Deficiencies in corporate governance and non-observance of proper separation between the company and the controlling owner. This is how the court sums up the story about the apartment of the private company MASY Properties and Investments that was owned by the late Yoram Yosifoff, who died unexpectedly of a heart attack in 2016.
The story is like this – his girlfriend owned an apartment. But he borrowed money while pledging the apartment to the Mercantile Discount Bank and another non-bank lender, when the loan funds were transferred to Yosifof’s personal use and not to the company, when in practice the company had no activity other than the ownership of the apartment and other assets.
Later, Yosipoff sold the company to another company controlled by Daniel Azogi. After the purchase of the company, Ezogi entered into an offset deal with the company and it was agreed that he would pay off the company’s debts to the tenants of the apartment and other debts. It was decided that the company’s debts would be transferred to him and in return the apartment would be owned by Azougi’s daughter.
However, after Yosifof’s death, bankruptcy administrators were appointed to his estate, who filed a request to liquidate the company and were appointed as the company’s special administrators. They turned to the court with the aim of canceling the agreement between Azougi and the company because, according to them, the contract was made “on the face of it and intended to steal the company’s assets from its creditors.”
Judge Lushi-Aboudi ruled in their favor but not for the reason they claimed. The judge determined that the administrators of the estate “did not prove that there was a hidden contract in this case, that the open contract was made only for appearance and to hide it. On the contrary, the open contract in this case discusses the transfer of the property to Azogi’s daughter in a clear manner (albeit through a trustee).
So why did she decide they were right? Because according to Loshi-Aboudi “in this case the entire offsetting transaction – and the agreement to sell the apartment to the trustee who stands at the center of it – is an invalid transaction and that it is an illegal agreement that even violates public policy, which must be annulled.” According to the judge, she pointed out that this is a chain of actions and taking legal and economic positions that are illegal and improper, that go against the most basic rules of company management and the fundamental principles of proper corporate governance.”
She gathered that the problematic sequence “began creating debts for the company, which were not its debts at all and did not serve it in any way. The problematic sequence continued with the company’s decision to transfer the property into the hands of Ezogi through the offsetting transaction and the signing of the agreement to sell the apartment to the trustee, and this without the property’s price being determined In some objective way (such as an appraiser’s assessment). Later on, the price of the apartment was not updated even though the execution of the transaction was delayed for about two years and the prices of apartments in Tel Aviv increased significantly during that period.”
Finally, Judge Lushi-Aboudi ruled that the manner of execution of the agreement is also unacceptable. Indeed, Azogi did show that he paid off part of the company’s debts and allowed the liens on the apartment to be released, but he did not show that he paid off the company’s debts at the full value set for the apartment, in particular debts that Azogi claimed he paid in cash but did not provide a reference for this.
Judge Lushi-Aboudi emphasized that this decision should be read against the background of the fact that the company entered into liquidation proceedings and has external creditors, so that Azogi himself became a creditor of the company and in fact preferred the debt to him over the debt to other creditors. The judge concluded by saying that: “I am of course aware of Ezogi’s claim that it is possible that during the current period things would have ‘sorted out’ and continued to ‘roll’ and that the death of the deceased actually interrupted the ‘rolling’ sequence.
However, similar to the game of ‘musical chairs’, in which when the music stops one of the participants will always lack a chair, so also when an external event occurs in social life (such as becoming insolvent and the death of the deceased which caused it in this case, according to Azugi), the ‘incarnation’ stops , things are checked backwards and they have to meet the basic rules of company management, separation of assets and liabilities and corporate governance. When it is found in the same retrospective examination that things did not go that way and that it was a complete mix-up and a continuous ‘rolling’, it is usually the one who is responsible for those mixing and ‘rolling’ who assumes the risk that may materialize and that he will be found, unfortunately, without a chair when the music stops . Indeed, there is nothing new about this, and these things happen new to the mornings in situations of insolvency, hence the need to adhere to proper corporate governance rules and the necessary separations, so that if the music stops, God forbid, things will be in order while reducing the extent of the damage.”
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