Preventive Restructuring Frameworks in Israel

Preventive restructuring frameworks in Israel give financially distressed companies a formal mechanism to reorganise their debts and operations before reaching the point of formal insolvency. The Israeli Insolvency and Economic Rehabilitation Law, which came into force in recent years, introduced a modern, court-supervised rehabilitation track that aligns the country';s approach with leading international standards. For creditors, founders and foreign investors operating in Israel, understanding how these frameworks operate - and when to use them - can mean the difference between preserving value and facing a disorderly liquidation.

This guide covers the legal foundations of preventive restructuring in Israel, the main procedures available, eligibility conditions, the roles of courts and practitioners, creditor rights, costs and timelines, and the practical considerations that determine whether a restructuring succeeds.

Israel';s primary insolvency statute is the Insolvency and Economic Rehabilitation Law (the "Insolvency Law"), which replaced the older Companies Ordinance and Bankruptcy Ordinance provisions that had governed the field for decades. The Insolvency Law introduced a unified, coherent framework that treats corporate and personal insolvency under a single legislative roof, while preserving distinct tracks for companies and individuals.

The central philosophy of the Insolvency Law is rehabilitation over liquidation. Where a company is viable as a going concern, the law encourages stakeholders to pursue a structured reorganisation rather than an immediate winding-up. This shift reflects a broader policy choice: preserving employment, protecting creditor recoveries and maintaining economic activity are treated as preferable outcomes to asset sales in a distressed market.

The law draws on concepts familiar from Chapter 11 of the United States Bankruptcy Code and the EU Directive on Preventive Restructuring Frameworks, though the Israeli implementation has its own procedural character. The Economic Court in Tel Aviv - a specialist commercial court - has jurisdiction over most significant corporate restructuring matters. District courts handle smaller cases and personal insolvency proceedings.

A non-obvious requirement for foreign founders is that the Insolvency Law applies to companies incorporated in Israel and, in certain circumstances, to foreign companies with a centre of main interests in Israel. A foreign company operating through an Israeli subsidiary is subject to Israeli insolvency law at the subsidiary level, even if the parent is restructuring under a different jurisdiction';s rules.

Access to preventive restructuring under the Insolvency Law is not automatic. A company must meet specific eligibility conditions before the Economic Court will open a rehabilitation proceeding.

The primary threshold is financial distress. The law defines this broadly: a company qualifies if it is unable to meet its debts as they fall due, or if it is reasonably foreseeable that it will reach that position within a defined period. This forward-looking test is significant - it allows management to act before a company is technically insolvent, which is precisely the preventive character of the framework.

The company must also demonstrate that rehabilitation is feasible. The court will not open a proceeding if the evidence shows the company has no realistic prospect of recovery. In practice, this means the applicant must present a credible preliminary business plan or financial analysis showing that the company';s core operations can generate sufficient value to satisfy creditors at a higher rate than liquidation would achieve.

Two practical scenarios illustrate how this threshold operates. In the first, a mid-sized Israeli technology company faces a liquidity crisis caused by a delayed customer payment cycle and rising operating costs. Its assets exceed its liabilities, but it cannot service its short-term debt. This company is a strong candidate for preventive restructuring: it is distressed but fundamentally solvent on a balance-sheet basis. In the second scenario, a retail chain has accumulated losses over several years, its lease portfolio is uneconomic and its brand has deteriorated. Here, the court will scrutinise whether rehabilitation is genuinely achievable or whether the proceeding would simply delay an inevitable liquidation.

The application may be filed by the company itself, by a creditor holding a material claim, or by the Israeli Official Receiver in certain circumstances. Management-initiated filings are the most common in practice, because they allow the company to shape the initial restructuring proposal and maintain operational control during the proceeding.

Once the Economic Court accepts a restructuring application, the proceeding moves through several defined stages. Understanding the sequence helps management and creditors plan their positions from the outset.

Opening and moratorium. Upon filing, the court typically grants an automatic stay - referred to in the Insolvency Law as a "freeze order" - that suspends enforcement actions by creditors. This moratorium covers most secured and unsecured claims, though certain categories of creditors, including employees with wage claims and holders of specific security interests, may retain limited enforcement rights. The initial moratorium period is set by the court and can be extended, but the law imposes outer time limits to prevent proceedings from dragging on indefinitely.

Appointment of a rehabilitation trustee. The court appoints a rehabilitation trustee (in Hebrew, "kamel shikum") to oversee the proceeding. The trustee';s role is supervisory rather than managerial in the first instance: management retains day-to-day control of the business, but the trustee monitors compliance, facilitates negotiations between the company and its creditors, and reports to the court. This "debtor in possession" model is a deliberate design choice in the Insolvency Law, intended to preserve management';s operational knowledge while providing independent oversight.

Preparation and submission of the rehabilitation plan. The company, with the trustee';s assistance, prepares a formal rehabilitation plan. The plan must address how existing debts will be restructured - through haircuts, extended maturities, debt-to-equity conversions or a combination - and how the business will be made viable going forward. The plan must be submitted within the timeframe set by the court, which is typically several months from the opening of the proceeding. Extensions are possible but require court approval and a showing of good cause.

Creditor classification and voting. Creditors are divided into classes based on the nature and priority of their claims. Secured creditors, preferential creditors (including employees and tax authorities) and unsecured creditors each vote separately on the plan. The plan is approved if it obtains the required majority within each class - generally a majority by number and a supermajority by value of claims. A plan approved by the required majorities is then submitted to the court for confirmation.

Court confirmation and cram-down. The court confirms the plan if it meets the statutory requirements, including the "best interests of creditors" test: no creditor may receive less under the plan than it would in a liquidation. Importantly, the Insolvency Law includes a cram-down mechanism: if one or more creditor classes vote against the plan but the overall structure is fair and equitable, the court may confirm the plan over the objection of dissenting classes. This provision is modelled on international best practice and prevents a minority of creditors from blocking a commercially sound restructuring.

In practice, the entire proceeding from filing to plan confirmation takes between six months and eighteen months for a mid-complexity case. Highly complex restructurings involving multiple creditor classes, cross-border elements or contested valuations can take longer.

The Economic Court in Tel Aviv sits at the centre of every significant corporate restructuring in Israel. Its judges have developed substantial expertise in insolvency matters, and the court';s procedural rules are designed to move cases efficiently. The court approves the opening of the proceeding, sets the moratorium, confirms appointments, reviews the rehabilitation plan and resolves disputes between stakeholders.

The rehabilitation trustee is the second key institutional actor. Trustees are typically senior insolvency practitioners - accountants or lawyers with specialist qualifications - drawn from a panel maintained by the Official Receiver';s office. The trustee';s duties run to all stakeholders, not just the debtor company. A trustee who identifies evidence of fraudulent trading or asset dissipation is obliged to report this to the court and, where appropriate, to law enforcement authorities.

Creditor committees play an important practical role, particularly in larger proceedings. The Insolvency Law allows creditors to form a committee that represents the collective interests of a class. The committee has the right to receive information from the company and the trustee, to attend court hearings and to negotiate directly on plan terms. In practice, the creditor committee in a significant restructuring often retains its own financial advisers and legal counsel, adding another layer of professional scrutiny to the process.

Employees occupy a protected position under the Insolvency Law. Wage arrears and certain other employment-related claims are treated as preferential debts, ranking ahead of most unsecured creditors. The National Insurance Institute of Israel provides a safety net for unpaid wages up to statutory limits, which reduces the immediate pressure on the company during the restructuring period.

For foreign creditors - a common feature of Israeli technology and pharmaceutical company restructurings - the Insolvency Law contains provisions on cross-border insolvency that draw on the UNCITRAL Model Law. A foreign creditor with a claim against an Israeli company participates in the Israeli proceeding on broadly equal terms with domestic creditors, subject to the priority rules of Israeli law.

If you are a creditor or a company director navigating a restructuring proceeding in Israel, early legal advice is essential. Contact info@vlolawfirm.com - we can help structure the setup correctly the first time.

The financial cost of a preventive restructuring proceeding in Israel is a material consideration for any company evaluating its options. Costs fall into several categories.

Court and official fees. Filing fees and court charges are set by regulation and vary with the size and complexity of the proceeding. These are generally modest relative to the overall cost of the process.

Trustee remuneration. The rehabilitation trustee is entitled to remuneration approved by the court. Trustee fees in complex proceedings can be substantial, reflecting the volume of work involved in managing creditor communications, reviewing financial information and preparing court reports. Trustee fees are treated as an expense of the proceeding and rank ahead of most pre-filing claims.

Professional fees. The company will typically engage legal counsel and financial advisers to prepare the restructuring plan, manage creditor negotiations and represent it in court. In a mid-sized restructuring, professional fees usually start from the low thousands of EUR equivalent and can rise significantly for complex, multi-creditor proceedings. Creditor committees and major creditors also incur their own advisory costs, which are generally borne by those parties rather than the estate.

Restructuring financing (DIP financing). A company in restructuring often needs new money to fund operations during the proceeding. The Insolvency Law permits the court to authorise "rescue financing" - equivalent to debtor-in-possession financing in US practice - that ranks ahead of pre-existing unsecured claims. This super-priority status makes rescue financing more attractive to lenders, but the court must be satisfied that the financing is necessary and that existing creditors are not unfairly prejudiced.

A common mistake made by companies entering restructuring is underestimating the working capital required to sustain operations through the proceeding. Many underestimate the time it takes to negotiate and confirm a plan, and they exhaust their liquidity before the process is complete. A realistic cash flow forecast covering the full expected duration of the proceeding is an essential planning tool.

Hidden costs also arise from the operational disruption that accompanies a public restructuring filing. Key customers may seek alternative suppliers, key employees may resign, and suppliers may demand cash-in-advance terms. These indirect costs are difficult to quantify in advance but can be as significant as the direct professional fees.

The Insolvency Law strikes a careful balance between giving the debtor company breathing space to reorganise and protecting the legitimate interests of creditors. Understanding the specific rights available to creditors is important for any party holding a claim against an Israeli company in restructuring.

Proof of debt. Creditors must file a formal proof of debt within the period set by the court or the trustee. Failure to file on time can result in a creditor being excluded from voting on the plan and from distributions under it. Foreign creditors unfamiliar with Israeli procedure sometimes miss this deadline, which is a costly mistake.

Information rights. Creditors are entitled to receive the rehabilitation plan and supporting financial information before the vote. The trustee is required to provide sufficient information to allow creditors to make an informed decision. In practice, the quality and completeness of information provided varies, and creditors with significant claims should consider appointing their own advisers to review the materials independently.

Challenge rights. A creditor who believes the plan is unfair - for example, because it would receive less than in a liquidation, or because the debtor has undervalued its assets - may object to court confirmation. The court will hear objections and may require modifications to the plan before confirming it.

Secured creditor position. Secured creditors retain their security interests during the moratorium, but enforcement is stayed. The court may allow a secured creditor to enforce its security if the collateral is depreciating in value and the debtor cannot provide adequate protection. This "adequate protection" concept, borrowed from US practice, is an important safeguard for lenders holding security over wasting assets.

Consider a practical scenario: a foreign bank holds a first-ranking charge over an Israeli company';s intellectual property portfolio. The company files for restructuring. The bank';s enforcement rights are stayed, but the bank can apply to the court for adequate protection - for example, a cash payment or additional security - if it can show the IP is losing value during the proceeding. If the court agrees, the debtor must provide protection or the stay may be lifted.

Formal court-supervised restructuring is not the only option available to a distressed Israeli company. Understanding the alternatives helps management and advisers choose the most appropriate path.

Out-of-court workouts. A company with a small number of creditors and a cooperative lender group may be able to negotiate a restructuring entirely outside the court process. An out-of-court workout avoids the publicity and cost of a formal proceeding, preserves management control and can be completed more quickly. The disadvantage is that it requires unanimous or near-unanimous creditor agreement: a single holdout creditor can refuse to participate and pursue enforcement action.

Scheme of arrangement under the Companies Law. Before the Insolvency Law came into force, Israeli companies frequently used the scheme of arrangement mechanism under the Companies Law to restructure their debts. This mechanism remains available and is sometimes preferred for restructurings that do not involve the full range of insolvency issues. A scheme requires court approval and creditor voting, but the threshold for approval differs from the Insolvency Law rehabilitation track.

Liquidation. Where rehabilitation is not feasible, the Insolvency Law provides for an orderly liquidation of the company';s assets. Liquidation may be voluntary (initiated by shareholders) or compulsory (ordered by the court on a creditor';s application). The proceeds are distributed according to the statutory priority waterfall: secured creditors first, then preferential creditors, then unsecured creditors, with shareholders receiving any residual.

The choice between these options depends on several factors: the number and diversity of creditors, the availability of new financing, the viability of the underlying business, the attitude of major creditors and the urgency of the company';s cash position. In practice, management should seek legal and financial advice at the earliest sign of financial difficulty, before the range of options narrows.

What is the biggest practical risk for a company entering preventive restructuring in Israel?

The most significant risk is running out of liquidity before the plan is confirmed. Court-supervised restructuring takes time - typically six to eighteen months for a mid-complexity case - and the company must fund its operations throughout. A company that enters the process without adequate cash reserves or a committed source of rescue financing may be forced into liquidation before the restructuring can be completed. Management should prepare a detailed cash flow forecast and, where possible, secure a committed credit facility before filing. Early engagement with major creditors to gauge their likely cooperation is also essential, as a hostile creditor group can significantly extend the timeline and cost of the proceeding.

How long does a preventive restructuring proceeding take in Israel, and what does it cost?

A straightforward restructuring with a cooperative creditor group and a clear business plan can be completed in six to nine months from filing to plan confirmation. Complex cases - particularly those involving multiple creditor classes, disputed valuations or cross-border elements - routinely take twelve to eighteen months or longer. Costs vary considerably with complexity. Professional fees for legal and financial advisers usually start from the low thousands of EUR equivalent for smaller proceedings and rise substantially for larger, contested cases. Trustee remuneration and court fees add further to the total. Companies should budget conservatively and treat the cost estimate as a floor rather than a ceiling.

Can a foreign company or foreign creditor participate in Israeli restructuring proceedings?

Yes, on both sides. A foreign company with a centre of main interests in Israel, or an Israeli subsidiary of a foreign group, is subject to Israeli insolvency law and can access the preventive restructuring framework. Foreign creditors holding claims against an Israeli company participate in the Israeli proceeding on broadly equal terms with domestic creditors, subject to Israeli priority rules. The Insolvency Law incorporates cross-border insolvency provisions based on the UNCITRAL Model Law, which facilitates cooperation between Israeli courts and foreign insolvency courts in multi-jurisdictional cases. Foreign creditors should be aware of the proof-of-debt deadline and should appoint Israeli legal counsel to protect their position in the proceeding.

Israel';s preventive restructuring framework under the Insolvency Law represents a significant modernisation of the country';s approach to corporate distress. The framework gives viable businesses a genuine opportunity to reorganise before insolvency becomes irreversible, while providing creditors with meaningful protections and a clear process. For management, the key is to act early - before liquidity is exhausted and before creditor relationships deteriorate beyond repair.

VLO Law Firms advises international clients on bankruptcy and restructuring matters in Israel. We can assist with restructuring applications, creditor negotiations, plan preparation, cross-border insolvency coordination and creditor committee representation. To request a consultation, contact: info@vlolawfirm.com