Realization Of Security Interests When Debtor Is In Insolvency Proceeding

Author:Mr Yoram Shiv and Alex Berman
Profession:Sharir, Shiv & Co. Law Offices

During the course of an appeal concerning the realization by a creditor of a security interest in real property at a time when the debtor was in the midst of an insolvency proceeding, the Israeli Supreme Court reviewed certain principles regarding the realization of secured assets. The Court held that although in general a secured creditor may act independently of other creditors and outside of any parallel insolvency proceedings involving the debtor, in certain situations the interests of these other creditors must be considered.

The Supreme Court reviewed a distinction developed over the years in the lower instance District Court decisions. According to this line of cases, the Court recognizes that when a debt owed to a secured creditor exceeds the value of the secured asset, that the creditor's interest lies in maximizing proceeds received from the asset in order to repay as large a proportion of the debt as possible. In contrast, when the outstanding debt is less than the value of the secured asset, the Court recognizes the concern that it is often in a secured creditor's interest to realize the asset quickly, even at an undervalued price. This second scenario creates a conflict with the interests of the debtor's unsecured creditors in insolvency proceedings; it is to the unsecured creditor's advantage to maximize proceeds from the secured asset, even at the expense of a quick resolution.

The Supreme Court held that when the debt owed to a secured creditor exceeds the value of the asset value, due to common interests between...

To continue reading