Receiverships and Liquidations - What Happens When a Company Encounters Difficulties and What Remedies Are Available to Creditors

1. Once a winding-up order is issued for a company, all proceedings are stayed. A creditor can no longer sue the company separately, execute attachments, or remove assets from it. All creditors enter a single collective framework.
2. Not all creditors are equal. Secured creditors-those holding a charge over a specific asset-are paid first from that asset. They are followed by employees and tax authorities in a certain order of priority. Ordinary creditors come last.
3. A director who withdraws funds from a company in financial difficulty to pay one creditor over others commits a “preference of creditors.” The liquidator is authorized to void such a transaction if it occurred during the relevant period prior to liquidation and to return the funds to the estate.
4. The corporate veil of a limited liability company protects shareholders from personal liability-unless the court “pierces the veil.” This occurs when it is proven that the corporate structure was used to defraud creditors or when there is no real separation between the company’s assets and personal assets.
5. A proactive creditor who initiates early proceedings significantly increases the likelihood of recovery. A creditor who waits for matters to “work themselves out” typically discovers that by the time their turn arrives, little remains to be distributed.

Three Proceedings Worth Distinguishing

Receivership involves the appointment of a receiver-typically an attorney-to manage and realize a specific asset of a debtor. A secured creditor holding a charge over a particular asset applies to appoint a receiver who will seize the asset, manage it, and sell it for the purpose of debt repayment. Receivership affects one asset-not the entire company.

Voluntary liquidation is appropriate when the company is solvent and the shareholders wish to terminate its operations in an orderly manner. They convene meetings, appoint a liquidator, discharge debts, and distribute the remainder. This is a relatively expeditious process when there are no disputes.

Court-ordered liquidation commences when a creditor files an application, where the company is unable to pay its debts. From the moment the court issues the order, the liquidator is appointed, assets are frozen, and all parties must file proofs of debt. The liquidator is henceforth solely responsible for managing the assets and distributing them.

The Liquidator’s Role

The liquidator is a trustee-not of the company, not of the shareholders, and not of a specific creditor-but of all creditors collectively. The liquidator’s function is to locate assets, sell them at the best price, adjudicate proofs of debt, and distribute the proceeds according to the order of priority established by law.

Among the liquidator’s powers: to sue third parties who owe the company, to examine the company’s directors, and to apply to the court to void transactions executed shortly before liquidation that preferred one creditor over others.

Preference of Creditors – What It Is and Why It Is Dangerous

A director who knows the company is heading toward liquidation and chooses to pay a particular creditor-a supplier, bank, or family member-before others may discover that the liquidator voids the payment and returns the funds to the liquidation estate. This is a “preference of creditors.” The law prescribes periods during which such transactions may be voided. For those closely connected to the director, the vulnerable period is longer.

The risk is not limited to the company-a director who acted contrary to the interests of creditors may find himself personally sued.

Piercing the Veil – When a Shareholder Pays Out of Pocket

The rule: a limited liability company shields its shareholders from personal liability for the company’s debts. The exception: Section 6 of the Companies Law, 5759-1999, permits the court to pierce the corporate veil and attribute the company’s debts to shareholders-when certain conditions are met.

Common cases: using the company to defraud creditors, failure to separate company funds from personal funds, “thin capitalization”-a company established with virtually no equity capital and operating on artificial leverage-and fraudulent acts by the director.

An Anecdote Illustrating the Risk

In the case of R-Z Plastek Ltd. v. Efraymov, a company dismissed four employees under false pretenses. Before the employees could receive what was owed to them, the company transferred all its assets and business to a new company operating at the same site, with the same clients, the same telephone number, and the same controlling shareholder. The old company was left devoid of assets. The National Labor Court approved piercing the veil against the controlling shareholder and the new company, which it termed “an empty shell.” The Supreme Court affirmed: “The veil in this case is so transparent that it need not be lifted. Nova and the respondent are one and the same.” The employees received what was owed to them-from the new company.

When a Creditors’ Arrangement Is Preferable to Liquidation – Instructive Case Law

In a 2020 ruling concerning the construction company Sheikha Alah, debt claims totaling approximately NIS 625 million stood against assets valued at approximately NIS 280 million. Some creditors objected to the proposed creditors’ arrangement-but the court approved it on the grounds that if not approved, liquidation would yield even less for creditors. The judge noted that in liquidation proceedings, costs are high, realization takes time-and creditors receive less. The lesson: an early creditors’ arrangement, even if painful, is sometimes better for creditors than full liquidation.

Shufersal v. Girafa – A Creditor Who Acted Swiftly

In a landmark Supreme Court decision recently rendered in Shufersal v. Girafa Deliveries and Business Management-a company that entered insolvency proceedings-Justice David Mintz held that a creditor is entitled to exercise its right of set-off independently, without waiting for court approval. Shufersal, which owed Girafa funds for delivery services but was owed other amounts by Girafa, transferred only the balance to the trustee. The judgment held that the set-off was valid, even though executed without prior approval. The practical implication for creditors: an alert creditor who understands the asset situation can act even within insolvency proceedings.

What to Do If a Company That Owes You Money Encounters Difficulties

The first step: file a proof of debt. A creditor who fails to file forfeits the right to distribution. The second step: examine whether there is a charge, guarantee, or any other security-and utilize it promptly. The third step: monitor the liquidator’s actions and present your position when required. An involved creditor protects himself better than a creditor who waits on the sidelines.

Finding yourself in a situation where a company that owes you money enters proceedings, or your company is facing difficulties that threaten solvency? It is advisable to know what remedies are available to you before the situation crystallizes.

© Tidhar Tzur Law Firm | This article is for general information purposes only and does not constitute individual legal advice.