POLICY - May 2019

POL I CY The Israeli Insurance , Pension&FinanceNewspaper 12 Tel Aviv Re 2019 In March 2018, the Israeli Parliament approved the new Insolvency and Rehabilitation Law - 2018 (“ the Law” ). The Law will come into force on 15 th September 2019. The Law includes some material provisions with respect to the liability of directors and officers, to which we wish to draw your attention as follows: One of the main changes in the Law is the definition of the term “Insolvency”. This definition includes two alternative tests: the first is the Cash Flow Test , which examines whether the debtor can pay its debts on time, and whether their maturity date has arrived or not. The second is the Balance Test , which examines whether the debtor’s undertakings (including future or contingent undertakings) exceeds the value of the debtor’s assets. The main relevant issue, which is relevant to D&O’s insurance is the provision in the Law relating to the directors and the CEO’s liability in case of insolvency, as defined under the Law. The Law imposes liability on the directors and on the CEO of the company in any case where these individuals knew or could have known that the company is insolvent status (as defined above), and nevertheless they did not take reasonable measures to mitigate the scope of the insolvency. In such a case, the Court may, at the request of the trustee or the commissioner, following the initiation of proceedings against such company, instruct that the director or the CEO will be held liable towards the corporation for the losses sustained by the creditors, as a result of their failure to prevent or mitigate such losses. In this respect we should emphasize that the relevant period where the liability of the Director or CEO is examined is only when the status of the company is “insolvent” according to the above definition, and not prior to this time, i.e. not when there were mere suspicions that the corporation may become insolvent. It should also be noted that the duty of care of the directors and the CEO is towards the company and not towards the creditors. Section 288(b) of the Law includes a “safe harbor” defence for the directors and the CEO. The Law provides certain steps that. if taken by them, may constitute a valid defence against any attempt to impose liability on these individuals. The Law provides a presumption that the directors or CEO are not liable if they have taken necessary steps to assess the financial status of the corporation, and also have taken one of the following steps: Verified that the corporation will receive the assistance of experts in rehabilitation; or Carried out negotiations with the creditors in an attempt to reach a credit agreement with them; or Initiated insolvency proceeding; or They relied in good faith on information that the corporation is not insolvent. According to the Law, the corporation is not permitted to exempt or indemnify these individuals from their liability pursuant to the Law. Comment The extended liability imposed pursuant to the Law on directors and on the CEO in case the company is defined as “insolvent” according to the broad definition of the Law should be addressed in D&Os policies. The fact that a corporation cannot grant exemption or indemnification to these individuals, who may be found liable pursuant to the new Law, may be a source of new claims against these individuals by special managers appointed to the corporation. This new exposure could be dealt with at the underwriting stage by drafting new wording with respect to this specific risk. New Codification of Insolvency and Rehabilitation By Adv. Sigal Schlimoff and Adv. Noya Yulish GOS - Gross, Orad, Schlimoff & Co.