When, if at all, may a trustee be sued personally for actions taken in the course of insolvency proceedings? This question stood at the centre of a recent decision of the Tel Aviv District Court, which denied leave to bring a personal claim against trustees — and laid down important guiding principles.
Background: Companies That Collapsed Twice
The case concerned three construction companies that became insolvent. In 2016 a creditors' arrangement was approved for them, under which control was sold to groups of purchasers. Three years later, in 2019, the companies collapsed again.
The trustees brought an action against the new controlling shareholders and eleven additional defendants for a total of approximately NIS 115 million, alleging that the purchasers had breached the terms of the creditors' arrangement and had thinly financed the companies to the point of causing their renewed collapse. In response, one of the controlling shareholders sought leave to bring a personal counterclaim against the trustees themselves for NIS 30 million, alleging that they had made false representations regarding the companies' true value at the time of their sale. The court denied the application.
The Basic Rule: Leave of the Court Is Required
The starting point is that bringing a personal claim against an officeholder appointed by the court — whether a liquidator or a trustee for the implementation of an arrangement — is conditional upon obtaining leave from the appointing court. This principle is anchored in section 41 of the Insolvency and Economic Rehabilitation Law, 5778-2018, and in the case law that preceded it.
The rationale is clear: an officeholder acts as an "officer of the court" and as its long arm. He makes complex decisions, at times under pressure and uncertainty, and on the basis of partial information. If every disappointed creditor could sue him personally without any threshold, the result would be over-deterrence: officeholders would tend to take conservative positions, refrain from selling a business as a going concern, and prefer outright liquidation — an outcome that harms the creditors themselves.
The Exculpation Clause: a First and Significant Barrier
In this case, the rehabilitation plan included an express exculpation clause releasing the trustees from any liability towards the creditors. The court held that the applicant, as a creditor of the new companies, was bound by that clause and could not divest herself of that capacity.
Her attempt to present herself as a creditor "under the purchase agreements only" — rather than as a creditor under the rehabilitation plan — was rejected. The court held that one cannot wear the convenient hat of creditor status while shedding the restrictive one; both hats are worn together.
The "Presumption of Propriety" for Actions Taken Under Judicial Supervision
A central principle emerging from the decision is that the court's approval of an officeholder's actions gives rise to a "presumption of propriety" — a presumption that the officeholder acted lawfully. The presumption is rebuttable, but the burden on the applicant is a heavy one.
In the case at hand, the trustees acted under close judicial supervision: they filed periodic reports, sought directions for every material step, and every principal action received the court's backing. In those circumstances, the applicant failed to rebut the presumption or to show, even prima facie, that the trustees had acted with actual negligence or exceeded their authority.
An "As Is" Sale and the Purchaser's Informed Risk
The decision adds a further dimension concerning an officeholder's liability as seller: asset sales in insolvency proceedings are generally conducted on an "as is" basis — at the purchaser's risk. Purchasers in such proceedings are ordinarily regarded as sophisticated parties capable of assessing the risks.
Moreover, in circumstances where the companies collapsed a second time, and on the morning after the collapse the applicant herself sought to have the very same trustees re-appointed to manage them — an attempt to portray them years later as having made false representations is inconsistent with the conduct the applicant actually displayed.
Guiding Principles — the Court's Conclusions
- Leave of the court is required for any personal claim against an officeholder appointed by the court.
- An exculpation clause in a rehabilitation plan binds everyone who benefits from the plan — one cannot take the benefit and reject the restriction.
- Close judicial supervision gives rise to a presumption of propriety, which the applicant bears a heavy burden to rebut.
- A sale on an "as is" basis — a sophisticated purchaser bears its own valuation risks.
- The threshold for a personal claim is high: knowing deception, dishonesty, or a flagrant excess of authority is required — not a mere error of judgment.
The above is general in nature and does not constitute legal advice. For advice on insolvency matters, please contact the office.