The authors are from the Doron Ariel & Co. law firm
The District Court in Tel Aviv recently retroactively annulled a real estate transaction made between the owner of a private company and a member of his family, and retroactively applied to the private company binding norms of conduct of proper corporate governance. This is a precedent ruling by Judge Iris Loshi-Aboudi, who annulled a sales agreement for an apartment, even though at the time the deal was executed, apparently there was no one who could attack its execution, and even though the company was not actually insolvent at the time the deal was executed.
Background: As part of an examination of the assets of the late Yoram Yosifof’s estate, it was found by the special administrators that a company that was his sole ownership was transferred, three years before his death, to a company owned by Dani Azogi and his family members. In 2016, this company sold an apartment owned by the company to Mrs. May Azogi, daughter of Danny Azogi The consideration for the apartment was mainly paid by way of offsetting debts towards its shareholders and/or by way of repayment of debts to the bank and/or to third parties.
In 2018, a liquidation order was issued against the company due to insolvency, and the special managers presented evidence of internal conduct in the company that does not necessarily correspond to the documents the company signed in real time. As a result, they argued for the annulment of the sale agreement for the apartment, since in their opinion it was a sham contract, the purpose of which was to smuggle property from the company’s creditors.
The main argument of the respondents was that at the time the sale transaction was concluded there was in fact no indication that the company was insolvent, and that at the time the transaction was made the company was owned by Ezogi – and the late Yossif was still alive, so that if it had not been for his death at a later date and the entry of his estate into insolvency proceedings, In any case, there was no room for any claim against the deal.
Decision: The district did not accept the position of the special managers according to which it is supposedly a contract of appearance. However, he also rejected the buyer’s position regarding the rights in the apartment, and stated that it is an invalid contract that goes against public policy, in view of the execution of “a chain of actions that are illegal and improper, that go against the most basic rules of company management and the fundamental principles of proper corporate governance.” Because of this, the court ordered the retroactive cancellation of the sales agreement.
The meaning: the court applied binding norms of behavior also to a private company that carried out actions between itself and its shareholder, when it was supposedly solvent – something that is routinely done in many companies. In doing so, the court ruled that the company’s actions can be examined retrospectively, when an event occurs external to the company that stops its current conduct, such as entering into insolvency proceedings. The court used a well-known abstraction from the world of childhood – the “game of musical chairs”. And so, in his opinion: as long as the private company’s music continues, no one will come forward with any claim against its shareholders. However, when the music stops, and it is found that one of the participants lacks a chair, then the shareholder or the winner of the property will not be able to hide from improper actions done by him in his private company, and these will be examined retrospectively under the iron combs of proper corporate governance even if it is a private company.
Parak 54454-12-17