I am a Canadian director of an Israeli subsidiary that is running out of money. Can I be made to pay its debts personally?

There is a point at which an Israeli director stops working for the shareholders and starts working for the creditors, and Israeli law fixes that point by reference to insolvency rather than to a formal filing. Section 288 of the Insolvency and Economic Rehabilitation Law 5778-2018 is the provision that does it. It replaced the older wrongful trading concepts carried over from the Companies Ordinance, and it bites earlier and more directly than most overseas directors expect.

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Detailed Answer

Section 288 imposes liability on a director or a chief executive who knew, or in the circumstances ought to have known, that the company was insolvent, and who did not take reasonable measures to reduce the scope of the insolvency. The liability runs to the company in respect of the damage caused to its creditors by those acts or omissions, and it is enforced in the insolvency proceedings themselves, usually on the application of the trustee, in the District Court. Section 288(b) identifies the kind of steps expected, and they are recognisable to any Canadian director who has sat through a solvency review: obtaining professional advice from an insolvency specialist, opening negotiations with creditors, and where nothing else will work, initiating insolvency proceedings rather than trading on. What the section is really targeting is the middle period, the months in which a company keeps taking deposits, keeps ordering stock and keeps running payroll on the strength of funding that has not arrived. Israeli courts read the phrase reduce the scope of the insolvency literally: the question is not whether you caused the collapse, it is whether the hole got deeper on your watch when it did not have to.

Nothing in the section attaches to residence, and that is the trap for a director who joined an Israeli subsidiary's board as a formality on behalf of a Canadian parent. Non-executive status does not answer the duty. Nor does the fact that the Israeli general manager ran the business day to day and sent quarterly reports, because the test includes what you ought to have known. Three points of practice follow. Board minutes matter more here than in most Israeli contexts, because a documented decision to take advice, or a recorded objection to continued trading, is the evidence Section 288(b) invites. Second, an application against a director abroad is served under the service rules for defendants outside Israel, and the fact that you are in Ontario delays it rather than defeating it. Third, personal exposure in Israel is what generates the exit orders and asset attachments that follow, so a director who intends to visit should resolve the claim rather than avoid it. The related exposures under the Companies Law, which run on a separate track from Section 288, are covered in our answer on when a non-resident director is personally liable for an Israeli company's obligations.

In Practice: Section 288 of the Insolvency and Economic Rehabilitation Law 5778-2018 makes a director or chief executive who knew or ought to have known of the company's insolvency, and failed to take reasonable measures to reduce its scope, liable to the company for the damage to creditors; Section 288(b) identifies obtaining specialist advice, negotiating with creditors and initiating proceedings as those measures. The claim is brought by the trustee in the District Court inside the insolvency file. On unsecured trade debt of NIS 3,000,000 accumulated after the point of insolvency, that is the order of exposure the trustee will pursue, and a contested Section 288 application commonly runs 18 to 30 months from filing to judgment.

When to Consult a Lawyer

• The Israeli company is still trading while waiting for a capital injection from the Canadian parent that has been promised but not documented. That is the exact fact pattern Section 288 was drafted for, and a signed and funded commitment is worth far more than a board resolution recording an intention.
• You have resigned or are being asked to resign from the Israeli board. Resignation stops the clock going forward but does nothing about the period you served, and the timing of it becomes evidence.
• Employee wages, pension contributions or withheld tax are in arrears. Those carry their own personal exposure for officers on top of Section 288, and they are the debts an Israeli trustee pursues first.

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Speak With an Israeli Attorney

We assess where the point of insolvency actually fell, put the Section 288(b) measures on the record while they still count, and defend a trustee's application against you without your travelling to Israel.

Contact us for a confidential initial consultation.