Protection of Employees Rights in Insolvency

Full text


Protection of Employees’ Rights in Insolvency


Since the beginning of the 21st century, the world faced many economic challenges (to be gentle), the crash of the dot-com bubble in 2000–2001, the subprime mortgage crisis and the bursting of other real estate bubbles around the world in 2008-2009, and of course the recession followed by every such crisis.

In such unstable global economy, not all companies survive such crisis or recession, and more often during an economic crisis companies become insolvent and file for bankruptcy, leaving their employees to face an uncertain future.

There is an unavoidable tension between bankruptcy and labor laws regarding employee's rights. When a company experience financial difficulties, it has to decide whether to rehabilitate the company by making serious salary cuts or file for bankruptcy, because employees are protected by statute or by a collective bargaining agreement.

For example there are companies (like General Motors or American Airlines) that have entered into financial distress partly due to problematic labor agreements they committed to, these companies filed for bankruptcy as an attempt to decrease their employment costs and to rehabilitate.

This example brings me to the topic of my lecture, how to protect employees' rights in general (and intellectual property rights in specific), during the bankruptcy process?

How to find the balance that allows and helps companies rehabilitate with the help of its employees and for their own good and in case of bankruptcy how to best protect the company's employees.

The employees' status during bankruptcy

The status of the employee during bankruptcy of insolvent company differs from state to state in accordance of the bankruptcy regime implemented in every country. Here is a quick review of the situation in several parts of the world as I learned about during my research.

Hong Kong - A company must pay out all employee entitlements before it files for bankruptcy.

New Zealand - Appendix 7 of the Companies Act sets out the rules about who should be paid first when a company goes into liquidation or receivership.

Employees' wages and benefits claims (and deductions such as tax and child

support payments) rank immediately behind costs incurred during the


liquidation process. Wages and holiday pay have priority over unsecured creditors.

It is interesting that in European countries, known for their strong employment protections, like France, Germany or Spain had to change their labor practices within insolvency proceedings in order to promote the survival of businesses as going concerns.

United States - In the U.S which generally has relatively weak employment protections; there is a growing tendency to protect the employees during a bankruptcy process, for example, it has been determined that rehabilitation will not serve as a justification for a unilateral modification of labor rights.

Claims of employees of a company will take precedent and will be paid before other unsecured creditors are paid, but i will let the American members of this panel to explain in detail regarding the American law.

Israeli insolvency regime

In order to understand the position and status of the Israeli employees in the bankruptcy process we, first, have to understand the principals of Israeli insolvency regime.

The Israeli insolvency regime contemplates various scenarios for insolvent companies:

• A voluntary liquidation by either the debtor's shareholders (provided that the debtor being liquidated is a solvent entity) or its creditors;

• A court-ordered liquidation;

• A court-supervised voluntary liquidation initiated by the debtor's shareholders or creditors;

• A reorganization in which the debtor may seek a stay of proceedings while it pursues a recovery plan.

In Israel, employees whose wages, and their social benefits were not paid, can apply for the liquidation of the company. Some would say that these employee's posses a lot of power and have the ability (which is not always used in good faith or with due consideration to what's on stake), to determine the future of the company.

Recently, my firm began representing a high-tech company during its initial public offering (IPO); This company has developed a wonderful, cutting edge technology and operates in an almost non competitive market and has a profit potential of billions of dollars, (toward the upcoming IPO the company was evaluated in approximately 21 million dollars), this company had to deal, until recently with a petition, Submitted to the court, by its' employees, due a debt of 72,000 NIS (!!!!), in or

Since then the company has reached an arrangement with its creditors and is on

the way to its IPO.


Moreover, the Social Security Act (Consolidated Version)-1995, provides a safety net for employees. Chapter 8 of this law, specifically, states that in case of a bankruptcy, employees' rights (wages, benefits ect), will be paid directly by the NII (The National Insurance Institute), subject to conditions prescribed by the law.

Israeli courts often required to find the balance between employees rights and those of the company, for example, when Negevtech went through a liquidation process its workers asked the district court in Tel-Aviv to deny the company's request for stay of proceedings, justice Alshaich stated that "When a company undergoes economic difficulties, the fact that workers do not receive a salary for their work does not indicate a rare and unusual situation", Justice Alshaich also stated that " the stay of proceedings will benefit all sides, it gives the company a chance for reorganization or time to look for an investors, and in respect of employees, those who were let go will apply the NII for their rights regardless the stay of proceedings, and the employees who choose to take an unpaid leave of absence just might restate their jobs under a new employer".

It is safe to say that the Israeli employees' rights is protected both by law and by the Israeli court, but in the past few years we witness a growing tendency to rehabilitate companies, rather than liquidate them, there is an understanding that reorganizing companies is much more beneficent to the economy than liquidation. This approach is seen mainly in the verdicts given by the district court, judges tend to grant a stay of proceedings, if they were convinced that liquidation can be avoided and the company is salvageable. Judges are also extending the stay of proceedings over the nine months period, stated in the law, (implementing the Civil Procedure Regulations - 528, that allows the court to prolong any period of time stated in the law according to his own discretion).

Though courts, as mentioned above, tend to prefer the reorganization of the company rather than its liquidation. The Israeli law, unlike the American chapter 11, does not grant an automatic stay of proceedings. In Israel, in order for the company to be entitled to a stay of proceedings it has to be requested by the company during the use of Section 350, of the companies law, which states that where an arrangement between the debtor and its creditors, is being negotiated, and the court finds the delay in proceedings necessary for the preparation or approval of such an arrangement or recovery plan for the company, it may issue an order staying all proceedings against the debtor for a period of up to nine months.

What other options are available to employees?

Realization of the intellectual property of the company

High-tech companies most important and valuable asset is their intellectual property, patents, inventions and samples.

My friend talked about Nortel Networks Corporation whose intellectual

property portfolio consisted over 6,000 patents. Nortel's patent portfolio was

sold to a consortium of technology companies. The group beat out rivals


including Intel and Google with a $4.5 billion bid for the intellectual property, which included patents and patent applications for wireless, wireless 4G, data networking, optical, voice, Internet, and semiconductor technologies.

This can be a wonderful remedy to the creditors (among them employees) of an insolvent company.

But not all companies have a technological portfolio that contains registered and valuable patents. Israeli courts have already stated the Problematic use of intellectual property assets as collateral voluntarily [lien - property] or involuntarily [Foreclosure - discussions], the problem, according to them, derived from a number of factors. For example: the elements of period and time. Technological advances, high turnover and frequent innovation made that even if intellectual property was of economic value during the credit granting, it is not guaranteed that it will maintain its value.

Another problem is that a patent, prior to registration, has no real value according to Judge Shtruzman in Master v. Herzog "one can not seize property without a value because an asset without value is not an asset".

But there are different opinions, according to judge Frooktzih in Aloni v. Zand a patent is an example of an asset that can be seized although there is no ability to assess its economic value much like the farmer that provides as collateral, his future crops, without knowing its true value that depends on so many factors like weather or annual rainfall.

The Committee for Compensation and royalty

Chapter 8 of the Patent Act, 1967, establishes the legal provisions regarding employees' inventions during their work. Among other things, the law sets the obligation to report to the employer about any invention that came to work

"because of his service or during his service" (Article 131 of the Law), the distribution of property rights, derived from the invention invented by the employee "due to his service and during his service", between the employer and employee, and the employee's right to receive compensation for the service invention (Article 134 of the Law).

During 2010 an important decision was made by the committee for compensation and royalty which was established- under the Patent Act. The decision was regarding the interpretation of Article 134, which states that "the absence of any agreement which states if the employee is entitled for compensation and royalties for the invention service, and/or to what extent and under what conditions, it shall be decided by the Commission for compensation and royalties ..."

The committee has already decided on several cases that despite of standard

clauses regarding intellectual property rights assignment in agreements made

between the employee and the employer, employees have the right to claim

compensation and royalties for their inventions. According to the committee


the right of an employee - under Article 134 of the Law is a personal right separated of the employer right to ownership rights. In light of this interpretation the committee stated that the absence of a specific provision, standard intellectual property rights clauses can not be considered to be a waiver of the employees' right for payment of compensation in respect of Waiver of the right to receive compensation requires, according to the committee, an explicit statement in the contract.

PLURALITY LTD was a very successful company that manufactured microchips for the high-tech industry, the company went into liquidation. Dr.

Nimrod Bayer, who was the founder of its' technology, the same technology underlying the existence of the company, and the company's senior scantiest.

Turned to the District Court, as part of the liquidation proceedings, and filed a request to be given permission to begin proceedings against the company regarding the right to receive royalties for "service invention."

The District Court rejected Dr. Bayer's application in a brief decision: "Given the fact that the agreement expressly denies the applicant the aid to which he claims and in light of the response of Hcn"r - the request is denied."

Bayer appealed to the Supreme Court which accepted the appeal and allowed Dr. Bayer to apply to the committee in order to secure his rights.

The Supreme court draws this conclusion on one of the decisions of the Committee for Compensation and royalties, according to which the right to compensation for service invention is a cogent right that is integral to the protective employment law." That is a right that can not be stipulated, and even an explicit agreement that denies such consideration does not override the right of the court to hear it.

Moreover according to the Supreme Court, the only reason which established the District court's decision is the agreement between the parties, who allegedly denied the right to any compensation in respects Dr. Buyers' inventions, as well as an implicit determination in the decision, that the committee has no authority to discuss the case.

I would like to leave you with something to think about, it is yet to be

determined what should be the statues of royalties or compensation, ruled by

the committee in favor of the employee. Should the Israeli legislator expand the

protection on employee's intellectual property rights, by giving the

compensation or royalties a priority equal to this of secured creditors?


Orly Guy

Being the co-founder and managing partner of Guy, Bachar & Co, a leading law firm, Orly's main areas of practice are commercial and civil litigation, corporate law, real estate law bankruptcy law and international investments. Orly is highly experienced in promoting, establishing and accompanying businesses in the fields of internet, real estate and retail chains.

As legal counsel to leading companies in the Israeli market, Orly possess extensive experience in all aspects of corporate law and provides legal advice on diverse matters and transactions as well as on a wide range of day-to-day operational matters.

Orly serves as a member of boards of directors of private, public and

government companies in the fields of communication, medical, insurance

and the capital market.