter of legal exposure is on its agenda but said the financial implications are marginal if anything. The draft mentioned damage to the bank resulting from the board's conduct but didn't say to what extent.

In a letter to the board in August, CEO Eli Yones estimated that failure to approve a loan to Carasso Motors cost the bank NIS 1.5 million. The loan couldn't be approved because half the members of the committee also had a personal interest in Carasso.

The central bank's draft report also criticized audit committee chairman Avi Zigelman for dealing with the problem, which was his responsibility.

The report also faulted the directors comprising or representing the bank's controlling shareholders for removing Sabina Biran from the audit committee, a decision that also hogtied the committee in its dealings with Carasso.

"In deciding on staffing the audit committee, the directors preferred the principle of maintaining a balance (between the controlling parties ) over the interests of the bank," the draft said.