Fearing Bankrupcy Wave, Israeli Government to Offer Debtor Relief

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A shopper and a vendor wear face masks at the Carmel market in Tel Aviv, Israel May 7, 2020.
A shopper and a vendor wear face masks at the Carmel market in Tel Aviv, Israel May 7, 2020. Credit: AMIR COHEN/Reuters

Officials are worried that thousands of businesses that were forced to cease all activity in the last few weeks due to the coronavirus lockdown are at risk of going belly up and clogging the courts with petitions for protection from creditors and bankruptcies.

To overcome the problem the Justice Ministry is at work on a plan to set up a special track for businesses and individuals in financial difficulties due to the pandemic. The track, which would remain in place for one year, would give them protection from creditors for two to three months. It is expected to be included in a draft version of the law as early as next week.

Officials say the track is aimed at addressing the special problem created by the coronavirus, namely that otherwise financially healthy businesses experienced a cashflow crisis because business at the peak of the lockdown came to a halt. Now that business is returning to normal, cashflow will gradually resume. Businesses simply need more time.

On the other hand, the special track is something of a band aid solution. It only buys time for troubled businesses, rather than offering them any help to get back on their feet. Nevertheless, officials said they believed it would help many businesses by giving them time to reach understandings with suppliers and creditors without having to go through a formal legal process.

That has already happened for some relatively big companies, including the Bagir Group (an apparel company, but not the one that makes men’s suits) and the ice cream chain Vaniglia.

Under the proposed rules, the ability of creditors to start legal proceedings against a business that has been declared insolvent for failure to repay debt will be restricted for a period of three months rather than the usual one month. In addition, an indebted company will be able to ask the courts for temporary relief from repayments while it tries to negotiate an agreement with creditors even before it has received formal court protection.

The courts can automatically block legal proceedings against a company for three months, unless it determines that there’s no reasonable chance of a debt agreement being reached or that a creditor will be irreparably harmed by a delay.

During this period, instead of the usual practice of a court appointing a receiver or some other official to manage the indebted business in the interest of creditors, the company will remain under its own management. The aim is to give its manager time to get a better handle on its finances and negotiate with creditors.

The only limitations that will be put on the indebted firm during the three months is a ban on making any out-of-the-ordinary business moves or repaying any debt aide from day-to-day business transactions. In some cases, the court is entitled to install a monitor of the business to ensure violations such as divesting assets or repaying some creditors do not occur.

The rules come amid disagreements between judges who have been handling insolvency cases.

In one case, Central District Court Judge Irit Weinberg-Nutovitz in March rejected a request to give a company relief outside the usual legal framework. In her ruling she noted that the new Insolvency Law, which went into force last September, was comprehensive and didn’t require any special remedies by the court.

However, a month later Judge Attif Ailabouni of Nazareth District Court ruled in April that the company may apply for temporary relief to delay the proceedings.

The special track will also be relevant to individuals in severe financial straits. Because the crisis hit so suddenly individuals will also be able to ask for a grace period to reach a debt arrangement with creditors and, if needed, even get a professional adviser for the negotiations.

To get those protections, an individual will have to apply to the Registrar for Execution of Court Orders for temporary relief from debt repayment. So long as the debtor meets the criteria for the start of legal proceedings, these can be delayed for up to two months. Creditors can ask the court to cancel the protections in certain cases.

In exchange, debtors will have some restrictions placed on them much like those placed on businesses enjoying the same protections. The adviser can in some cases can be instructed by the court to supervise the debtor’s assets and ensure he or she isn’t violating any of the terms of the protection.

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