In a recent decision the Financial Division of the District Court of Tel Aviv – Jaffa (the Hon. Ruth Ronen, J.) determined that a court may permit a company to distribute dividends even if reasonable doubt exists as to the company’s long-term solvency, so long as its long-term creditors agree to such distribution (Civil Claim [Econ. Div.] 62924-03-18 IronSource Ltd. v. Registrar of Companies (6.5.2018)). The circumstances of the IronSource matter are very case specific and uncommon, however some comments made by the court in its ruling are noteworthy.
Background
The Israeli Companies Law allows a company to distribute dividends to its shareholders if two cumulative tests are met: (1) the amounts distributed originate from the company’s profits (commonly referred to as the “Profits Test”); and (2) no reasonable doubt exists as to such distribution preventing the company from being able to meet its current and future obligations when they become due (commonly referred to as the “Solvency Test”).
A company that does not meet the Profits Test but meets the Solvency Test may nevertheless distribute dividends, subject to obtaining court approval.
IronSource wished to distribute a dividend in an amount of $250,000,000. As it did not meet the Profits Test, it applied to the court for permissions to distribute. IronSource’s only significant creditor was a banking syndicate led by Silicon Valley Bank (SVB), which extended certain loans and credit lines to IronSource, the express purpose of which was (among others) the financing of the requested distribution, therefore implying SVB’s approval of the distribution.
The Official State Receiver, being the respondent to Ironsource’s application, argued that while there was no doubt that IronSource could meet its short-term obligations, there was reasonable doubt whether it would be able to meet its long-term obligations given the distribution. However, due to SVB’s implied approval of the distribution, the Official State Receiver did not oppose the application.
The Court’s Ruling
The court noted that its general role in applications for dividend distributions which do not meet the Profits Test is to determine whether the company meets the Solvency Test, in order to protect the company’s creditors. Such creditors, in most cases, are not a party to the proceedings or do not have the resources to analyse the implications of the distribution on the company’s solvency.
However, the court found that the circumstances of IronSource’s application differ from other such applications commonly made by companies, mainly due to the fact that IronSource’s application included, implicitly, the position of its main creditor (SVB) on the matter, and the purpose of the funds loaned to IronSource by such creditor was, among others, financing the distribution.
The court also noted that the fact that SVB is a sophisticated creditor equipped and capable of assessing the risks facing the company and “pricing” such risk as part of its credit instruments with the company, does not mandate that the court protect it (as it would protect other, less sophisticated, creditors).
The court further distinguished between creditors who could not likely foresee the requested distribution (and thus did not price it in their risk and cost when becoming a creditor); and those (like SVB) that we assume were aware of the potential distribution when becoming a creditor.
The court resolved to partially grant IronSource’s application, for distribution, and approved the distribution of a dividend in an amount of $150,000,000 (subject to an affirmative approval by SVB), reflecting the amount that SVB agreed to lend IronSource, for which the court decided SVB did not require its protection.
Note that this ruling by the court is subject to appeal.
This article provides general information and should not be used or taken as legal advice for specific situations, which depend on the evaluation of precise factual circumstances.