Our Israeli customer says it is doing a 'creditors' arrangement' under Section 350. Can they cut our invoice without our agreement?

An arrangement is not a negotiation, and treating it as one is how overseas suppliers end up with fifteen agorot in the shekel. It is a statutory vote. Your consent is worth exactly your share of the value in your class, and if that class approves, the court's sanction reaches you whether you engaged or not.

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Detailed Answer

Section 350 of the Companies Law 5759-1999 allows the company, a creditor or a shareholder to ask the court to convene meetings of the classes of creditors or shareholders whose rights the proposal would alter. The threshold is set in Section 350(i): at each class meeting the arrangement must attract a majority in number of those participating in the vote, abstentions excluded, who between them hold three-quarters of the value represented in that vote. Where that majority is achieved and the court approves the compromise, it binds the company and every creditor or shareholder of the class, dissenters included. Applications of any size are heard in the District Court, and commercial restructurings of substance tend to land in the Economic Department of the Tel Aviv District Court. One structural point causes confusion abroad. Since the Insolvency and Economic Rehabilitation Law 5778-2018 came into force in September 2019, proceedings for a company that genuinely cannot pay its debts run under that statute, with a trustee and the Commissioner for Insolvency Proceedings at the Ministry of Justice supervising, while Section 350 continues to carry arrangements advanced by companies that are not in formal insolvency. A customer invoking Section 350 is therefore usually telling you it is solvent and wants to stay that way.

Two things decide the outcome for a supplier in Milan, Manchester or Toronto, and neither is the merits of the invoice. The first is class placement. Unsecured trade creditors are typically pooled together, so a NIS 2,000,000 claim inside a class voting NIS 30,000,000 of debt carries under 7% of the value and cannot block anything, whereas a creditor with retention of title, a registered charge or a genuinely different legal position may be entitled to its own class and its own veto. Argue class composition at the convening stage, because after the meetings it is close to unarguable. The second is presence. Notices go to the address the company holds for you, which for a foreign supplier is often an old email on a purchase order, and the votes are cast in Hebrew on a court timetable that does not accommodate anyone's holidays. Appoint Israeli counsel with a proxy the moment you hear the word hesder, verify your debt has been correctly recorded in shekels at the right conversion date, and check whether any part of it is secured. A supplier who stays out and later tries to sue is met with the sanctioned arrangement, and the enforcement routes described in our guide on enforcing a foreign judgment in Israel will not reopen a debt that has already been compromised.

In Practice: Section 350(i) of the Companies Law 5759-1999 requires a majority in number of those voting plus three-quarters of the value represented in each class meeting, followed by sanction from the District Court, after which the arrangement binds dissenting creditors. A NIS 2,000,000 unsecured claim in a class voting NIS 30,000,000 controls under 7% of the value and cannot block approval on its own. Expect three to nine months from application to sanction in a contested case, and object to class composition at the convening hearing, which is normally listed within weeks of the application.

When to Consult a Lawyer

• Your contract contains a retention of title clause or you hold a registered charge, either of which may entitle you to a separate class and a separate veto rather than a seat in the general unsecured pool
• The company is proposing to release directors or guarantors as part of the arrangement, which extinguishes claims you may hold against people rather than the company
• Your debt is denominated in euros or dollars and the conversion date the company has used materially understates your voting value

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Speak With an Israeli Attorney

An Israeli lawyer challenges your class placement, votes your claim by proxy, and preserves any security or guarantee before the arrangement is sanctioned.

Contact us for a confidential initial consultation.