Priority of Creditors in Israeli Insolvency: Who Gets Paid First

When an Israeli company files for insolvency, or when a debtor enters the individual financial rehabilitation process, one question matters above all others to creditors: will I get paid, and if so, how much? The answer depends almost entirely on where you sit in the priority queue.

Foreign creditors are at a particular disadvantage here. They typically extend credit without registering any security interest in Israel, which places them at the back of the line behind state agencies, employees, and secured lenders who knew to protect themselves. This guide explains the full priority structure under the Insolvency and Economic Rehabilitation Law 5778-2018 (*Chok HaShikum HaKalcali veHaInsolventzyah*), which replaced the older Bankruptcy Ordinance and Companies Ordinance and has governed all Israeli insolvency proceedings since September 2019.

1. The Legal Framework

Israel's insolvency regime was comprehensively modernised by the Insolvency and Economic Rehabilitation Law 5778-2018, which came into force in September 2019. The law unified the previously separate frameworks for individual and corporate insolvency into a single statute, borrowing significantly from US Chapter 11 and Chapter 7 concepts while retaining distinctly Israeli features.

The 2018 law applies to all insolvency proceedings opened after its commencement date. Older proceedings still running under the prior Bankruptcy Ordinance or Companies Ordinance continue under those rules. For most practical purposes today, you will be dealing with the 2018 framework.

When an insolvency proceeding is opened, the court appoints either a kones nechsaim (receiver) for urgent asset-preservation steps or a ne'eman (trustee) to administer the estate through to distribution. The trustee must identify all assets, resolve all claims, and distribute proceeds in the statutory priority order, not in the order claims arrived or debts arose.

Priority of claims is governed by Chapter 11 of the law (Sections 234 to 248). The hierarchy is fixed by statute and cannot be varied by contract between creditors, except where the law specifically allows subordination agreements.

2. Secured Creditors: First Claim on Their Collateral

Secured creditors hold the strongest position. A creditor is "secured" for insolvency purposes if it holds a registered charge, pledge, or mortgage over a specific Israeli asset that predates the insolvency. The debt is not paid from the general estate. Instead, the secured creditor realises its collateral and takes payment from those proceeds, ahead of every other class of creditor.

Common forms of registered security in Israel include:

• Registered mortgage (*mashkanta*): A first or second charge over Israeli real property, registered at the Land Registry (*Lishkat Rissum Mekarka'in*, commonly called the Tabu).
• Floating or fixed charge over company assets: Registered with the Companies Registrar (*Rasham HaChavarot*) under Section 179 of the Companies Law 5759-1999.
• Pledge over personal property or financial assets: Registered with the Pledges Registry (*Rasham HaShibudim*) under the Pledges Law 5727-1967.
• Lien over bank account: Created by contract with an Israeli bank, effective without public registration if the bank holds the account.

If the collateral's realised value exceeds the secured debt, the surplus goes back into the general estate for other creditors. If it falls short, the secured creditor files a claim for the shortfall as a general unsecured creditor.

3. Super-Priority Claims and Preferential Creditors

Between secured creditors and the general unsecured pool sit two sub-tiers that most foreign creditors do not anticipate: the costs of the insolvency proceedings themselves, and a set of preferential debts defined by Section 235 of the 2018 law. Both rank above unsecured creditors but, in principle, below secured creditors on their specific collateral.

Administration expenses

The trustee's fees, legal costs of the proceedings, and any expenses incurred in preserving and realising assets are paid first from the general estate before any creditor claims are satisfied. Courts typically approve trustee remuneration on a percentage basis (around 3% to 8% of assets realised) plus VAT. In a large corporate insolvency, administration expenses can consume a significant portion of the estate.

Preferential debts under Section 235

Section 235 grants statutory priority, above all unsecured creditors but below secured creditors on their collateral, to the following categories:

• Employee wage arrears: The last three months of each employee's wages before the insolvency date, capped per employee at the amount prescribed by regulation (currently approximately NIS 23,940 per employee, updated periodically by the National Insurance Institute).
• Vacation pay and severance: Accrued vacation pay and severance entitlements owed to employees at the time of insolvency, also subject to statutory caps.
• National Insurance contributions (Bituach Leumi): Unpaid employer NII contributions for the 12 months before insolvency, paid to the National Insurance Institute (*Hamossad LeBituach Leumi*).
• Tax Authority debts: Certain VAT liabilities and income tax withheld at source (nikui bemkor) that were deducted from employees but not remitted. These rank as preferential because the debtor collected that money on behalf of the state and held it in trust.

Ordinary corporation tax debts and VAT on the company's own sales do not rank as preferential under Section 235. The Tax Authority (Rashut HaMisim) files those as general unsecured claims, competing alongside commercial creditors for whatever remains.

4. General Unsecured Creditors: Last in Line

After secured creditors receive payment from their collateral, after administration expenses are paid, and after preferential debts are satisfied, whatever remains in the estate is distributed pro rata among all general unsecured creditors.

General unsecured creditors include:

• Trade creditors and suppliers owed money on open account
• Foreign creditors holding an unsatisfied invoice or recognised judgment
• Bondholders where no security was granted
• Shareholders who advanced loans to the company (subject to subordination rules if the advance was within 12 months of insolvency)
• The Tax Authority for ordinary corporate tax and regular VAT debts
• Landlords for unpaid rent beyond any preference period

Pro-rata distribution means every creditor in this class receives the same percentage of their proven claim. If the estate has NIS 2 million available for the general pool and proven unsecured claims total NIS 20 million, every creditor receives 10 cents per shekel, regardless of when the debt arose, what currency it was denominated in, or how many demand letters were sent before insolvency.

For individual debtors, the picture is different. Under Chapter 3 of the 2018 law, an individual who completes the financial rehabilitation process receives a discharge from unsecured debts at the end of the proceeding. After discharge, creditors cannot pursue the individual for the unpaid balance. The proceedings typically last 18 months to three years, depending on the debtor's circumstances and the court's determination.

5. How Foreign Creditors File a Proof of Debt

To participate in distributions, every creditor (secured or unsecured, Israeli or foreign) must file a formal proof of debt (tviat chov, תביעת חוב) with the trustee or official receiver. Filing is not automatic. If you hold an Israeli judgment, a recognised foreign judgment, or simply an unpaid invoice, you must still file. Creditors who miss the deadline are typically excluded from distributions.

How You Are Notified

The appointment of a trustee or receiver is published in Reshumot, Israel's official government gazette. The notice sets the deadline for submitting proofs of debt, usually 30 days from the publication date. Israeli creditors generally receive direct written notice from the debtor or trustee, but foreign creditors dealing with a debtor they have never met in Israel may not.

This is a significant practical risk. If you have a material unsecured exposure to an Israeli company, monitor Israeli corporate registry filings (*Rasham HaChavarot*) periodically, or retain an Israeli attorney to do so. Insolvency proceedings are a matter of public record but are not automatically communicated internationally.

What to File

A proof of debt must state:

• Your full name and contact details
• The amount of the claim in Israeli shekels (NIS) at the insolvency date, with currency conversion shown
• The basis of the claim (invoice, judgment, contract, etc.)
• Whether the claim is secured (and the particulars of the security) or unsecured
• Supporting documents: contracts, invoices, correspondence, judgment copies

The filing must be in Hebrew or accompanied by a certified Hebrew translation. Trustees have discretion to accept English documents in some proceedings, particularly in international cases, but relying on that discretion is risky. File in Hebrew.

6. Improving Your Priority Position Before Insolvency Strikes

The time to think about creditor priority is before extending significant credit to an Israeli counterparty, not after insolvency is filed. Once proceedings open, most security registrations and transactions from the preceding 30 to 90 days can be challenged as preferential transactions or fraudulent transfers under Sections 218–220 of the 2018 law. For related-party transactions, courts look back up to two years.

The most effective protections, in roughly descending order of strength:

Register a pledge at the Rasham HaShibudim. For any loan or credit line, register a pledge (shiabud) over Israeli assets (accounts receivable, inventory, intellectual property) before funds are advanced. Registration is straightforward and costs NIS 500–1,500 for a typical transaction. Without it, you are unsecured by default.

Require a bank guarantee (michtav achrayut). An Israeli bank guarantee is independent of the debtor's financial position. The bank pays on demand regardless of whether the debtor is insolvent. This is the strongest protection available in Israeli commercial practice, though debtors in financial difficulty will resist providing one.

Take a personal guarantee from the controlling shareholder or director. A guarantee creates a separate enforceable debt against an individual, which you can pursue even after the company enters insolvency. See our guide on Personal Guarantors in Israel for the formalities and limitations.

Require prepayment or letters of credit for large orders. The simplest protection is reducing your unsecured exposure in the first place, particularly for recurring supply relationships.

Move quickly on overdue debts. File an Execution Office (Lishkat HaHotza'a LaPo'al) claim or commence court proceedings before an insolvency petition is filed. A judgment lien (shiabud mishpati) registered over the debtor's property before insolvency proceedings open can improve your recovery position.

Monitor credit signals. Israeli credit bureau reports through BDI Code and the Bank of Israel's credit registry flag payment deterioration. A debtor who starts missing payments to suppliers often files for insolvency within 12 to 18 months.