A wave of popular sentiment against Israel's so-called "tycoons" – a small group of entrepreneurs, who have built corporate empires on the back of debt raised in the capital markets – has given a rise to a number of significant legislative measures in Israel over the last year.
It has long been felt that the guardians of public funds, the managers of Pension Funds and Provident Funds, have been too easy-going in providing corporate finance, failing to insist on the level of security for indebtedness that banks would demand in similar circumstances. In light of the recommendations of a committee established by the Ministry of Finance, institutional lenders are now required (subject to a number of exceptions) to insist on a series of protective conditions in any debenture in which they invest.
As a number of large corporate borrowers encountered difficulties in repaying their indebtedness, they looked to renegotiate terms. Once again, popular feeling was that the institutional lenders were too liberal in agreeing to debt write-offs. The result was the enactment of Amendment 18 to Israel's Companies Law, which provides that as soon as negotiations begin between a company and its bondholders with a view to an arrangement which includes a reduction or rescheduling of the debt, the trustee of the debentures (and if there is no trustee, the company itself) must apply to the Court to appoint an expert on behalf of the Court to examine the proposed arrangement. The responsibilities of the expert include preparing a report on the fairness for the bondholders of the proposed arrangement and an opinion on whether any alternative arrangements would better protect the interests of the bondholders, including a conversion of debt into equity.
A more wide-sweeping change to the law relating to companies in financial difficulties was introduced with Amendment 19 to the Companies Law, which came into effect in January 2013. Amendment 19 addressed company rehabilitation and incorporated into law rules established over the years by the courts, as well as a series of new provisions similar to Chapter 11 of the US Bankruptcy Code.
At the heart of the corporate rehabilitation process introduced by Amendment 19 is the ability of the Court to grant a stay of proceedings (a 'Stay Order'), the purpose of which is to give a company in financial difficulties breathing space, a period of time to rehabilitate the company's business under the supervision of the Court. If an application is filed to Court to approve a compromise or arrangement the purpose of which is to rehabilitate the company, the Court can grant a Stay Order for a period of up to nine months, renewable for successive periods of up to three months.
The Court will appoint an 'Authorised Person' (who can be an existing office holder in the company) to implement the recovery process.
A dramatic change introduced by the Amendment is to enable the Authorised Person to make use of an asset, which is subject to a charge or a retention of title arrangement, including selling the asset free of any encumbrance in the ordinary course of business of the company, if this is necessary for the rehabilitation of the company. The secured creditor/owner must have "adequate protection" (a key concept introduced by the Amendment), either from the proceeds of sale or from an asset acquired in substitution for the asset being sold.
If a company is subject to a Stay Order, utility providers (e.g. water, electricity) must continue to supply those utilities notwithstanding past unpaid debts. The Court is also authorised to direct the provider of a "vital service or commodity" to continue to provide that essential service or commodity, provided that it will be paid for.
Amendment 19 provides that a party to an existing (executory) contract with a company subject to a Stay Order may not cancel the contract and the contract will not be revoked automatically by reason of the insolvency of the company, even if the contract specifically provides for this. The Authorised Person may elect to adopt the existing contract or waive the contract, whichever is necessary for the rehabilitation of the company, in each case subject to the approval of the Court.
Amendment 19 empowers the Authorised Person to raise new finance for the continued operations of the company subject to a Stay Order. The new credit will be treated as an expense of the rehabilitation, and hence given priority over other liabilities of the company. The Authorised Person can secure repayment of the new credit by creating a charge, even over assets of the company, which are subject to existing security interests, and even in priority to those existing security interests, if the Court believes that this is necessary in order to raise the finance.
Two new legislative measures will be shortly approved by the Knesset (Israel's Parliament). As its name suggests, the draft Law for Promotion of Competition and Reduction of Concentration is aimed at reducing the level of concentration in the Israeli marketplace. Principal recommendations within the draft Law are (i) to separate ownership of substantial financial and non-financial companies and (ii) to limit "pyramid" structures of corporations that have raised money from the public (either by way of offering shares or raising public debt) to no more than two layers.
At the same time, legislation is being introduced which will restrict dramatically the tax efficiency of offshore trusts and other vehicles which are widely viewed as tax avoidance vehicles for the wealthiest element of Israeli society.
In recent years, the "super rich" have become symbols of the growing economic disparity in Israel. Time will tell whether the new legislation will achieve the desired result of protecting public funds and lessening the disparities (actual and perceived) within Israeli society.