Empowered to Report or Empowered to Commit Negligence

Empowered to Report or Empowered to Commit Negligence

Doron Afik, Esq.
June 17, 2024

As of June 27, 2024, all companies in Israel are required to submit electronic reports to the Israeli Companies Registrar - ostensibly a technical amendment intended to perhaps save manpower at the Companies Registrar by removing the requirement to type in the manual forms, but in practice a significant change that may reduce the gross negligence in which a large number of companies in Israel conduct themselves.

Except in some cases (for example, the replacement of the company's articles of association), the recording at the Companies Register is declarative only and the relevant record is the internal ledger of the company (which in many cases does not maintain a company secretariat and such a ledger does not really exist). Thus, for example, in a case discussed in the District Court in Tel Aviv in November, 2021, a person discovered that shares in a company had been transferred to his name and demanded to delete his record as a shareholder and director of the company, which was done without his knowledge and without having any connection to the company. The Court ordered that the record must be corrected and his removal as a shareholder and director both at the Companies Registrar and in the company’s ledger and made it clear that the role of the Companies Registrar is declarative only and in the event of a contradiction between the record at the Companies Registrar and the company’s ledger, the company ledger determines. In that case, the record was made as part of a fraud, without that person having any connection to the company and without his knowledge, but our office also handled in the past a case where a large car importer suddenly discovered that an unknown person was recorded at the Companies Registrar as a shareholder, due to a technical fault.

The Israeli Companies Law requires the submission of an annual report to the Companies Registrar, where this report is a technical report updating on changes in the company's articles of association, including a resolution to change the name or increase or decrease the registered capital, change of company address, changes in the board of directors, changes in the company's holdings etc. - all changes that the company was obligated under law to report within a few days after they were carried out during the year, so it is effectively a completely unnecessary report.

In practice, the report is not only redundant but also dangerous because accountants were also authorized to submit the reports to the Companies Registrar, and CPA’s in practice had the company sign the annual tax returns it would also have it sign a manual annual report to the Companies Registrar, in which at best the details were copied from the latest Companies Registrar report (and in the worst case, wrong details were written due to incorrect copying or because they were copied from old information) and the Companies Registrar would automatically update the data from the report, which was not prepared by a lawyer but by an accountant, whose job this is certainly not, and cannot be aware of changes made in the company during the year. In other words, a celebration of professional negligence that caused the information in the Companies Registrar to become less and less relevant and is more and more susceptible to mistakes.

The requirement that now only a director, CEO or a person registered as authorized to report in the company, can submit the annual report online, is an opportunity for companies (who choose not to replace one gross negligence with another) to start acting as companies should, by appointing secretariat, which will hold orderly company ledgers and due documentation of all the company's official documents and agreements (as well as verifying that they were duly signed and are binding on both parties), and will not only report the annual report to the Companies Registrar, but will also ensure that the company operates as required by law in all other aspects as well.

Or not... Companies may also "save money" and simply register one of the directors or the CEO (or another person, whose job this is not, and does not have the professional background for this, and anything he does cannot be beyond negligence) and continue to act under the well-known economic rule: small savings today increases the chance of large damage and expenses in the future…