A scheme of arrangement in Israel is a court-supervised restructuring mechanism that allows a company to reach a binding agreement with its creditors or shareholders, avoiding liquidation while reorganising its debts and obligations. The Israeli insolvency framework was substantially modernised by the Insolvency and Economic Rehabilitation Law of 2018, which replaced older legislation and brought Israeli practice closer to international standards. This guide covers the legal foundation, procedural steps, creditor rights, practical timelines, costs, and common pitfalls for any party considering or facing a scheme of arrangement in Israel.
A scheme of arrangement is a statutory procedure under which a company, its creditors, or its shareholders propose a plan to restructure obligations, renegotiate debt terms, or reorganise the corporate structure. Once approved by the required majority and confirmed by the court, the scheme binds all parties within the relevant class, including those who voted against it.
Under the Insolvency and Economic Rehabilitation Law, the scheme of arrangement sits within a broader rehabilitation framework. The law distinguishes between a voluntary arrangement proposed outside formal insolvency proceedings and a court-supervised rehabilitation plan filed as part of insolvency proceedings. In practice, most significant restructurings proceed through the court-supervised route, which provides the strongest legal protection and binding effect.
The mechanism is available to companies incorporated in Israel as well as to foreign companies with sufficient connection to the Israeli jurisdiction, such as those conducting business or holding assets in Israel. Individual debtors may also use related rehabilitation procedures, though the scheme of arrangement in the corporate context is the primary focus for business restructurings.
A key feature of the Israeli scheme is that it can bind dissenting creditors within a class, provided the statutory majority thresholds are met and the court is satisfied that the arrangement is fair and equitable. This makes it a powerful tool for resolving complex multi-creditor situations where unanimous consent is unattainable.
The Insolvency and Economic Rehabilitation Law of 2018 is the central statute governing schemes of arrangement and corporate rehabilitation in Israel. It came into full effect in stages and replaced the Companies Ordinance provisions that previously governed arrangements and compromises, as well as the older Bankruptcy Ordinance for individual debtors.
The 2018 Law introduced several significant changes. It created a unified insolvency regime covering both corporate and individual debtors, established clearer procedures for appointing trustees and administrators, and introduced the concept of a rehabilitation administrator who manages the debtor';s affairs during the restructuring process. The law also strengthened the automatic stay mechanism, which halts enforcement actions by creditors once insolvency proceedings are opened.
The Companies Law of 1999 remains relevant for corporate governance matters during a scheme, including shareholder approvals and board responsibilities. The court with jurisdiction over insolvency matters is the District Court, which exercises supervisory authority throughout the scheme process. The Official Receiver, an administrative body within the Ministry of Justice, also plays a role in certain insolvency proceedings, particularly where public interest is engaged.
Secondary regulations and court rules supplement the primary legislation, setting out procedural requirements for filing, notice, creditor meetings, and court hearings. Practitioners must be familiar with both the statutory text and the evolving body of case law, as Israeli courts have developed significant jurisprudence on creditor classification, valuation disputes, and the fairness standard applied when confirming a scheme.
A non-obvious requirement is that the debtor must typically demonstrate that the scheme offers creditors a better outcome than liquidation. Courts apply a comparative analysis, and a scheme that fails this test is unlikely to receive judicial confirmation even if it achieves the required creditor majority.
The process for a scheme of arrangement in Israel involves several distinct stages, each with its own requirements and timelines.
Initiating the proceedings
Proceedings are initiated by filing a petition with the District Court. The petition may be filed by the company itself, by a creditor holding a qualifying claim, or by a shareholder. The petition must include a description of the company';s financial position, the proposed arrangement or a framework for developing one, and evidence that the company meets the threshold for insolvency or imminent insolvency under the 2018 Law.
Upon filing, the court may grant an interim stay of proceedings, preventing creditors from taking enforcement action while the scheme is developed. This stay is one of the most valuable protections available to a debtor in financial difficulty, as it creates breathing room for negotiations. The interim stay is typically granted for an initial period of weeks and can be extended by the court.
Appointment of a rehabilitation administrator
In most court-supervised schemes, the court appoints a rehabilitation administrator. This professional, who must meet qualification requirements set by the Ministry of Justice, takes on responsibility for managing the debtor';s business, preparing the rehabilitation plan, and communicating with creditors. The administrator acts as an officer of the court and owes duties to all stakeholders, not solely to the debtor.
The administrator';s fees are treated as a priority expense of the estate, which means they are paid before distributions to unsecured creditors. This is a cost that debtors and creditors alike must factor into their analysis of the scheme';s viability.
Developing and filing the rehabilitation plan
The rehabilitation plan is the core document of the scheme. It must set out the proposed treatment of each class of creditors, the basis for classifying creditors into classes, the proposed timeline for implementation, and the mechanism for distributions or debt restructuring. The plan must also include a liquidation analysis demonstrating that creditors receive at least as much under the scheme as they would in a liquidation.
The administrator, in consultation with the debtor and major creditors, typically prepares the plan. In practice, this process involves significant negotiation, particularly with secured creditors and major unsecured creditors who have leverage in the process. The timeline for developing a plan varies considerably depending on the complexity of the debtor';s balance sheet, but a period of several months from the filing of the petition to the submission of a plan is common.
Creditor classification and meetings
Creditors are grouped into classes based on the similarity of their legal rights and economic interests. Secured creditors, preferential creditors, and unsecured creditors are typically placed in separate classes. The classification exercise is critical because the voting thresholds apply class by class, and a creditor who disagrees with their classification may challenge it before the court.
Once the plan is filed, the court orders creditor meetings. Each class votes separately. Under the 2018 Law, approval requires a majority in number of creditors voting and a majority of at least three-quarters in value of the claims represented at the meeting. These dual thresholds - headcount and value - are designed to prevent a small number of large creditors from overriding the wishes of the broader creditor body, and vice versa.
Notice of the creditor meetings must be given in accordance with court orders, typically including publication in newspapers and direct notice to known creditors. A common mistake made by debtors unfamiliar with Israeli procedure is underestimating the notice requirements and the time needed to identify and notify all creditors, including contingent and disputed claimants.
Court confirmation
After the creditor meetings, the results are reported to the court. If the required majorities are achieved in each class, the debtor or administrator applies for court confirmation of the scheme. The court does not simply rubber-stamp a creditor-approved scheme. It conducts an independent review to ensure that the arrangement is fair and equitable, that the classification of creditors was appropriate, and that no creditor receives less than they would in a liquidation.
Creditors who voted against the scheme may appear at the confirmation hearing and raise objections. The court has discretion to confirm, modify, or reject the scheme. If confirmed, the court order is binding on all creditors within the relevant classes, including dissenters. The confirmed scheme is then implemented under the supervision of the administrator or a court-appointed trustee.
The total timeline from petition to court confirmation, in a moderately complex case, typically runs from six months to over a year. Highly complex cases involving multiple creditor classes, valuation disputes, or contested classification can take considerably longer.
Creditors occupy a central position in the scheme of arrangement process, and Israeli law provides them with a range of procedural and substantive protections.
Proof of debt and claims adjudication
Creditors must file proofs of debt within the deadline set by the court or administrator. Claims that are not filed in time risk being excluded from voting and from distributions under the scheme. The administrator reviews filed claims and may accept, reject, or partially admit them. Disputed claims can be referred to the court for adjudication, a process that can add time and cost to the overall proceedings.
Secured creditors occupy a privileged position. Their security interests are generally preserved through the scheme, and they are entitled to receive at least the value of their collateral. A scheme that proposes to impair secured creditors'; rights must offer them compensation equivalent to the economic value of their security, or obtain their consent.
The automatic stay and its limits
The automatic stay that arises upon the opening of insolvency proceedings prevents most enforcement actions, including the commencement or continuation of litigation, the enforcement of judgments, and the exercise of set-off rights in certain circumstances. However, the stay is not absolute. Certain categories of creditor, including some secured creditors and parties to financial contracts, may have rights that are not fully stayed under the 2018 Law.
A practical scenario: a foreign bank holding a pledge over Israeli real estate may find that its enforcement rights are stayed during the scheme process, requiring it to participate in the creditor meeting process rather than proceeding directly to enforcement. This is a significant shift from the position that would apply outside insolvency, and foreign creditors unfamiliar with Israeli law sometimes underestimate the impact of the stay.
Cram-down and dissenting creditors
One of the most significant features of the Israeli scheme is the ability to bind dissenting creditors within a class once the required majority is achieved and the court confirms the scheme. This cram-down mechanism is essential for restructurings where a minority of creditors would otherwise hold out for better terms.
However, the cram-down is subject to important limitations. The court will not confirm a scheme that discriminates unfairly between creditors of the same class, or that provides a recovery to junior creditors while senior creditors are not paid in full, unless the senior creditors consent. This absolute priority principle, while not codified in exactly the same terms as in some other jurisdictions, is applied by Israeli courts as a matter of fairness.
Creditor committees
In larger or more complex cases, the court may establish a creditor committee to represent the interests of unsecured creditors. The committee has the right to receive information from the administrator, to be consulted on major decisions, and to appear before the court. Creditor committees can be an effective mechanism for coordinating the position of a dispersed creditor body, but they also add a layer of process and cost.
If you are a creditor or investor navigating an Israeli scheme and need guidance on protecting your position, contact info@vlolawfirm.com. We can help structure the setup correctly the first time.
The cost of a scheme of arrangement in Israel depends on the complexity of the case, the number of creditor classes, the extent of litigation, and the professional fees involved.
Professional fees and estate costs
The rehabilitation administrator';s fees are set by the court and are treated as a priority expense. In complex cases, these fees can be substantial, running into the mid-to-high hundreds of thousands of shekels or more. Legal fees for the debtor';s counsel, creditor committees, and individual creditors add further cost. Valuation experts, financial advisers, and other professionals are commonly engaged in larger restructurings.
Many underestimate the cost of the claims adjudication process. Where there are numerous disputed claims, the cost of resolving them through the administrator and, if necessary, through court proceedings can be significant and can delay the implementation of the scheme.
State and court fees
Court filing fees and administrative charges apply at various stages of the proceedings. These are set by regulation and vary depending on the size of the claim and the nature of the application. While these fees are generally modest relative to professional fees in a complex restructuring, they should be budgeted for.
Practical timelines
A straightforward scheme involving a single class of unsecured creditors and a cooperative debtor can sometimes be completed within six to nine months of the initial petition. More complex cases, particularly those involving secured creditors, cross-border elements, or contested classification, routinely take twelve to twenty-four months or longer. Parties should plan for the longer end of this range when assessing the viability of a scheme as a restructuring tool.
Cross-border considerations
Israel does not have a bilateral treaty with most countries for the mutual recognition of insolvency proceedings. However, Israeli courts have shown willingness to recognise foreign insolvency proceedings on a case-by-case basis, applying principles of comity. Conversely, a scheme confirmed by an Israeli court may not be automatically recognised in other jurisdictions, and parallel proceedings or recognition applications may be necessary.
A practical scenario: an Israeli company with significant operations and creditors in Europe may need to run parallel proceedings in Israel and in one or more European jurisdictions to achieve a comprehensive restructuring. This adds complexity, cost, and coordination challenges that must be addressed at the outset of the planning process.
Common mistakes and practical tips
A common mistake is initiating the scheme process too late, when the company';s cash position is already critical and there is insufficient runway to complete the process. The scheme requires time, and a debtor that files for insolvency with only weeks of liquidity remaining is at a severe disadvantage.
In practice, founders and management should consider engaging restructuring advisers well before a formal filing, to assess options, prepare the necessary financial information, and open dialogue with major creditors. Early engagement with creditors often results in a more cooperative process and a better outcome for all parties.
Another frequent error is failing to classify creditors correctly at the outset. Incorrect classification can lead to challenges at the confirmation stage, delaying the process and increasing costs. Legal advice on classification should be obtained before the plan is filed with the court.
What happens to ongoing contracts and employees during a scheme of arrangement in Israel?
During the scheme process, the automatic stay generally prevents counterparties from terminating contracts solely on the basis of the insolvency filing, though the precise scope depends on the contract terms and applicable law. The rehabilitation administrator has the power to adopt or reject executory contracts, which can be a significant tool in restructuring the debtor';s obligations. Employment contracts are subject to Israeli labour law protections, and employees are treated as preferential creditors for certain claims, including unpaid wages and severance. The administrator must manage the workforce carefully, as mass redundancies require compliance with specific notice and consultation requirements under Israeli employment legislation. In practice, maintaining key employees during a restructuring is often critical to preserving the business value that makes the scheme viable.
How long does a scheme of arrangement typically take in Israel, and what does it cost?
The timeline varies significantly depending on case complexity. A relatively straightforward scheme can be completed in six to nine months, while complex multi-creditor restructurings often take twelve to twenty-four months or more. Costs are driven primarily by professional fees - the rehabilitation administrator, legal counsel, and financial advisers - which in significant cases can reach into the millions of shekels. Court and administrative fees are comparatively modest. Creditors and debtors should budget conservatively and obtain fee estimates from advisers at the outset. Hidden costs often arise from disputed claims, valuation exercises, and any cross-border recognition proceedings that may be required.
Can a foreign company or foreign creditor use the Israeli scheme of arrangement?
A foreign company with sufficient connection to Israel - such as assets, operations, or registered presence in the country - can be subject to Israeli insolvency proceedings and can use the scheme of arrangement mechanism. Foreign creditors are entitled to participate in Israeli insolvency proceedings on the same basis as Israeli creditors, subject to filing proofs of debt within the required deadlines. However, foreign creditors should be aware that the automatic stay may affect their enforcement rights in Israel even if they hold security or judgments obtained abroad. Cross-border recognition of an Israeli scheme in other jurisdictions is not automatic and may require separate applications in those countries. Specialist advice is essential for any cross-border restructuring involving Israeli elements.
The scheme of arrangement in Israel is a sophisticated and effective restructuring tool, substantially modernised by the Insolvency and Economic Rehabilitation Law of 2018. It offers debtors a court-supervised path to reorganisation while providing creditors with meaningful procedural protections and the ability to bind dissenting minorities. Success depends on early planning, correct creditor classification, realistic financial projections, and experienced professional guidance.
VLO Law Firms advises international clients on bankruptcy and insolvency matters in Israel. We can assist with scheme of arrangement petitions, rehabilitation plan preparation, creditor representation, cross-border recognition, and related corporate restructuring matters. To request a consultation, contact: info@vlolawfirm.com