Arbitration and Insolvency in Israel: What Happens When Your Counterparty Goes Bankrupt

A contract with an Israeli company that includes a solid arbitration clause feels like solid protection. Then the company files for insolvency and suddenly the rules change. The arbitration clause still exists on paper, but the insolvency proceeding has created a parallel legal universe with its own statute, its own court-appointed administrator (kones nosim), and its own priority rules that largely override what the original contract contemplated.

Foreign businesses find this genuinely disorienting. They have an agreement that says any dispute goes to arbitration — maybe ICC arbitration in Paris, or ICCA arbitration in Tel Aviv — and a real claim against the insolvent company. Whether the path to recovering on that claim still runs through arbitration, or whether insolvency has redirected everything into a different process, turns on timing, the nature of the claim, and a few early procedural steps.

The foreign creditor who acts in the first weeks preserves options. The one who waits — treating insolvency as someone else's problem — can end up with a missed proof-of-claim deadline, an award that has nowhere to go, or both.

1. The Insolvency and Economic Rehabilitation Law 5778-2018

Israel's current insolvency framework is the Insolvency and Economic Rehabilitation Law 5778-2018 (Chok HaHadlashot VeShikum Kalcali HaTasham), which came into force in September 2019 and replaced the former Company Ordinance insolvency provisions along with the Bankruptcy Ordinance that had governed individual insolvency since the British Mandate era.

The 2018 Law introduced a fundamentally different philosophy: where the old law prioritized creditor recovery, the new law explicitly aims for the economic rehabilitation of viable businesses and individuals wherever possible. A company that cannot pay its debts does not automatically proceed to liquidation — it may enter a reorganization process (shikum kalcali) under court supervision, with an administrator working to restructure the business and reach a compromise with creditors.

Four parties matter for any foreign creditor trying to navigate Israeli insolvency. The District Court has exclusive jurisdiction over company insolvency, with applications filed at the court nearest the company's registered address (Section 180 for companies, Section 102 for individuals). The administrator (kones nosim) is a court-appointed accountant or attorney who takes over management of the company's affairs, investigates the financial position, and runs the claims process. The Official Receiver (HaKoneset HaRashmit), a Ministry of Justice body, supervises administrators and handles individual insolvency matters — in corporate cases it plays a background supervisory role. The insolvency court is simply the District Court wearing its insolvency hat: it approves the administrator's actions, adjudicates disputed claims, and signs off on any reorganization plan or distribution.

2. The automatic stay and its effect on arbitration

Section 119 of the Insolvency and Economic Rehabilitation Law 5778-2018 is the most immediately consequential provision for any creditor with a pending or potential arbitration claim. It creates an automatic stay that takes effect the moment insolvency proceedings are opened by the court.

Under Section 119(a), from the date of the court's order opening insolvency proceedings, no person may commence or continue any proceeding or take any enforcement action against the debtor or the debtor's assets without the permission of the insolvency court. This prohibition expressly extends to legal proceedings of all kinds — civil litigation, execution proceedings at the Execution Office (Lishkat HaHotzaa LaPoal), and arbitration proceedings.

The stay is broad. An arbitration that was already well advanced — past the filing of statements of claim, deep into the evidence phase — does not continue automatically just because it started before the insolvency filing. It is stayed the same day the insolvency order is made. Pressing ahead without court permission exposes the creditor (and potentially the arbitrator) to contempt-of-court risk under Section 119(d).

Section 119(b) permits the insolvency court to lift the stay for specific proceedings where there is sufficient justification. The court's discretion is broad. In deciding whether to permit an arbitration to proceed, the court will typically consider: whether the arbitration clause is valid and binding on the administrator, whether the dispute is genuinely arbitrable (within the scope of the clause), whether allowing arbitration would be more efficient than having the administrator adjudicate the claim, and whether the claims are so entangled with the insolvency estate that they require the insolvency court's own supervision.

3. Arbitrations already in progress when insolvency is filed

The situation is somewhat more favorable when arbitration proceedings were already well advanced before the insolvency filing. Israeli courts have generally been willing to permit ongoing arbitrations to proceed to an award in two scenarios: where the arbitration is so far advanced that stopping it would waste significant resources already invested, and where the dispute involves technical or commercial issues that an arbitral tribunal is better placed to decide than the insolvency court.

However, permission under Section 119(b) is not automatic. The creditor must apply to the insolvency court — typically within 30 days of the stay taking effect — and present arguments for why the arbitration should continue rather than be absorbed into the insolvency claims process. The application should demonstrate that:

• There is a binding arbitration agreement that covers the subject matter of the claim (the agreement has not been terminated or repudiated by the insolvency)
• Significant progress has been made in the arbitration, making termination wasteful
• The arbitral tribunal has jurisdiction and the arbitration is not on grounds that are reserved for the insolvency court (for example, a challenge to the priority of the claimant's security interest is typically for the insolvency court to decide)
• Any award obtained will be treated as a proof of claim in the insolvency rather than as an immediately enforceable judgment giving the creditor priority over other unsecured creditors

That last point is important. Even if a court grants permission for the arbitration to proceed and the claimant obtains a favorable award, the award does not create priority over other creditors. It establishes the existence and quantum of the debt — which then participates in the insolvency distribution alongside all other unsecured claims at the same priority level.

The administrator has a say in this process. Under Section 161 of the Insolvency Law, the administrator may, within 90 days of appointment, repudiate or affirm unprofitable executory contracts of the company. An arbitration agreement embedded in a contract that the administrator repudiates may not bind the administrator to arbitrate. If the administrator repudiates the contract, the creditor's claim converts to a damages claim for the financial loss caused by the repudiation, filed as a proof of claim in the insolvency proceedings.

4. Claims not yet in arbitration when insolvency begins

A creditor who has not yet commenced arbitration when the Israeli counterparty enters insolvency faces a different analysis. The arbitration clause is still valid, but the insolvency framework has introduced a competing and more immediate process: the proof-of-claim procedure.

For undisputed monetary claims, the insolvency process is often more efficient than arbitration. The creditor files a proof of claim, the administrator reviews it, and either admits or disputes it. If the administrator disputes the claim, the insolvency court adjudicates it. This process bypasses the need for arbitration entirely — it is faster, cheaper, and does not require the creditor to pay arbitration fees or engage arbitration counsel for a dispute that the administrator may in any event not contest.

For complex or disputed claims — particularly those involving technical disputes about contract performance, alleged wrongdoing, or substantial damages calculations — arbitration may still be the better forum. A creditor who genuinely wants to arbitrate a complex claim against an insolvent Israeli company must apply to the insolvency court under Section 119(b) for permission to commence the arbitration, before the arbitration is initiated.

The argument for granting permission is typically efficiency and expertise: an arbitral tribunal with commercial expertise and an agreed-upon procedure can resolve a complex dispute more efficiently than an insolvency court managing dozens of creditors with competing claims. The administrator will often not oppose a permission application for a genuinely complex commercial dispute — processing the arbitration outside the insolvency is one less contested claim for the administrator to manage.

5. Filing a proof of claim: the mandatory parallel step

Regardless of whether a creditor intends to pursue arbitration, filing a timely proof of claim under Section 228 of the Insolvency and Economic Rehabilitation Law 5778-2018 is mandatory and time-critical. The proof-of-claim deadline is not a procedural technicality — it is a substantive cutoff date after which, as a general rule, late claims are excluded from any distribution to unsecured creditors.

The administrator publishes a notice (typically in Reshumot, the Official Gazette, and in two major Hebrew-language newspapers) setting out the claims deadline. Under the Insolvency Law, this deadline must be at least 60 days from the date of the first publication. In complex cases, the administrator may set a longer deadline. But 60 days is the minimum, and in practice many foreign creditors first learn of an Israeli counterparty's insolvency close to or after this deadline has expired.

A proof of claim under Section 228 should include:

• The creditor's full identity and contact details (including an Israeli address for service, which a foreign creditor can provide through their Israeli attorney)
• The nature and basis of the claim — contract, judgment, arbitral award, or other legal basis
• The amount of the claim in NIS (claims in foreign currency must be converted to NIS at the exchange rate on the date insolvency proceedings commenced)
• Whether the claim is secured (backed by a registered charge, pledge, or other security over assets of the company), preferential (wages and certain other statutory categories), or unsecured
• Supporting documentation: the relevant contract, invoices, correspondence, any arbitration clause invoked, and any arbitral award already obtained

A creditor with a pending arbitration clause should explicitly note in their proof of claim that the claim is subject to an arbitration agreement and that the creditor reserves the right to seek permission under Section 119(b) to arbitrate the quantum or liability. This notation preserves the procedural option without requiring an immediate election between arbitration and the insolvency process.

6. Foreign arbitral awards: recognition and insolvency

A creditor who already holds a foreign arbitral award before the Israeli counterparty enters insolvency is in a relatively strong position — provided they act quickly. The New York Convention, implemented in Israel through Section 29A of the Arbitration Law 5728-1968, provides the mechanism for recognizing and enforcing foreign awards in Israel.

A recognized foreign award is treated as a judgment debt for proof-of-claim purposes. This means a creditor who has successfully recognized a foreign award in the Israeli District Court can file the recognized judgment as a proof of claim with the full weight of a court-confirmed liability — the administrator cannot dispute that the debt is owed, only whether it should be classified as secured or at what priority level.

The challenge is timing. A recognition application under Section 29A takes approximately three to six months in the Israeli District Court under normal circumstances. If the insolvency proceedings open while the recognition application is pending, the creditor should: (a) continue the recognition application, seeking a court order (under Section 119(b) if necessary) to permit the recognition proceedings to continue; and (b) simultaneously file a proof of claim based on the foreign award, noting that it is subject to formal recognition proceedings and is being pursued in the District Court.

An unrecognized foreign award — one that has not yet been through the Section 29A process — is not automatically treated as a judgment debt by the insolvency administrator. It is treated as a contractual claim supported by an arbitral decision, which the administrator can dispute. To benefit from the full weight of a court-confirmed debt, recognition proceedings must be completed.

7. Reorganization plans and creditors with arbitration clauses

Israeli insolvency proceedings do not always end in liquidation. The Insolvency and Economic Rehabilitation Law 5778-2018 actively promotes reorganization where viable. When the administrator recommends a reorganization plan to the court, all creditors — including those with arbitration clauses and those whose claims are disputed — are bound by the approved plan if it receives the required creditor vote and court approval.

A reorganization plan under Sections 316-360 of the Insolvency Law can impair or restructure the claims of unsecured creditors regardless of the terms of any arbitration agreement. If the plan provides that unsecured creditors receive 30 cents on the NIS, a creditor with a pending arbitration claim against the company gets 30 cents on their arbitrated amount — not an unimpaired arbitration award. The arbitration award, once obtained, establishes the amount to which the 30 cents applies. The reorganization plan's terms apply to the recoverable portion.

Creditors who oppose a reorganization plan have the right to vote against it and, in some circumstances, to challenge it before the insolvency court as unfairly prejudicial (pgia bilti haogenet) under Section 353 of the Insolvency Law. A creditor with a strong arbitration claim and a realistic chance of full recovery may have grounds to argue that acceptance of the plan would prejudice them disproportionately relative to similarly-situated creditors. This is a technical argument requiring specialist insolvency counsel, but it is not theoretical — Israeli courts have set aside reorganization plans where particular creditor classes were treated inequitably.

8. Practical steps for foreign creditors

Foreign businesses with arbitration claims against insolvent Israeli counterparties should treat the first 90 days after the insolvency filing as a critical action window. Here is the practical sequence.

Week 1-2: Engage Israeli insolvency counsel immediately. Obtain the court case number and the administrator's contact details. Confirm whether the insolvency order has been made (preliminary stages may precede the formal order) and whether Section 119 stay is in effect. Do not send further correspondence or demands directly to the Israeli company — communicate through the administrator's office.

Week 2-4: File a protective proof of claim if the deadline is approaching. Even a preliminary claim with a reservation of rights is better than missing the deadline entirely. Note in the claim that you hold an arbitration agreement and reserve the right to apply for arbitration permission. Attach the key contract, arbitration clause, and any invoices or correspondence supporting the amount.

Week 4-8: Assess whether to apply under Section 119(b) for permission to proceed with or commence arbitration. This decision turns on: the complexity and contested nature of the claim, the cost-benefit of arbitration versus letting the administrator's claims process run, and whether the administrator is likely to dispute the claim. For straightforward unpaid invoices, the insolvency process may be faster and cheaper. For complex commercial disputes, arbitration may produce better outcomes.

Ongoing: Monitor the insolvency proceedings through the court register and the administrator's reports (filed with the District Court and publicly accessible). Watch for the creditors' committee meetings, distribution proposals, and any reorganization plan submissions. Creditors who do not monitor actively can miss voting deadlines and distribution distributions.

Frequently Asked Questions