Legislative Proposal For Major Reform in Pledges Law
28/07/2015
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Dear clients and friends,

On 21 July 2015 the government presented a legislative proposal for a single, comprehensive law on pledges to replace the rules currently in place under the Pledge Law, 1967 and the Companies Ordinance (New Version), 1983 (relating to pledges on company assets).

The aim of the proposal is to facilitate access to credit and to foster competitiveness in the credit market by increasing the scope of assets that may be used as collateral.

The proposed legislation eliminates the current distinction between the rules governing pledges of assets of individuals and those governing pledges over companies’ assets, by applying a uniform regime. For example, the proposal explicitly permits an individual to grant a valid security interest over future assets that are not currently owned by him or her (e.g. over securities registered with a broker in the name of an individual), or even over assets that do not yet exist. In addition, instead of two public registries for registration of pledges (the Registry of Pledges and the Registry of Companies), the proposal calls for the creation of one unified Registry of Pledges).

The proposal, if legislated, will provide for more flexibility vis-à-vis creditors and assumedly will result in loans being granted on better terms. It raises concerns, however, that creditors will automatically require debtors to grant them a security interest over all current and future assets. For this reason, the proposed legislation provides for various protection mechanisms, one of which is prohibition of granting a security interest over future personal effects. Another limitation excludes from the bankruptcy estate assets to which a debtor did not acquire rights prior to the commencement of bankruptcy proceedings.

A main aspect of the discussed proposal is that it replaces the current ability to cast as “floating charge” over all existing and future assets, with a regime under which it is possible to create a fixed charge on all current and future assets of a debtor. If duly perfected, a fixed charge (on current or future assets) will be subject to the general rule, whereby an earlier charge has priority over a later charge (contrary to a floating charge, which currently ranks lower in priority to a fixed charge). The proposed legislation does not, however, eliminate the ability to create preferred creditors, which will have right to be paid off first.

Another important change relates to the effectiveness of charges against third parties. Under currently effective legislation, a charge is retrospectively valid against third parties, if duly registered, from the date of its creation (i.e., the date on which the pledgor entered into an agreement with the creditor). If the proposal is legislated, charges will be effective against third parties only from the date of due registration with the Registrar of Pledges. This change is aimed at improving transparency and reliability of the Registry of Pledges.

The proposed legislation is likely to undergo further amendment and revision prior to its adoption by the Knesset (the Israeli parliament).

 

This publication 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.

 

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