Knesset panel advances revolutionary bankruptcy legislation

The Attorney-General’s Office on Wednesday praised the legislature’s Constitution, Law and Justice Committee for approving a landmark bill for its final readings in the Knesset plenum, which is set to revolutionize corporate and individual reorganizations and bankruptcies.

The committee approved the bill late on Tuesday for its second and third (final) readings by the full Knesset, where it is expected to become law.

Many of the changes will bring Israel into the modern Western age of corporate reorganizations and bankruptcy, in which rehabilitation and maximizing overall economic gains are emphasized over liquidation and punishing debtors as a moral issue.

After years of unusual bipartisan work spanning the full spectrum of right-wing, Arab and Haredi parties, the bill will put rehabilitating corporate and individual debtors front and center in place of liquidation. The united Knesset MKs celebrated the bill as a victory for social justice.

Debtors who run into financial distress due to “economic collisions” or bad luck beyond their control will be empowered and given greater protection to achieve a fresh start.

In contrast, debtors who arrived at financial ruin in bad faith will not necessarily reap the bill’s benefits.

Furthermore, the legislation emphasizes greater equality in divvying up among all classes of creditors a corporate debtor’s assets or revenue from a reorganization.

In place of secured creditors, usually banks, which until now have gotten most or all of the “pieces of the pie” of whatever value was left from a corporate debtor, unsecured or general creditors will have more of a chance to share in getting repaid some of what they are owed.

Unsecured creditors are essentially any companies or people who loaned funds to a corporation, but do not hold a mortgage or lien on a piece of real estate or other substantial property.

Banks and the state, often the Israel Tax Authority, will have to take a partial hit on some of what they are owed, but this approach has been adopted in many Western countries for some time as a more stable way of reducing broader economic instability resulting from corporate defaults.

More specifically, until now secured creditors have gotten to charge higher interest for the debts they are owed than unsecured creditors, which has had the effect of preventing unsecured creditors from getting any “pennies back on their dollar.” The bill again will make interest rates more equal between different classes of creditors.

The bill will also bring Israel into the 21st century in having a more streamlined process to cooperate with other countries’ courts in cases of cross-border insolvency of multinational corporations.

Part of what will give both corporate and individual debtors a fresh start will be a quicker and more uniform process for them to get debt obligations they cannot pay discharged or forgiven. Discharges will normally be granted within four years and, for certain poorer individuals, within only one year. Debtors who landed in their situation in bad faith will still need to wait longer.

The committee put out a statement that it had successfully pressed state organs dealing with bankruptcy issues to help fund parts of the debtor rehabilitation process.

The statement also highlighted that the appointment of the powerful trustees who often take over debtor-corporations and help determine how best to reorganize or liquidate them will become a more transparent process.

Moreover, the bill provides stronger protections for individual debtor-residents who may need to be evicted, so they at least have somewhere new to move to as well, as protecting their privacy.

Finally, the bill will alter incentives for employees of debtor-corporations to encourage them to support their companies’ rehabilitation instead of its liquidation.

In the past, such employees would usually get paid, and would be paid sooner, only if their companies liquidated. Under the bill, the National Insurance Institute will pay them if the companies reorganize.

Justice Minister Ayelet Shaked and committee chairman Nissan Slomiansky, both of Bayit Yehdui, former Joint List MK Osama Sa’adi, who was involved in many of the committee’s hearings, United Torah Judaism MK Uri Maklev and many others celebrated the legislation as a crowning achievement of the committee.