Newsletter 50 – May 15 2014

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We are pleased to present another English-language edition of our firm newsletter.  In this edition we provide a brief synopsis of recent court decisions regarding realization of security interests when the debtor is in an insolvency proceeding and reliance on Pre-Rulings from the Israeli Securities Authority.

The newsletter, which our firm publishes periodically, addresses important practical developments in the field of Israeli corporate and commercial law.  The objective of the newsletter is to create awareness of these developments and of the underlying principles of the issues discussed.  We hope that you will find the newsletter informative and helpful.  Any comments or suggestions are appreciated.  If you need further information or have any questions concerning the issues discussed in this newsletter, please contact either Yoram Shiv, 972-3-607-4777,, or Alex Berman, 972-3-607-4777,

Sharir, Shiv & Co., Law Offices

Supreme Court / Realization of Security Interests When Debtor is in Insolvency Proceeding

During the course of an appeal concerning the realization by a creditor of a security interest in real property at a time when the debtor was in the midst of an insolvency proceeding, the Israeli Supreme Court reviewed certain principles regarding the realization of secured assets. The Court held that although in general a secured creditor may act independently of other creditors and outside of any parallel insolvency proceedings involving the debtor, in certain situations the interests of these other creditors must be considered.

The Supreme Court reviewed a distinction developed over the years in the lower instance District Court decisions. According to this line of cases, the Court recognizes that when a debt owed to a secured creditor exceeds the value of the secured asset, that the creditor’s interest lies in maximizing proceeds received from the asset in order to repay as large a proportion of the debt as possible. In contrast, when the outstanding debt is less than the value of the secured asset, the Court recognizes the concern that it is often in a secured creditor’s interest to realize the asset quickly, even at an undervalued price. This second scenario creates a conflict with the interests of the debtor’s unsecured creditors in insolvency proceedings; it is to the unsecured creditor’s advantage to maximize proceeds from the secured asset, even at the expense of a quick resolution.

The Supreme Court held that when the debt owed to a secured creditor exceeds the value of the asset value, due to common interests between creditors, a secured creditor can act independently and without interference, merely providing the Trustee or Liquidator with a report detailing the amount of debt, the value of the secured asset, and how the secured creditor intends on realizing the asset. In this scenario the Trustee or Liquidator is not involved with the actual realization of the asset. In contrast, when the value of the asset exceeds the debt, realization of the secured asset has to be under the supervision of the Trustee or Liquidator. Supervision should be proportionate, taking into consideration all relevant circumstances and balancing competing interests of secured and unsecured creditors.

In addition, the Supreme Court refined the District Court’s line of analysis by making a further distinction: recognizing an additional category of cases in which a delay in the realization of the secured asset could result in increased complication and expense. The Court held that in this type of unusual situation, such as in the case at hand, the Trustee or Liquidator should have special authority to actually manage and realize the secured asset, together with the secured party.

District Court – Commercial Division / Reliance on Pre-Rulings from the Israel Securities Authority

The applicants requested that the District Court approve the filing of a class action against certain shareholders of an Israeli public company (respectively, the “Shareholders” and the “Company”). The applicants alleged that the Shareholders had breached their statutory duty to other shareholders in the Company by having failed to comply with the Israeli tender offer rules regarding their acquisition of a controlling interest in the Company. In their defense, the Shareholders clarified that prior to acting the Shareholders had requested and received a Preliminary Request (or “Pre-Ruling”) from the Israel Securities Authority (the “ISA”).* The Shareholders alleged that due to the ISA’s position in the Pre-Ruling, they had believed in good faith that they were exempted from the tender offer requirements.

The Court held that as a matter of policy it is appropriate to recognize reliance on ISA Pre-Rulings. The Court noted that although ISA guidelines and circulars are not definitive as far as the Court is concerned, given the ISA’s role, its interpretation of the law cannot be disregarded, and the Court will give weight to such interpretation.

In the present case, notwithstanding that the Court disagreed with the ISA’s interpretation of the law and the Court believed that compliance with the tender offer rules was required by the statute, the Court held that the Shareholders were not liable for tort or damages based on a breach of statutory duty with respect to their failure to comply with the tender offer rules. The Court clarified that it was a sufficient defense that the Shareholders had turned to the ISA for a Pre-Ruling regarding the matter, and had in good faith followed the instructions provided in such Pre-Ruling.

It is important to note that while the Shareholders were excused from violation of statutory duties, the Court ultimately approved the filing of the class action against the Shareholders on the basis of a different cause of action, unjust enrichment, due to shares subject to tender offer rules being subsequently sold to a third party.

This newsletter provides general information and should not be used or taken as legal advice for specific situations, which depends on the evaluation of precise factual circumstances.

* A Pre-ruling Request is a request to receive the ISA’s position regarding a specific potential future transaction. A Pre-ruling Request is fact-based, and is binding on the ISA only to the extent that there has been full disclosure of all relevant facts, and only with respect to the transaction that is the subject of the request.