Legal Precedent of the Israeli Supreme Court regarding the Imposition of a Pledge on a Securities Account
In Civil Appeal 1339/12 Bank Mizrahi-Tefahot Ltd. v ICM Air-conditioning Manufacturer Ltd. (in liquidation) (the “ICM Case“), the Israeli Supreme Court provided its extensive and clear view of important matters in connection with creating and perfecting a pledge on securities, which are traded on the Tel Aviv Stock Exchange (“TASE“) and which are deposited in a client account, in favor of the bank.
In practice, Israeli banks tend to have their clients sign a general terms and conditions agreement, which normally includes a general provision stating that the bank has a charge, pledge, set-off and lien rights over any asset of the clients deposited in the bank account.
In the ICM Case, the court ruled that a charge created by virtue of such general provisions, shall be effective only between the parties (i.e. the client and the bank), but shall have no force and effect vis-à-vis third parties and/or in case the pledgor becomes subject to insolvency proceedings, if the pledge was not perfected in accordance with the requirements of Israeli law. The perfection of the pledge will be achieved, in the case of shares which are traded on a stock exchange, by way of registration of the charge with the Israeli Registrar of Companies, if the pledgor is a company, or with the Israeli Registrar of Pledges, if the pledgor is an individual. The court emphasized that a pledge on shares which are traded on a stock exchange cannot be perfected by way of deposit of such securities with the creditor (although Israeli law does acknowledge the creation of a pledge by way of deposit), and that perfection of a pledge by way of deposit can only apply to securities which are evidenced by a physical document which can be deposited, such as bearer securities.
The Court noted that if there are no insolvency proceedings, a pledge created on shares which are traded on the TASE could still be independently realized by the bank (even if not perfected) in accordance with the provisions of the Israeli Pledge Law, without the bank being required to apply to the Israeli court or Execution Office. It should be noted that the right to independently realize a pledge under Israeli law is granted only to specific entities, such as banking corporations which are licensed under Israeli law.
In an Obiter Dictum the court referred to one of the most common questions in the context of pledging shares which are traded on a stock exchange, namely the question whether a pledge over a securities account can be a fixed pledge (as opposed to a floating pledge).The question arose because a pledge on securities which are traded on a stock exchange normally includes the borrower’s right to sell such securities and therefore applies to a changing number of securities, hence such pledge may be viewed as a floating pledge, which is subordinate to the rights of certain creditors (such as employees and tax authorities). Notwithstanding such characteristics, the court expressed its view that such pledge can be classified as a fixed pledge, thereby granting the bank (as creditor) a stronger protection.
For additional information please contact Adv. Rona Bergman Naveh, Tel: +972 (3) 607 4430, email rona@gkh-law.com, or Adv. Yael Hershkovitz, Tel +972 (3) 607 4576, email yaelfr@gkh-law.com.
