- Payments in Israel normally transpire within 120 to 150 days between domestic companies, though these numbers are lower when dealing with foreign companies.
- The Israeli legislation allows speedy proceedings and execution activities for lawsuits up to NIS 75,000 (EUR 20,000 approx.). Despite this, significant delays, costs and difficulties should be expected when taking legal action, especially in cross-border disputes.
- Various insolvency proceedings are available, although in practice the chance of collecting debt when the debtor has become insolvent remains poor. It should be noted that on September 2019 the Insolvency and Financial Rehabilitation Law, 5778-2018 entered into force, regulating insolvency proceedings, and it may increase the success of our collection efforts, thanks to the improved rights of non-secured creditors on the expense of secured ones.
Collecting in Israel
Availability of financial information
All businesses in Israel must register with the Companies Registrar and all incorporated companies must release annual audited financials to their shareholders. There is, however, no obligation to publish these documents, therefore the system lacks transparency and little reliable financial data is publicly available.
On the other hand, there are companies in Israel dedicated to providing credit details, which can provide very good and reliable information about most businesses.
Allianz Trade allocates each company a grade reflecting its financial health and how it conducts business. Grades represent a core of our knowledge and analyses, and help clients identify and avoid risk. Data is continuously monitored to offer the most up-to- date information to support management decisions.
Main corporate structures
Liability for business debts is determined by legal structures, which are described as follows:
- Businesses which do not require a commercial organization may be operated by one private individual registered as a Sole Trader. Two or more individuals may also decide to share ownership and responsibilities through Partnerships (under the Partnership Ordinance of 1975), in which case the partners may be jointly
and individually liable for the actions of the other partners (while increasing fundraising capacity). Limited Partnerships may alternatively offer limited liability to the partners, excluding the general partner, which is liable for all the actions and debts of the partnership, and usually manages it.
- Incorporated entities may also be relied upon (as provided under the Israeli Companies Ordinance of 1983). Private Limited Companies are popular since the shareholders (up to 50 members) are only liable for the company’s debts in relation to their capital contribution, and there is no minimum capital requirement. Larger businesses would rather be set up through Public Companies, for which a minimum capital of NIS 25 million is required. In this type of company, the shares are tradable and the shareholders are only liable for the value of their share, while debts may only be recuperated on the company’s assets.
Israel has a mixed legal environment which, even though it is based on Common Law principles, is also influenced by Civil Law. Israeli courts have significant difficulties in coping with the case load for several reasons. First, domestic companies are quick to commence litigation proceedings and the law allows billing for legal expertise on a 'no win, no fee' basis, which means that the ability of debtors to engage in a lawsuit may play against creditors. Second, civil and commercial proceedings are regulated by numerous procedural rules which make litigation rather complex and time consuming. Third, all documents must be translated in the official languages (Hebrew and Arabic) thus making proceedings more complex to handle for foreigners.
The judiciary is otherwise sophisticated and divided into various courts which deal with business claims as follows: 30 Magistrates Courts (Beit Mishpat HaShalom) all over the country handle small business disputes of less than NIS 2.5 million (EUR 520,000), while providing for a particular Execution Institute (Hotsa‘a Lapoal) in charge for enforcing judgments and unpaid checks, drafts and promissory notes without the need to go to court. The Antitrust Tribunal deals with claims related to uncompetitive practices, while the Standard Contracts Tribunal based in Jerusalem deals with actions brought by consumers against unfair contractual terms. District Courts (Beit Mishpat Mehozi) rather deal with all commercial cases in excess of NIS 2.5 million and hear appeal proceedings against decisions rendered in the first instance by the Shalom Courts. Issuers of land and trademark infringements will normally be referred to the District Court, even for small amounts. Jurisdiction normally depends on the debtor's address but many international commercial disputes would be heard by the Courts of Tel Aviv and Jerusalem, while maritime claims would be dealt with in Haifa and Ashdod, where the ports of Israel are located. The Supreme Court (Beit Mishpat Elyon) would hear appeal claims brought against decisions rendered by the District Courts, as well as certain claims brought in relation to trademark infringements.
Days Sales Outstanding (DSO)
Late payment interest
Debt collection costs
Use of Retention of Title (RoT) agreements, aimed at preserving ownership over goods until the related invoice is paid in full, is an established practice in Israel, but case law has had a significant impact on their admissibility.
The courts have characterized many RoT provisions into security interests (which must be registered with the Registrar of Pledges in order to be valid) and have limited their applicability, as they are considered as an ownership protection tool rather than as a right granting priority on future proceeds should the debtor default.
In practice, the courts would tend to verify whether the RoT originally aimed at protecting ownership or at ensuring such priority, which means that RoT provisions triggered against insolvent debtors might only have a limited effect unless the goods sold are still available and identifiable. RoTs in Israel thus have little margin of movement against banks’ priority rights (in the form of floating charges) crystalizing as pledges during insolvency proceedings, and thus rarely allow receiving dividends in insolvency proceedings.
Local bank guarantees are generally available, but they remain more expensive than in other developed countries. Promissory notes and checks also constitute interesting payment tools, as they are considered transferable securities which may be enforced by the court if the debtor defaults. Finally, 30% of transactions tend to be paid in advance and negotiating down payments is advisable.
The slow and drawn out judicial system means amicable settlement opportunities constitute the strongest alternative to formal proceedings. Before starting legal proceedings against a debtor, assessment of assets is essential to verify whether the latter is still active and whether recovery chances are at best. In addition, it is essential to be aware of the debtor’s solvency status: if insolvency proceedings have been initiated, it often becomes more complex and difficult to collect a debt.
Prior to initiating a formal dispute, it may also be worth considering whether the contract allows having foreign or arbitral tribunals.
Given the complexity of conducting legal action in Israel, it is essential to first ensure that legal action only commences when all amicable negotiation opportunities have been exhausted.
Fast-track proceedings may also help to solve payment issues without having to conduct an ordinary lawsuit. These are available when the claim is up to NIS 75,000 (EUR 18,000): in such a case, the plaintiff files the claim with an affidavit, together with documented proof of the debt amount. The debtor has 45 days to file a defense with an affidavit (there is no need to obtain the court's permission).
Another quick way to receive payment is through a shorter process (injunction), which can be submitted directly to the Hotsa’a Lapoal: A claim up to NIS 25,000 (EUR 7,000) may be filed through a shortened track in which the Hotsa'a Lapoal office initiates and manages the proceedings against the debtor. The processing time for a case in the shortened track is up to 8 months with the exception of exceptional cases and the success rate in collecting the debt in the shortened track cases is about 85%. A claim exceeding NIS 25,000 requires the claim issuer to initiate the proceedings against the debtor by submitting applications (as opposed to the shortened track). Both tracks mentioned above must be based on clear evidence which the debtor cannot deny (e.g. an acknowledgement of debt signed by the debtor). If the evidence is opposed, the debtor must apply for special permission from court in order to file a defense. If permission is granted, the process will become an ordinary one; if not, a judgment will be made.
Originating motions proceedings aim at solving disputes affecting one’s rights (i.e. ownership rights, creditor’s status, etc.). An ordinary proceeding must be based on claim facts accompanied by supporting documentation and the arguments of the plaintiff versus defender. When the option of commencing formal legal proceedings remains, a claim may be filed to the competent court (depending on the amount at stake) and the debtor must be served with a summon. The debtor must submit a defense within 60 days (in case of a speedy procedure – within 45 days). The parties are given a chance to meet and exchange during a pre- trial hearing, which also provides them with an opportunity to settle the claim amicably. If no compromise is reached, the parties’ evidence and arguments are then examined. The court may render its decision once the evidentiary hearing has taken place and the parties’ summaries have been submitted. It should be added that, in practice, the parties may ask the court for extensions of the time periods stated in law, which are often granted.
Israeli courts may award remedies in the form of compensatory damages, mandatory or prohibitory injunctions and declarative decisions, but punitive damages are not allowed by law.
Lodging an appeal
The defeated party may lodge an appeal against the decision rendered in first instance before the higher court, within 60 days following the notification of the decision. It is however necessary to obtain the authorization (leave for appeal) from the court in certain cases, which would then review the decision, taking issues of fact and law into consideration.
Decisions rendered in second instance may also be appealed against before the Supreme Court, whose awards are final and binding on the parties. However, the Supreme Court only has authority to consider questions of law.
Enforcing court decisions
How long could legal action take?
How much could this cost?
Alternatives to legal action
Alternative Dispute Resolution methods (ADR)
Given the difficulty of obtaining timely judgments from the courts, alternative methods of resolution such as mediation and arbitration are increasingly common in Israel.
Mediation involves the nomination of a mediator who is given the responsibility of helping the parties reach a compromise. The mediator has no authority to decide on behalf of the parties and cannot bind the parties with a decision. An agreement is only binding if a settlement agreement is entered into between the parties at the end of the mediation. The mediator acts as a facilitator to settlement. In practice, the agreement is usually sent to court which then assures it in order to give it the value of a binding judgment. Arbitration involves the parties agreeing to rely on an independent and impartial third-party arbitrator, who is given authority to settle their dispute on their behalf. The arbitrators’ decision will be binding on the parties.
As an out-of-court settlement method, ADR can be cost-effective, generally reduces delays (awards must normally be rendered within three to nine months), allows preserving of confidentiality and offers a binding decision which may then be enforced before the courts if necessary. When international transactions are involved, international arbitration may also be considered.
Precautionary measures (see above) normally fall under the jurisdiction of the courts, however in practice arbitration tribunals are given increasing liberty in awarding such orders.
Enforcing foreign awards
When the parties consider obtaining a decision from a foreign court in order to reduce delays, or when a foreign decision must be enforced in Israel because a debtor has assets in the country, it is first essential to ensure that Israeli courts will recognize the decision. As a general rule, indeed, courts must recognize foreign judgments as domestic decisions prior to enforcing them (through a bailiff), but specific rules apply.
Enforcement under the Foreign Judgment Enforcement Law of 1958 takes place before District Courts through an exequatur procedure aimed at verifying that the foreign proceedings have fulfilled certain requirements. In particular, it must be established that the issuing foreign court had jurisdiction to decide on the case, that the decision is final (i.e. that all appeal opportunities have been exhausted) and enforceable in the issuing country, and that enforcement of the foreign decision does not contradict Israeli public policy. Foreign claims must also be brought to court within five years in order to be enforced.
It is interesting to emphasize that Israel only has four reciprocal recognition and enforcement treaties with foreign countries (Austria, Germany, Spain, UK) but that, by contrast with many countries, it does not require the existence of a treaty to recognize and enforce a foreign decision as long as the previously mentioned conditions are fulfilled, and as long as the issuing country has a reciprocity policy despite the absence of a treaty.
Israel is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958, therefore its domestic courts ought to recognize and enforce awards rendered through international arbitration proceedings.
Legislation on insolvent companies consists mainly of the Companies Ordinance of 1983 (as amended), the Bankruptcy Ordinance of 1980, and the Companies Law of 1999.
Israeli law recognizes several main ways of dealing with insolvent companies: a voluntary arrangement between the company and its creditors, liquidation of the company, stay of proceedings and receivership. All insolvency proceedings may be initiated by either the debtor or its creditors, but in each type of proceeding the courts would tend to give priority to the creditors over the interests of the company and third parties.
The Insolvency and Financial Rehabilitation Law, 5778-2018 entered into force on September 2019, regulating the insolvency proceedings. The purpose of this legislation is to rearrange the law of insolvency and economic recovery as follows:
- Redefine insolvency of corporations, and allowing corporations to take part of rehabilitation procedures and liquidation.
- Redefine the order of payments among the creditors.
- Limit creditors share, for those who possess a Floating charge, to maximum 75% of the asset. Hence, unsecured creditors enjoys a greater share than before.
- Cancellation of some of the priority debts.
- Setting a special duty of care to directors and CEO's in cases of economical insolvency of a corporation that has yet to be declared legally.
- Enabling court to instruct a supplier who supplied to a corporation before an order to open proceedings, or a supplier who ceased deliveries slightly prior the order, to continue providing, when such goods are necessary for the rehabilitation of the corporation.
Due to COVID-19, on March 2021, an amendment to the Insolvency and Financial Rehabilitation Law entered into force as a temporary order and was extended until the end of 2022. Its purpose is enabling corporations and individuals to ask court for a delay of proceedings for a duration of up to four months, in order for them to reach a debt restructuring without appointing an external official to replace the management.
The Insolvency and Financial Rehabilitation law may increase the success of our collection efforts thanks to the improved rights of non-secured creditors on the expense of secured ones. That said, there is not enough experience do be certain whether the result above will occur.
Restructuring the debt
Formal rescue proceedings take place under section 350 of the Companies Act. Upon approval of the insolvency petition, the court orders a meeting of the parties aiming at a restructuration compromise. A proposal is drafted by the debtor and must be approved by a majority of participants (representing at least 75% of the value present at the vote), but the law imposes no limitation as to how much of the debt must be repaid in order for the proposal to be deemed acceptable. The proposal is then validated by the court and becomes binding.
This procedure usually comes along with a petition to the court for a stay on the proceedings aiming at protecting the debtor from parallel enforcement claims. During the proceedings, a trustee is given responsibility for managing the company in place of the directors.
When the debt cannot be restructured, liquidation proceedings can be commenced upon request of the debtor (voluntary liquidation) or by the creditors with a view to realize the company’s assets. The court appoints a liquidator, with whom the creditors must file a proof of claim within 6 months from the formal date of the orfer given by court. The liquidator then takes responsibility for managing the company, selling its assets and distributing the proceeds of the sale to the various creditors taking priority rights into account.
Receivership proceedings are rather initiated by secured creditors to enforce specific contractual agreements and to recuperate specific debts.This may be done to the detriment of the other creditors as these will not be represented.