Loans that were withdrawn by the banks for companies that collapsed will not be transferred to the liquidation fund - this was the final ruling of the Supreme Court, which overruled the appeal of Adv. Yitzchak Molcho against Bank Discount and Bank Mizrahi-Tefahot in the Heftziba affair – They will no be required to return NIS 100 million

21.04.2021 | The Bizportal Desk

The final chord in the Heftziba Affair?  The Court overruled the request of the Special Director, Yitzchak Molcho, to require the banks to return the deposits to the liquidation fund that had been impounded during the collapse.  The Supreme Court overruled the appeal of Adv. Yitzchak Molcho, the special director that was appointed by the Heftziba Group, regarding the court rulings issued by the Jerusalem District Court in favor of Bank Discount and Bank Mizrahi.  This brings to an end the legal proceeding that lasted many years, following the collapse of the Heftziba Group in 2007.

The court ruling in the matter of the “back to back” loan deals in which the banks provided loans to the companies with a central condition being that the money be deposited in a closed deposit with a lien in favor of the lending bank.  As the companies collapsed, the banks confiscated the pledged deposits and the special director sued for these impounded deposits to be returned to the liquidation fund, sums totaling more than NIS 100 million.

Molcho’s claims were based on the Companies Law that determines the manner of authorizing transactions of interested parties, and determines that these transactions must be to the benefit of the company.  The special director claimed that the transactions were not authorized as was required, and since they do not make economic sense (as this is a circular transaction that seemingly does not provide an advantage for the companies), they are not considered transactions for the benefit of the company; and consequently, they should be revoked.  There was also a claim that the transactions were illegal, as they were designed for the purpose of financial statement fraud.

The ruling determined that the transactions did not raise concern of damages to the companies or the shareholders and they were not at risk from these transactions.  Consequently, the claim of illegality and financial statement fraud raised by Molcho was not proven, and he didn’t offer any evidence supporting the claims, which even bear a criminal nature.  A ruling was made that since the transactions that were executed in his matter with the consent of all the company’s shareholders, there was no room for the claims for revocation by virtue of the mechanisms set down in the Companies Law that deal with shareholders’ transactions or breach of fiduciary duty.  “The action taken with the consent of the Company’s shareholders, as a rule, is not considered a breach of fiduciary duty toward the company.”  Also in the context of shareholders’ transactions, it was clarified that in a situation in which the company’s shareholders agree to a particular transaction, “it should be considered a legal act, even if it was not authorized in accordance with the rules for authorizing shareholders’ transactions.”

The ruling also clarified that the banks are entitled to rely upon the explicit authorization of Hefziba’s lawyers, whereby the transaction was authorized by the company as required by law.  “Consequently, it cannot be determined that the banks knew, or should have known, that the transactions did not receive the authorizations required by the Companies Law, a required condition for the purpose of revoking transactions.”

Intervention of the Court in the Matter of Interested Parties Must be Conducted with Restraint and Caution

In the matter of the best interest of the company, the Court ruled that “the intervention of the Court in a transaction of interested parties that was legally authorized must be conducted with restraint and caution; and it is not easy to provide the burden of proof that the transaction was not in the best interest of the company, when it passed the Companies Law’s authorization mechanism.”

During this proceeding, Bank Discount was represented by Adv. Assaf Englard and Adv. Eleanor Stark of the Hamburger Evron & Co. law firm.  Bank Mizrahi Tefahot was represented by Adv. Pini Yaniv and Ro’ee Dalach of the Meitar Law Firm.

According to Adv. Assaf Englard and Adv. Eleanor Stark:  “The significance of this court ruling deviates from the specific circumstances of this case related to loans granted to the Heftziba Group.  This is a central court ruling that includes set laws regarding the core issues of the Companies Law, in particular regarding the authorization of interested parties’ transactions, the company’s relations with third  parties and the option for the bank to rely upon authorization it received by the company’s lawyer.  In its ruling, the Court also clarified the standard of judicial control it exerts in cases in which it is presented with claims, whereby certain transactions are not in the best interest of the company, as is required by the Companies Law.”