Leave to Appeal (Civil) 2549/09 I.C.M.: Mizrahi Tefahot has no right of set-off in shares of a customer in liquidation

Background and facts in Leave to Appeal (Civil) 2549/09 I.C.M. v. Mizrahi Tefahot Bank

The judgment was given in the Supreme Court on July 28, 2010. The applicant is I.C.M. Air Conditioning Manufacturers Ltd., which is in liquidation and acted through the liquidator. The respondents are Mizrahi Tefahot Bank and the Official Receiver. The proceeding was filed as a motion for leave to appeal, and the court heard it as an appeal.

According to the judgment, the company held a quarter of the shares of another company, which held most of the shares of a public company. In 1999 the bank lent the other company NIS 4,500,000. Later it was decided that the shareholders would take the loan upon themselves according to their share, and receive the shares of the public company in the same ratio.

In 2002 the company opened an account at the bank. At that time a floating charge in favor of Bank Hapoalim lay on its assets, and the bank demanded confirmation that the shares would be excluded from it. After such confirmation was received by fax, a quarter of the shares were transferred to the company's account. In July 2003 an order was given to wind up the company. In May 2004, after the winding-up order, the bank sold the shares and used the proceeds to cover the debt. According to the liquidator, he discovered only in 2007 that the company had an account at the bank and that its shares had been sold.

The parties' arguments

The liquidator argued that the debt was not the company's but its controlling shareholder's. He also argued that the bank concealed the sale of the shares. According to him, the bank filed a proof of debt of only NIS 4,000 in the receivership proceeding, and stated in an attachment proceeding that it held no assets of the company.

The bank argued that it is a secured creditor in the shares by virtue of a pledge or a lien. Alternatively it argued that it was entitled to set off the company's right in the shares against the debt, under section 74 of the Bankruptcy Ordinance. The Official Receiver supported the bank's position on the set-off.

In March 2008 the parties agreed, on the District Court's proposal, that the bank would transfer to the liquidator all the funds demanded, and at the same time would ask the liquidator to recognize its rights in the proceeds of the shares. The liquidator rejected the bank's demand and determined that its status was that of an ordinary creditor. The Tel Aviv District Court allowed the bank's appeal and held that it was entitled to set off. However, the District Court criticized the bank's conduct and ordered it to pay costs.

What the Supreme Court held: Mizrahi Tefahot's right of set-off in shares

Justice A. Grunis wrote the judgment, and Justices M. Naor and E. Hayut agreed. First it was held that the proceeding should have been an appeal as of right, because a decision on the status of a particular debt claim is a judgment.

On the factual question, the court did not intervene in the finding that it was the company that took the debt upon itself. The debt was recorded in its account and it began to repay it. The argument that attributing the debt to the company was a fraudulent preference of a creditor was also rejected, because the liquidator did not show that the conditions for this were met. The court added that the bank's conduct toward the receiver and the liquidator was problematic, but this does not change the conclusion on the debt.

On the question of set-off, the court held that section 74 of the Bankruptcy Ordinance applies only to monetary obligations. An obligation to deliver an asset cannot be set off under it. The determining date in liquidation is the day the winding-up order was given.

The court also referred to English law, under which a trustee may not set off assets he holds in trust against a private debt of the beneficiary, because the beneficiary's right is proprietary. It was left open, and not decided, whether a monetary obligation that had not yet crystallized on the determining date can be set off.

The shares were of a public company, registered in the name of a nominee company. The court relied on the Obziler precedent, which described the chain of trusts between the nominee company, the clearing bank and the stock exchange member. Under section 177(1) of the Companies Law, the company was the shareholder, and the bank, as a stock exchange member, held them for it in trust. It was not argued that the bank received an instruction to sell them. Therefore, on the day of the winding-up order the bank had no monetary obligation toward the company that could be set off.

The outcome: the appeal was allowed and the District Court's judgment was set aside, except for the costs component. The case was returned to the District Court to determine whether the bank had a pledge or a lien on the shares, and whether it was entitled to realize them. No costs were awarded in the Supreme Court.

Quotes from the decision

The shares did not reflect a monetary debt of the bank toward the company. The shares were owned by the company, and the bank held them for it in trust.

From the judgment of Justice A. Grunis (translated from Hebrew).

Since there was no monetary obligation regarding the shares, the bank had nothing to set off against the company's debt to it.

From the judgment of Justice A. Grunis (translated from Hebrew).

The respondent's conduct toward the receiver and the liquidator was problematic, to put it mildly, in various respects.

From the judgment of Justice A. Grunis, referring to the finding of the District Court (translated from Hebrew).

What it means for Mizrahi Tefahot customers

The judgment holds that securities the bank holds for a customer belong to the customer. They are not money the bank owes him, and so the bank cannot set them off against a debt under section 74 of the Bankruptcy Ordinance. A right of the bank in the shares depends on another security, such as a pledge, which is examined separately.

A customer or liquidator who discovers that the bank sold securities from an account can ask for the documents the bank relies on and the date of the sale. More judgments on credit and set-off appear in the rulings database.

Sources

• Text of the judgment in Leave to Appeal (Civil) 2549/09 (ygoldlaw.co.il website)

Frequently asked questions about court rulings against Mizrahi Tefahot Bank

How to cite

Leave to Appeal (Civil) 2549/09 (I.C.M. Air Conditioning Manufacturers Ltd. v. Mizrahi Tefahot Bank), Supreme Court, 28.07.2010. Source: Net HaMishpat (Israeli courts database), case Leave to Appeal (Civil) 2549/09 (I.C.M. Air Conditioning Manufacturers Ltd. v. Mizrahi Tefahot Bank).