This ruling pertains to a number of appeals against the decision of the trustees of New Central Bus Station Company (the "NCBS"), a company in liquidation that owned assets in the building of the New Central Bus Station in Tel Aviv, related to the debt claim submitted by Nitsba Holdings 1995 Ltd. ("Nitsba"). The ruling dealt with the status of NCBS's debts to Nitsba, who was the controlling shareholder of NCBS and asserted that it was NCBS's secured creditor. Nitsba effected several actions that caused the District Court (the "Court") to suspect that Nitsba's hidden purpose was to cause NCBS's collapse and to then re-acquire NCBS at a reduced price during an insolvency procedure.

Nitsba claimed that it acted in good faith belief of its ability to rehabilitate NCBS and in NCBS's ability to fulfill all of NCBS's obligations, including NCBS's obligations to its shareholders. The Court concluded that Nitsba had acted in bad faith. Nitsba had not believed in NCBS's ability to rehabilitate itself or, alternatively, was not interested in such rehabilitation. Nitsba's coverall plan was to implement certain transactions that established its control and its position as a debtor and which enabled it to initiate insolvency proceedings against NCBS at the time of Nitsba's choosing. NCBS's subsequent insolvency allowed Nitsba to submit an offer to purchase NCBS or its assets at a reduced price.

The Court held that due to the exceptional circumstances in this case, it would subordinate some of the components of the debt owed to Nitsba (i.e., rule that the Nitsba debt has a lower preference than other debts of NCBS, such that these Nitsba debts will be prior in repayment only to the shareholders).

Firstly, the Court noted that Nitsba thinly capitalized NCBS by providing loans to NCBS rather than equity investments, leaving NCBS with insufficient capital. Although Nitsba claimed that the real estate assets of NCBS provided sufficient capital to meet the terms of the "thin capitalization" tests, the Court ruled that such test must be primarily on a cash flow basis and that NCSB's real estate assets were not sufficiently liquid to be taken into account. The thin capitalization discussion in this case was limited to the issue of debt subordination and was not expanded to include piercing the corporate veil between Nitsba and NCBS (even though piercing the corporate veil is a possibility in severe cases of thin capitalization). Piercing the corporate veil would have resulted in more serious consequences for Nitsba, as it would leave Nitsba responsible for NCBS's debts.

Secondly, despite the precarious economic situation of NCBS, Nitsba decided to purchase NCBS's secured debt and not invest in NCBS's capital. This created a "market distortion" in that NCBS had a conflict of interest by wearing "two hats" – as a controlling shareholder and as a secured creditor. This failure to make an equity investment is one of the reasons the Court "re-characterized" the shareholders' loans as a capital investment in the Company.

The Court adopted the position that it is necessary to not recognize the validity of a pledge accompanying a shareholder's loan due to the resulting market distortion which places the controlling shareholder in a position of absolute priority over the other creditors and shareholders. The Court held that a shareholder's loan can place the shareholder, at most, in a position of an unsecured creditor.

In addition, it was determined that Nitsba had violated its duty of trust towards NCBS as a de facto office holder and as its agent. The Court examined Nitsba's substantial involvement in NCBS's decision-making process and determined that Nitsba had a significant influence on NCBS's business. Similarly, it was found that NCBS gave Nitsba broad authority to conduct NCBS's affairs, which created a principal-agent relationship between the companies.

The Court ruling indicated that Nitsba sidelined the board of directors of NCBS from involvement in material business activity, presented false representations and violated its obligations of disclosure and good faith. It was determined that, in practice, Nitsba acted on its own behalf in reaching an agreement for the purchase of the outstanding debt of NCBS at a reduced price (less than 75% of the full value of the original debts).

Out of the Nitsba's seven debt claims, the court accepted two, three were subordinated and two were completely dismissed.

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