Borrowing and lending practices are an essential part of business, however, such financial commitments are also riddled with the risk that a debt owed to you may not be repaid on time or at all. Whether the debtor is a private individual, a local business or perhaps someone residing in another country, the legal procedures for debt collection are largely the same for Israeli citizens and foreigners alike, with some exceptions. Regardless of the circumstances, collecting an unpaid debt can be rather stressful and complicated, especially without a broad picture of the possible legal routes.
Litigation Options in Israel
If legal action is the only way to proceed, litigation to collect an unpaid debt can be set in motion in three ways:
Jurisdiction stipulation to Israeli law
This is applicable if there is a clause in the contract stating that all conflict resolution will be conducted in an Israeli court. Such clauses, usually referred to as stipulations of judgment, are a common business practice if both sides have legal counsel and/or come from different countries. Stipulations of judgment are particularly durable so, if the contract clearly states that an Israeli court has the jurisdiction to resolve disputes, it is extremely rare that this can be contested.
Enforcing a foreign court decision in Israel
If a creditor files and wins a debt collection lawsuit in another country against a debtor who either lives in Israel or whose assets are in Israel, this decision can be enforced in Israel without reopening the case. According to the Foreign Judgment Enforcement Law of 1958, a foreign court decision can be recognized and enforced if, (i) the ruling is a final court ruling with no possibility of an appeal and, (ii) there is reciprocity between Israel and the issuing country such that if the situation was reversed, the foreign court in question would also recognize and enforce decisions made in an Israeli court.
Litigation according to private international law and affinity to Israel
Private international law offers another option for filing civil lawsuits against debtors; however, this option is only possible if Israel is established as the proper forum for the legal issue. According to the Civil Procedure Regulations (2018), the plaintiff (in this case, the one filing a lawsuit) must show that the case has an ‘affinity’ to Israel, either because the debt concerned is connected to goods shipped to or from Israel, or the assets are in the form of real estate which is under Israeli jurisdiction.
Guidelines for establishing affinity to Israel were outlined in case 1739/17, Michael Flacks v. Stephen Bisk. In this case, the Supreme Court stated that if there is a degree of doubt regarding jurisdiction in Israel, the ruling should be in favor of the foreign defendant. What if the case involves a foreign plaintiff? Unfortunately, in such instances, it is still undetermined whether a court would rule in favor of the foreign plaintiff. Either way, courts may decline jurisdiction, so it is important to consult an attorney who is familiar with debt collection in Israeli contexts.
If the plaintiff is a foreign company (LLC or LTD), Israel Company Law, Article 353(a) states that the foreign company must deposit a collateral before filing the lawsuit. This is done to ensure that if the foreign entity loses the case and is subsequently obligated to pay the necessary expenses, they have the funds to do so.
The Enforcement System in Israel
The law enforcement and collection system authority (hereby, ‘the enforcement system) was set up as an independent body to enforce judicial decisions including the collection of debts and fines. Being an authority that is separate from the court system is extremely helpful for creditors because it makes the debt collection process faster and more stream lined.
In fact, in minor cases, creditors can go directly to the enforcement system, bypassing the court entirely. A debt collection case can be submitted directly to the enforcement system if the debt is for a fixed amount of less than 75,000 NIS. Cases can also be prosecuted directly by the enforcement system if the creditor has a bounced cheque or a letter of guarantee by the debtor, since these documents hold the same legal status as a court verdict.
Legal tools for creditors
The Israeli enforcement system offers creditors a series of legal tools designed to pressurize defendants to repay their debts. If the defendant fails to pay despite a court ruling, creditors can apply to have the defendant’s driver’s license restricted. A defendant’s ability to leave the country can also be limited. While in most Western countries, such limitations are only for alimony cases, in Israel, these measures can be applied to all debtors who fail to pay.
Additionally, the enforcement system allows creditors to foreclose on the debtor’s bank account, funds, house, and everything else registered in their name. The system also authorizes creditors to summon the debtor before a judge or a registrar to demand an explanation as to why they have not repaid their debt. Of course, all procedural expenses are borne by the debtor, in addition to a high interest rate on the amount owed.
The Israeli enforcement system is inherently passive, with countless active cases at any given time. Therefore, if you intend on collecting a debt via the enforcement system, it is best to do so with an experienced attorney who knows how to keep things moving.