[co-author: Hadar Eilon]

The Insolvency and Financial Rehabilitation Law came into effect in 2019. The new law added a new cause of action for imposing personal liability on a director or CEO of a corporation in insolvency in respect of damages caused to the corporation and to its creditors, insofar as such directors and officers failed to take action to minimize the scope of the corporation’s insolvency.

The purpose of the provision is to incentivize directors and CEOs to take action immediately when a corporation finds itself in a state of insolvency and before creditors suffer substantive damages. In this way, directors and officers are able to eliminate their exposure to personal liability in respect of damages caused to the corporation as of the date they took measures to reduce the corporation’s insolvency.

Debts to the Registrar of Companies

The district court’s ruling addresses an application for instructions filed by a trustee of Provimet Ltd. The trustee requested to hold the company’s CEO and director personally liable for the company’s accumulated debts in respect of the annual fee to the Registrar of Companies since the company ceased operating.

The court backed the trustee, enforcing personal liability on the CEO and director under Insolvency Law Section 288. Their inability to halt accumulating debt, particularly unpaid annual fees to the Registrar of Companies, triggered this ruling. Had the CEO and director initiated liquidation proceedings, the company could have averted this debt. The court ruled that once the company ceased operating, the only way to “stop” accumulating an annual fee debt was to file a petition to open court proceedings (to liquidate the company).

However, as this constitutes a new cause of action, the court ruled not to hold the CEO and director liable for damages predating the law’s enactment in 2019. Despite the company’s closure in 2003, the CEO and director were found liable for its debt starting in 2019.

New Norms

The ruling creates a new norm that obligates CEOs and directors (who, in most instances, are also controlling shareholders) to take action to file a petition to open proceedings and liquidate the company, even if the company has no active creditors, in order to avoid accumulating debts to the Registrar of Companies. It is also important for CEOs and directors of dormant companies to proactively open the necessary court proceedings to liquidate such companies in order to avoid accumulating debts and personal liabilities.

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Adv. Idan Miller, a partner and head of Barnea Jaffa Lande’s insolvency practice, and Adv. Hadar Eilon are at your service to answer any questions you may have about liquidation of a company and insolvency.

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