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Floating Charges on Assets of Individuals*

  • Joshua Weisman

Extract

The Security Interests Law, 1967, created a revolutionary change in Israel's law of security interests inasmuch as it replaced the previous obsolete regime with a modern one. Notwithstanding, it refrained from adopting a clear position on the question of whether a non-corporate debtor may create a security interest over his assets by means of a floating charge. Such a charge, which according to Israeli law may be given by companies and cooperative societies, applies to both the current property of the debtor and any property which he may acquire in the future. The uniqueness of the floating charge, however, is not merely insofar as it extends to the future property of the debtor. Unless otherwise provided for, the floating charge allows the debtor to continue to execute transactions with his assets, such as their sale or mortgage, whereby the grantee of the rights by virtue of such transactions is not subject to the floating charge.

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1 The Security Interests Law is referred to in Laws of the State of Israel as the Pledges Law, 5727–1967 (21 L.S.I. 44).

2 The Companies Ordinance (N.V.), 1983, 37 Dinei Medinat Israel (N.V.) 761, articles 1, 164, 166.

3 Article One. Although the article does not explicitly mention sale, judicial interpretation has left no doubt as to its inclusion. Gower's Principles of Company Law (London, 4th ed., 1979) 105. See Bank Leumi Ltd. v. Anglo-Palestine Bank (1972) 26 (ii) P.D. 468–473. See also article 169, which deals with floating charges incorporating an undertaking not to create further charges.

4 See Weisman, J., The Law of Security Interests, 1967 in Commentary on Laws Relating to Contracts, Tedeschi, G., ed. (Jerusalem, 1974, in Hebrew) 2436.

5 Doukhan, M., ed., Laws of Palestine (19341935) vol. 1, p. 347.

6 Ibid. (1933) 41, 48.

7 23 L.S.I. 277.

8 See Ben-Porat, M., Transfer of Obligations Law, 1969 in Commentary on Laws Relating to Contracts, Tedeschi, G., ed. (Jerusalem, 1972, in Hebrew) 910. See also the revised booklet (1978) p. 5.

9 21 L.S.I. 149.

10 22 L.S.I. 107.

11 Yekutiel v. Bergman (1975) 29 (ii) P.D. 757, 765; see Zeltner, , Sale Law, 1968 in Commentary on Laws Relating to Contracts, Tedeschi, G., ed. (Jerusalem, 1972, in Hebrew) section 2.

12 A member of the Commission, Mr. Ben-Dov of Bank Leumi, reported this phenomenon.

13 Dr. Meir Tamari of the Bank of Israel pointed out this aspect in his testimony before the Commission.

14 Insolvency Law and Practice, 1982, cmnd. 8558, p. 354 (known as the Cork Commission); Report on Consumer Credit, 1971, cmnd. 4596, (known as the Crowther Report), Article 5.6.5.

15 See introductory note.

16 Mr. Ben-Dov of Bank Leumi noted that he knew of diamond merchants who had incorporated in order to benefit from the advantages of floating charges; he did not, however, possess any precise information as to the scope of this phenomenon.

17 Mr. Lev, presenting the banker's perspective, testified that regarding floating charges, he attributes greater importance to debts owed to his clients, rather than merchandise which they may possess. Merchandise necessitates a search for a buyer, while the former type of security does not.

18 Jackson, and Kronman, , “Secured Financing and Priorities among Creditors” (1979) 88 Yale L.J. 1143, 1158.

19 This testimony was given by Mr. Ben-Dov and Mr. Lev.

20 According to the testimony of Mr. Ben-Dov.

21 Gilmore, G., Security Interests in Personal Property (Boston, Little, Brown, 1965) vol. 1, p. 360.

22 Cork Commission Report, op. cit. supra n. 14, at 345, 34.

23 Abel, A.S., “Has Article 9 Scuttled the Floating Charges?” in Ziegel, and Foster, , Aspects of Comparative Commercial Law (Dobbs Ferry, Oceana, 1969) 410, 413.

24 Cork Commission Report, op. cit. supra n. 14, at 344–345.

25 Schwartz, A., “Security Assets and Bankruptcy Priorities: A Review of Current Theories” (1981) 10 J. Leg. Studies 1, 45.

26 McLaren, R.H., Secured Transactions in Personal Property in Canada (Toronto, 1980) s. 5.02.

27 Cork Commission Report, op. cit. supra n. 14, at 4, 32, 34.

28 G. Gilmore, op. cit. supra n. 21, at 360.

29 This is the lesson that may be learned from the Israeli experience with floating charges. A practice has developed according to which such charges are rendered conditional upon an undertaking by the debtor not to transfer any of his assets in the absence of the creditor's consent, with the exception of inventory assets transferred in the ordinary course of business.

30 Cork Commission Report, op. cit. supra n. 14, at 345–346.

31 “Purchase Money Security Interest”, see Gilmore, op. cit. supra n. 21, at 349–350; Jackson and Kronman, op. cit. supra n. 18, at 1167.

32 Bankruptcy Ordinance (N.V.) 1980, Art. 85 (3) (3 L.S.I. [N.V.] 131).

33 Procaccia, U., Bankruptcy Law and Civil Legislation in Israel (Jerusalem, 1984, in Hebrew) 256257.

34 See Vinograd v. Israel Bank of Commerce (1955) 10 P.M. 76; see also Weisman, op. cit. supra n. 4, at 35 (n. 42), 116.

* This article is based on a proposal which I wrote as chairman of a commission appointed by the Minister of Justice to examine the question of floating charges on the assets of individuals. The other members of the Commission included Ephraim Avramson, Gideon Ben-Dov, Haim Crown, Davida Lachman-Messer, Varda Losthoiz, Avraham Lozowick, Tana Shpanitz and Shimon Weiss. The secretary of the Commission was Rivka Levi. The proposal was adopted by a vote of 6–3, and was submitted as a report to the Minister of Justice on 1 November 1984.

** Professor of Law, The Hebrew University of Jerusalem.

Floating Charges on Assets of Individuals*

  • Joshua Weisman

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