Amendment 50 of the Israeli Execution Law enacted at the end of March, 2016, prevents creditors from waiting for the interest to accumulated before commencing debt enforcement procedures. This amendment sealed one of the loopholes that attorneys representing large service organizations (including banks) used to increase their fees on collecting accounts receivable. But this is not the only problematic behavior of such lawyers and for that reason corporations hire the services of firms dealing also in the field of audit, such as our firm, in order to audit the behavior of external lawyers engaged in collection for the corporation. In the absence of such audit directors and officers expose themselves to personal liability.
A few years ago, when I served as a director of one of the commercial banks, I insisted on a thorough audit of the operation of the lawyers who carried out debt collection work on behalf of the bank. The audit revealed that one of the law firms reported collection actions that were never made by it. Such behavior endangered, of course, the bank, because it exposed the bank to credit risk of the debtor, but I did not realize at the time that the action was in fact benefitting the lawyer who was waiting for the interest to accumulate thus increasing the fees.
One of our firm's client, a businessman, returned from Canada after a 10-year stay. Two years later he suddenly discovered that Mercantile Discount Bank Ltd. opened an execution case against him and received, ex parte, an order preventing him from leaving the country. The debt, it was later revealed, was due to relatively minimal 12 years old verdict forgotten for many years after the businessman (leaving the country) thought that the matter was settled between the lawyers. The lawyer of the bank claimed that the debt now stands at about ILS 1.5 million. The ex parte order was issued on the basis of an unfounded affidavit of the law firm, who had an intern sign a false affidavit stating that the businessman fled the country and it was just now revealed that he returned to Israel and could escape again. The lawyer, on behalf of the bank, neglected to note that the businessman resides in Israel for two years and has entered and left the country on business trips dozens of times or that they have no real knowledge except from a limited request from a private investigation office to check if the businessman is in fact in Israel at such time. After the Court, regretfully as it often is the case, avoided taking a position and strongly suggested that the parties settle out of Court, the law firm demanded, as a condition for cancelling the ex parte order, that the businessman not only pay more than triplicate the original debts, but that he also waive any right of claim against the lawyer or the bank. Such waiver was agreed because for an international businessman it is more important to be able to keep working than managing expensive legal proceedings for several years.
A series of Israeli judgments established that there is no direct liability of directors and officers towards third parties unless the officer was himself involved in the wrongdoing, but if such action caused damage or expense to the corporation shareholders of the corporation may file a claim against the office holders for lack of supervision over the lawyers representing the corporation. In light of this, it is very important to audit the activity of the lawyers managing the corporate collection procedures, not only to ensure that all the funds collected indeed reach the corporation but also to avoid exposure to the corporation and its officers due to actions of such lawyers.