Quick Answer: Israeli insolvency law was significantly reformed by the Insolvency and Economic Rehabilitation Law 2018, which replaced decades of piecemeal legislation with a unified framework emphasizing rehabilitation over immediate liquidation. Foreign creditors, directors, and investors dealing with a financially distressed Israeli company need to understand this modern framework.

1. The 2018 Insolvency Law Reform: A New Framework

For most of the 20th century, Israeli corporate insolvency was governed by a patchwork of provisions scattered across the Companies Ordinance (inherited from the British Mandate period) and various standalone laws. This framework was outdated, inconsistent, and increasingly inadequate for modern commercial practice. The Insolvency and Economic Rehabilitation Law 2018 (Hok Chadelut V'Shiluv Kalcali), which came into force in 2019, replaced this with a comprehensive, coherent statute that brought Israel into line with international best practices.

The 2018 Law drew heavily on US Chapter 11 and UK administration concepts, adapting them to the Israeli legal context. Its core philosophy is a shift from reflexive liquidation toward a structured assessment: is this company viable? If so, it should be given an opportunity to rehabilitate. Liquidation (the winding up and sale of assets to pay creditors) is now explicitly a last resort, pursued only when rehabilitation is not feasible.

The reform also introduced a new professional role — the insolvency administrator (mnahel chadelut) — to replace the older, more fragmented roles of receiver and liquidator. The insolvency administrator is appointed by the court, is an officer of the court, and has broad powers to investigate the company's affairs, preserve its assets, and determine the appropriate path forward: rehabilitation, sale as a going concern, or liquidation.

2. The Insolvency Process: From Petition to Resolution

An insolvency petition in Israel can be filed by: the company itself (voluntary petition); a creditor with a debt of at least NIS 75,000 that is unpaid after a formal demand; the Israel Tax Authority or the National Insurance Institute (Bituach Leumi) for unpaid obligations; or certain other statutory authorities. The petition is filed with the Economic Court — specialized courts that handle commercial matters including insolvency, which were established as part of the broader judicial reform accompanying the 2018 Law.

Upon receiving a petition, the court may make a temporary stay order (atzira zmanit) — halting all enforcement proceedings against the company, including debt collection, attachment of assets, and foreclosure. This automatic stay is one of the most important features of the new law: it gives the court, the administrator, and the company breathing room to assess the situation without a race among creditors to seize assets. The stay is temporary and must be confirmed or lifted at a subsequent hearing.

The court then appoints an insolvency administrator to investigate the company's financial position, review its books, and report to the court. The administrator has extensive powers: to take possession of company assets; to continue or terminate contracts; to take legal proceedings on behalf of the company (including challenging preferential payments and fraudulent transfers made in the pre-insolvency period); and to present a rehabilitation plan or recommend liquidation. The process from petition to resolution typically takes 6–18 months for a mid-sized company, though complex cases can take longer.

3. Creditors' Rights and Priority in Israeli Insolvency

Israeli insolvency law establishes a clear hierarchy for the distribution of a company's assets among its creditors. Secured creditors — those with a registered charge (shieabed) over specific assets — generally have priority over the proceeds of those assets, subject to the administrator's costs of managing and selling the asset. The registration of security interests in Israel (at the Pledges Registry or the Land Registry for real estate) is therefore critical for foreign lenders and investors extending credit to Israeli companies.

After secured creditors come preferred creditors (no'she'im muvharim), who receive priority from the general pool of assets. Priority creditors under the 2018 Law include: employees' unpaid wages and severance pay (up to a statutory cap); certain pension contributions; and the costs of the insolvency proceedings themselves (administrator's fees, legal costs). These are paid before ordinary unsecured creditors.

Ordinary unsecured creditors rank equally among themselves (pari passu) and share pro-rata in whatever is left after secured and priority claims are satisfied. In most insolvency proceedings, ordinary creditors receive a fraction of what they are owed — sometimes nothing at all. This makes it critical for foreign businesses trading with Israeli companies to: obtain personal guarantees or security where possible; maintain credit insurance; and monitor their Israeli counterparties' financial health.

Foreign creditors should also be aware of the claw-back provisions in the 2018 Law. Transactions entered into in the period before insolvency — particularly payments to creditors (preferential payments), sales at undervalue, and transactions with related parties — can be challenged by the administrator and reversed. The look-back period is typically 1–3 years depending on the type of transaction. Foreign parties who received payments from an Israeli company that later went insolvent should seek advice on their exposure.

A German logistics company that supplied warehousing services to an Israeli distributor found itself holding NIS 620,000 in unpaid invoices when the distributor entered insolvency proceedings before the Tel Aviv Economic Court in 2024. The German company had no registered pledge over any asset and was an ordinary unsecured creditor. Their Israeli attorney filed a creditor claim form within the court-set deadline and participated in the creditors' committee. When the insolvency administrator completed the asset sale — including the Israeli distributor's truck fleet and warehouse lease — the ordinary creditor pool received 18 agurot on the shekel (18%). The lesson: foreign suppliers doing business with Israeli counterparties should insist on personal guarantees or a registered pledge over specific assets from day one, because in an Israeli insolvency proceeding, unsecured foreign creditors routinely recover a small fraction of the debt.

4. Director Duties in Financial Distress

One of the most practically important aspects of the 2018 Law for foreign directors serving on Israeli boards is the change in directors' duties when a company approaches insolvency. Under the Companies Law 1999, directors normally owe their duties to the company — acting in its best interests means acting in the interests of the shareholders. But when a company is insolvent or in the "vicinity of insolvency" (the pre-insolvency zone), the courts recognize that the directors' duties expand to encompass the interests of creditors.

Directors of a financially distressed Israeli company must: avoid taking on new contractual obligations they do not reasonably expect to be able to meet; not prefer certain creditors over others (particularly related parties) without court approval; not transfer assets out of the company at undervalue; and not use company resources to benefit shareholders at the expense of creditors. Failure to observe these duties can result in personal liability for directors — the administrator can bring a claim against directors who contributed to the deterioration of the company's financial position through breach of duty.

The 2018 Law also introduced a regime of director disqualification for those found to have mismanaged a company in the period before insolvency. A disqualified director cannot serve on any Israeli company board for a period determined by the court. Foreign directors who serve on Israeli boards should ensure that when a company faces financial difficulty, they receive independent legal advice and document their decisions carefully.

5. Rehabilitation vs Liquidation: The Court's Choice

The centrepiece of the 2018 reform is the primacy of rehabilitation. When an Israeli company becomes insolvent, the administrator's first task is to assess whether the company — or its business — is viable as a going concern. If rehabilitation is feasible, the administrator will develop a rehabilitation plan (toknit shiluv). This plan may include: debt restructuring (extending repayment terms or writing down debt); conversion of debt to equity; sale of non-core assets; changes to management; and new investment by existing or new shareholders.

The rehabilitation plan must be approved by a majority of creditors (by value) in each class, and confirmed by the court. Secured creditors vote separately from unsecured creditors. The court can confirm a plan even over the objection of a dissenting class (a "cram-down") if the plan is fair and equitable and does not unfairly discriminate. This is directly modeled on US Chapter 11's cram-down mechanism and represents a significant departure from the older Israeli approach that required unanimous creditor consent.

If rehabilitation is not feasible, the administrator proceeds to an orderly liquidation: selling the company's assets (real estate, equipment, inventory, intellectual property, contracts) to maximize recovery for creditors, paying creditors in the statutory priority order, and ultimately dissolving the company. The administrator may sell the business as a going concern to a third party — preserving jobs and value — rather than selling individual assets piecemeal. This sale-as-going-concern mechanism is one of the most commercially important tools introduced by the 2018 reform.

In Practice: The claw-back period for preferential payments to related parties extends up to three years before the insolvency petition under the 2018 Law. A foreign parent company that received loan repayments from its Israeli subsidiary in the years before the subsidiary became insolvent can have those payments reversed by the insolvency administrator — even if the repayments were made in the ordinary course of business. Foreign parent companies with intercompany loans to Israeli subsidiaries that are showing signs of financial distress should take legal advice before accepting any repayment of those loans, as the transaction may later be clawed back in insolvency proceedings.
In Practice: The NIS 75,000 minimum debt threshold for a creditor insolvency petition is per claim, not per creditor. A foreign supplier with multiple invoices, each below NIS 75,000, that total a much larger amount may not be able to petition unless a single consolidated invoice or judgment reaches the threshold. Foreign businesses dealing with Israeli counterparties should structure their payment terms so that unpaid amounts are documented as a single consolidated debt — particularly where invoices are issued frequently for recurring services. This makes it easier to satisfy the petition threshold and file promptly if payment defaults persist.