ISRAEL Law and Practice Contributed by: Shiri Shaham, Yuval Shalheveth, Aviad Lachmanovitch and Asher Bichoonski, Arnon, Tadmor-Levy
may cover all present and future assets of a com- pany (but individuals and partnerships cannot create a floating charge). Perfection generally requires registration at the Israeli Companies Registry (for companies) or the Pledges Registry (for partnerships/individuals), and, where rel- evant, at specific asset registries, such as the Land Registry. Failure to perfect a security interest renders it unen- forceable against third parties or insolvency officials. Registration costs are minimal, and registration is typi- cally completed within several business days. None- theless, a charge which does not detail the pledg- es assets or that allows the pledgor to change the pledged assets may be reclassified by a court as a floating charge, regardless of the fact that the parties referred to the pledge as fixed. There are certain assets of personal nature which can- not be pledged – eg, the salary of an individual up to a certain amount; rights in pension funds; and Social Security payments. 5.2 Floating Charges and/or Similar Security Interests Israeli companies may create floating charges over all present and future assets. Partnerships and individu- als cannot create floating charges. If a fixed charge is registered over a fluctuating or unidentified pool of assets, it is subject to the risk of being re-character- ised as a floating charge. Upon insolvency of the debtor, only 75% of the pro- ceeds from the realisation of a floating charge are pay- able to the secured creditor, and the remaining 25% will be distributed to unsecured creditors. Moreover, the realisation of a floating charge is likely to be per- formed by the insolvency official (trustee). 5.3 Downstream, Upstream and Cross- Stream Guarantees It is possible for Israeli entities in Israel to provide down- stream, upstream and/or cross-stream guarantees, but when guarantees and security interests are provided within a group of companies, it is important to ensure that the requisite corporate approvals are obtained.
Upstream and cross-stream guarantees require par- ticularly careful consideration, as they may be treated as distributions, which may be declared invalid if the statutory distribution tests are not met (profit test and solvency test) and may also be regarded as distribu- tions for tax purposes. Even where such tests are met, upon insolvency of the guarantor or security interest provider, the insolvency official and third-party creditors may challenge payments, particularly in the absence of apparent corporate benefit for the guarantor. 5.4 Restrictions on the Target Security or guarantees or any other form of financial assistance provided by a target for the acquisition of its own shares is treated as a distribution and must satisfy both profits and solvency tests. If these tests are not met, the support may be prohibited unless a court approval is obtained, though this is rarely used. An alternative is to merge a new acquisition vehicle into the target, but this approach carries some legal uncertainty. It is common to limit credit support to distributable reserves. Pledging the target’s shares by the purchaser of the shares is generally not problematic. Note that capi- tal adequacy requirements applicable to banks often classify loans secured by the target’s shares as high- risk loans, thereby increasing the capital requirements of the bank associated with such loan. 5.5 Other Restrictions As mentioned, obtaining a security interest over shares in certain regulated target companies (eg, banks, insurance companies, telecommunications or natural gas companies) may require a permit depend- ing on statutory or licence conditions. If the target received government funding, such as from the Israel Innovation Authority, additional restric- tions may apply. Contractual limitations on pledging assets should also be checked. With respect to the mortgage of a residential apart- ment, it is highly recommended to obtain the consent of the spouse, even if the spouse has no registered rights in the assets, in view of case law that deter- mined that the spouse may have unregistered rights
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