This article is based on information that was given by the Bank of Israel.
I have tried to include some personal observations to help those who may not understand the Israeli banking procedures. The issue is complicated and the real life banking methods may differ a little from the actual written rules. Therefore, you should consult an expert if you should have any questions or concerns.
A personal Touch:
Try not to use checks if you can avoid but if you really must, please read this article before you start writing a check: http://lawadv.com/checks-in-israel/
The Law
The “Checks Without Cover Law, 1981”, is meant to make checks more reliable to use, improve payment ethics, and deter account holders from writing checks using insufficient funds, by imposing quasi-criminal administrative sanctions for those who violate the rules. Sanctions would restrict the account holder’s ability to access his/her account. The law also states that the restriction sanctions may also be imposed on debtors who are going through a bankruptcy or Bailiff’s Service proceedings (“Otsaa La Foal”) and on those who refuse to grant a letter of divorce under rabbinical law (“Messarvei Get”).
Role of the Checks Without Cover Section at the Bank of Israel
The “Checks Without Cover” department at the Bank of Israel operates under the “Checks Without Cover Law, 1981”, and its rules and regulations by thereof.
When the Unit receives information from banks and other entities such as: bailiff’s services, rabbinical courts, and bankruptcy courts, regarding the restrictions on violator’s accounts, it then shares the information with all banks (In Israel), additional entities, and entities licensed under the Credit Data Service Law.
If there are special circumstances and conditions of the restrictions, Bank of Israel will send a notice to their customer, the Banks, and all additional entities. (Notices regarding ordinary restrictions are served by the bank.)
The department only handles inquiries related to restricted accounts and is not authorized to intervene directly with any bank decision regarding restrictions of an account or refusal of honoring a check. The department is also not authorized to deal with any restrictions that are imposed by law.
Displaying the accounts of customers who are restricted under aggravated circumstances
To help citizens avoid receiving checks that are written with insufficient funds, the Bank of Israel posts, on its web site; account numbers of restricted accounts, the dates of when the restriction will be lifted, and the bank name and branch where the account is kept.
The Bank of Israel also posts certain details of the customers who are restricted under aggravated circumstances, along with their ID numbers and the dates of which the restriction will be lifted.
Note: The Bank of Israel does not post the names of customers restricted under special circumstances; i.e., those restricted by the Bailiff’s Service, a rabbinical court, or a court of law in bankruptcy proceedings.
The information on the Bank of Israel website does not include customers who are restricted under aggravated circumstances and who have appealed their restrictions with the court. This seldom occurs.
Ordinary restriction
The law will restrict an account for one year if ten or more checks were written and returned without sufficient funds during a twelve-month period.
To protect customers who write a lot of checks that are returned because of insufficient funds, and there is not a reoccurring or exceptional reason, the law states that the account shall not be restricted if the first and the tenth check were returned within a period of less than fifteen days of each other.
Restrictions for a delinquent account
The main restriction for a customer with a delinquent account is that there will be an injunction on the actual bank account. In other words, the bank will not honor checks that are drawn out of this account during the restricted period: even if there are enough funds in the account to cover the check. However, if the holder of a restricted account has another account (even in the same bank) then that account is not restricted. He/she may continue to draw checks using the unaffected account.
A restricted customer may not open a new checking account at any back whatsoever. This pertains only to an account, in Israeli currency, which checks are drawn. The refusal of a bank to open a non-checking account solely because the customer is restricted does not constitute reasonable refusal to open the account.
Note: a restricted customer may open a non-checking account as long as there are no other impediments to opening the account. Such a customer may also continue to transact in the restricted account as long as all transaction are conducted in cash. He/she may also make deposits, withdrawals, and conduct any other transactions other than drawing checks on the account.
A restricted customer may not receive power of attorney or be named an authorized signatory of a new account to which checks are drawn.
How long does an ordinary restriction last?
The term of the restriction is one year. This period begins on the date the bank notified the customer about the restriction of his/her account and applies no more than fifteen days after the date of the notice was sent to the customer.
Can another account be opened for a restricted customer during the period preceding the onset of the restriction?
From the time, notice of the restriction is sent and during the subsequent fifteen days, the account is in a “waiting period” pending restriction. During this time, no checking accounts may be opened for the customer.
To whom does the restriction apply?
The restriction applies to the account and any account holders who are recorded with the bank on the day the conditions are imposed regardless of the identity of the member of the account who drew the insufficient checks.
Note: the restriction does not apply to a holder of power of attorney in the account even if He/she is the person who signed the insufficient checks.
Corporate Accounts
Corporate account—a limited-liability corporation is a legal entity established under law. A corporate account shall be restricted based on the corporation’s “ID number” (private corporation number). Its authorized signatories shall not be restricted under their ID numbers, meaning that they may continue drawing checks on their personal accounts.
Authorized dealer’s account—for restriction purposes, an authorized dealer’s business account falls under the same rules as a private customer’s account. (Restrictions are reported based on the account holder’s ID number.)
Account of workers’ committee and representative of condominiums —if an account belonging to one of these entities is restricted, the entity is marked as restricted but its authorized signatories are not restricted.
Restriction under aggravated circumstances
A customer who meets the following conditions is restricted under aggravated circumstances:
- He/she has had an additional account restricted during the period of the restriction; a former restricted customer who was restricted again within 3 years of the end of the term of the initial restriction—either for the same account or for another account.
What are the implications of restriction under aggravated circumstances?
- The sanctions imposed on a customer who is restricted under aggravated circumstances is that all checking accounts in his/her name are restricted. Also restricted are joint accounts in which he/she is a member and accounts for which he/she holds power of attorney, excluding accounts in which he/she is an authorized signatory. But, the customer may not draw checks on any of these accounts.
- A customer who is restricted under aggravated circumstances may not open a new checking account at any bank whatsoever. This provision applies only to an account in the domestic currency on which checks are drawn. The refusal of a bank to open a non-checking account solely because the customer is restricted does not constitute reasonable refusal to open the account.
Note: a customer who has been restricted under aggravated circumstances may open a regular non-checking account provided there are no other impediments to opening the account. Such a customer may also continue to make cash transactions in the restricted account, receive deposits in it, and take any action other than drawing checks on the account.
- A customer who has been restricted under aggravated circumstances may not be given power of attorney or named authorized signatory on a new checking account.
How long does a restriction under aggravated circumstances last?
Customer and accounts who have been restricted under aggravated circumstances are restricted for 2 years.
What is the status of an account in which the holder of power of attorney has been restricted under aggravated circumstances in respect of another account?
When a customer is restricted under aggravated circumstances, any account in which he/she holds power of attorney is also restricted. This means that the customer may not draw checks on the either account. The holder of an account that is restricted in this manner because of the holder of power of attorney may approach the bank and advise it of the cancellation of the power of attorney, whereupon the restriction of the account in which the holder of power of attorney had been authorized to draw checks will be rescinded.
Does the restriction under aggravated circumstances of an authorized signatory in a corporate account result in the restriction of the corporate account?
The law states that restriction under aggravated circumstances of an authorized signatory in a corporate account does not result in the restriction of the corporate account. However, the authorized signatory that was restricted under aggravated circumstances is not allowed to draw checks on any account, including the company’s.
How does a member in a joint account affected when another member is restricted under aggravated circumstances in a different account?
When a customer is restricted under aggravated circumstances, all of his/her accounts are restricted, including joint accounts in which he/she is a member, even though checks drawn on the joint account were not returned. While no checks may be drawn on the joint account after the restriction is imposed, a member who is not a restricted customer may continue to draw checks on other accounts that he/she has and may open a new checking account.
Restriction under special circumstances
The law allows restriction under special circumstances in the following situations:
- Debtors on whom a restriction has been imposed by the Bailiff’s Service;
- Debtors who have been declared bankrupt by a court of law;
- Persons who refuse to grant letters of divorce, provided the rabbinical court has issued a restriction order against them.
Apart from the period of the restriction, which may last from one year to five years in the aforementioned cases as determined by the authority competent to impose the restrictions, the rules applying to a customer who is restricted under special circumstances are identical to those applying to customers restricted under aggravated circumstances.
Indirect implications of restriction of customer
Apart from the direct implications for a person who has been restricted, irrespective of the type of restriction, the very fact of being restricted has additional implications:
Although the law does not prohibit a bank from issuing credit cards to a restricted customer, banks that issued credit cards to such customers are allowed to cancel them.
The cancellation of a card usually takes place due to the customer’s financial situation, the one that had caused the checks to be returned and the restriction to be imposed. Such cancellation falls within the ambit of the bank’s business decisions.
The bank may also refuse to issue credit (regular loans or mortgage loan) to restricted customers even after restriction has been canceled. This refusal also falls within the ambit of the bank’s business decisions.
Serving of process in regard to bank-imposed restriction
When is a pre-restriction warning sent?
When 5 checks have been returned in an account due to insufficient funds, the bank must send the account holder a warning. The warning should explain that if the bank returns ten or more checks drawn on the account within a twelve-month period, the account and its holder will be restricted.
If someone has been given power of attorney in the account or if the account has an authorized signatory, the warning shall be sent to them as well. A flaw in the warning or non-receipt of the warning are not grounds for the cancellation of the restriction, provided the bank actually sent the warning.
If conditions for restriction were present on the date the warning was sent out, the customer will not be sent a warning but rather a notice of restriction only.
When is a notice of restriction sent out?
A bank shall send a notice of restriction no later than five business days after the day on which the last check that triggered the restriction was refused. The restriction begins fifteen days after the notice is sent.
To whom are the warning and the notice of restriction sent?
The warning and the notice of restriction are sent to every member of the account, anyone who holds power of attorney, and any authorized signatory.
Who announces an ordinary restriction and a restriction under aggravated circumstances?
The banking corporation sends notice about the imposition of an ordinary restriction; the Supervisor of Banks (hereinafter: the Supervisor) sends notice about the imposition of restrictions under aggravated circumstances.
Counting of checks for restriction of account
What is a “refused check”?
A refused check is one that has been presented for payment on or after the date recorded on it and is refused by the bank due to insufficient funds in the account. When such a check is presented to the bank, the bank returns it on the grounds of insufficient funds and counts it among the checks without cover in the account.
Is a check for which a cancellation order is given counted among checks without cover?
The bank where the drafter of the check keeps his/her account (the paying bank) must make sure that the account has enough funds to cover the check even if the customer issued a cancellation order relating to it. This means that even a canceled check will be counted among checks without cover if the account did not have sufficient funds to cover it and the bank would not have honored it had the cancellation order not been issued.
In such a case—where the account lacks sufficient funds when the check is presented for payment and the drafter of the check cancel it (for example, if the drafter claims that s/he did not receive consideration for it)—the bank shall return the check and note two reasons for doing so: “Insufficient funds” and “Cancellation order given”.
Is a check that is returned for a reason other than a cancellation order counted among checks without cover?
Most of the reasons for returning checks that appear in the Clearinghouse Rules have nothing to do with sufficient funds in the account. Instead, they relate to “Account closed”; “Drafter’s signature faulty”; “Sums do not match”; “Not endorsed”, etc.
These reasons do not absolve the paying bank from responsibility for determining whether the check can be covered. If upon inquiry it is found that the check cannot be covered and the bank decides not to honor it for the additional reason as well, the bank shall return the check due to insufficient funds and also record the additional reason.
For example, if the account does not have sufficient funds on the day the check is presented for payment and the drafter’s signature does not resemble the specimen kept with the bank, the bank shall return the check for two reasons: “Insufficient funds” and “Drafter’s signature faulty”.
For what reasons would a check not be counted among checks without cover?
Below is a list of exceptional reasons for not counting a check among the refused checks even if the account lacked sufficient funds at the time the check was presented for payment:
- “Drafter deceased”;
- “Check form canceled” (for further information see below);
- “Drawn on other bank”;
- “Drawn on other branch”;
- “Drafter’s signature lacking”;
- “Check expired”;
- “Presented prematurely”;
- “Lacking signature/s next to correction”.
When a check is returned under these circumstances, there is no legal logic for defining it as having been refused and counting it among the uncovered checks because, in these cases, the drafter of the check either should not have or could not have left in h/her account sufficient funds to pay the check. In the main, these are cases where the person who appears to have drawn the check had not drawn it at all, or the check should not have been presented to begin with—on the date of its presentation or at all.
When may a check be returned for the sole reason of “Check form canceled”?
When an account holder informs his/her bank, under his/her signature, that blank check forms have been lost or stolen and a check written on such a blank form is presented for payment, it will not be counted among the refused checks in the account. Instead, it will be returned on the grounds of “Check form canceled.” In such a case, the bank will ask the customer to present, as evidence, proof that he/she presented the police with a complaint or obtained a decision from a court of law.
How are checks in a joint account counted?
In a joint account, checks are counted for both members of the account even if only one of them signed the checks that were refused and returned due to insufficient funds. In an account that requires both members to sign each check and only one of them did so, the bank returns the check on grounds of “Drafter’s signature faulty” and also, if the balance in the account is insufficient, “Insufficient funds”, resulting in its being counted among the checks refused.
What happens of a check is presented for payment after the account is restricted?
Checks presented after the onset of the restriction are returned on grounds of “Restricted account” and are not defined as checks that are refused.
Note: checks refused during the fifteen-day waiting period between the refusal of the last check—the event that triggered the restriction—and the beginning of the restriction are added to the count of checks that were refused and that caused the account to be restricted.
What happens when an account is foreclosed?
When a bank returns a check solely because the account has been foreclosed and would have honored the check otherwise, it does so on the grounds of “Account foreclosed” In this case, the check is not counted among those that are returned for insufficient funds. This rule remains in effect for sixty days from the day on which the bank is advised of the attachment.
However, if the balance in the account does not suffice to cover the check for reasons unrelated to the foreclosure, the bank shall return the check for two reasons: “Account foreclosed” and “Insufficient funds”.
What happens if a check is returned for insufficient funds more than once?
A check is counted among refused checks only once—even if it is presented for payment several times and the bank returns it each time on the grounds of “insufficient funds”. Such a check is a note that has been redeemed under the Notes Ordinance and, practically speaking, should not be presented again.
Can a check that has been returned on the grounds of “Cancellation notice received” be presented again?
According to the Clearinghouse Rules, a check returned on the grounds of “Cancellation notice received” should not be presented again. Accordingly, a check return for this reason and presented for payment again shall be returned only on grounds of cancellation, even if the funds in the account were insufficient at the time it was presented again.
Based on what balance should a bank decide whether to return a check on grounds of “insufficient funds”?
The balance that “counts” when a bank decides to return to check due to insufficient funds is the balance at the end of the business day on which the check is presented in the account of the payee (the person who received the check). In most cases, the check physically reaches the payer bank the day after it is presented in the payee’s account. Therefore, a cash deposit made on the day the drafter (the payer) of the check sees the check in h/her account is a late deposit; the bank does not have to rely on it although it may do so.
What makes a credit for depositing a check final, and can the sum of the check be withdrawn from the account by means of a check or in some other way?
As a rule, crediting of a check that has been deposited in an account is considered provisional and does not become final until three business days after the day on which it is deposited. If the draftee bank (the bank doing the paying) decides to return a check due to a cancellation order, insufficient funds, or any other reason—the payee’s account is debited in the amount of the check and this sum not available to h/her. Accordingly, the bank normally does not include checks deposited in the account in the determining balance for the coverage of checks drawn on the account until three business days after the day on which the checks are deposited.
Recommendation: to make sure that the balance resulting from the depositing of checks can be used to cover payments from the account (such as checks drawn on the account), checks should be deposited at least four business days before the day on which the account is expected to be debited for these payments
Cancellation of a imposed restriction
The procedure used to cancel a restriction is set in motion by an appeal to magistrate’s court under Section 10 of the Checks Without Cover Law. A customer who is restricted or restricted under aggravated circumstances may ask magistrate’s court to revoke the inclusion of a check in the count of refused checks if one of the following conditions is present:
- The bank refused to honor the check due to an error.
- The bank refused to honor the check due to an attachment of the account in the presence of both of the following two conditions: the check was drawn before the bank received the attachment notice and the check could not have been paid for sixty days from the date on which the bank received the attachment notice;
- The customer has reasonable grounds to assume that the bank should have honored the check—either because there were sufficient funds in the account or due to an agreement with the bank.
- The customer was unable to take care of h/her affairs due to injury (to h/herself or h/her property) in an enemy action, and the check was refused for this reason.
- The customer lives in an area where a state of emergency was declared under
Paragraphs (1) and (2) of the “Declaration of Emergency” provisions in Section 1 of the Checks Without Cover Law, and between the date on which the check was drawn and the day on which it was presented for payment the customer’s income was badly compromised due to the state of emergency, for which reason the check was refused.
An appeal under Section 10 of the law centers on a claim by the appellant that a specific check or several checks should be excluded from the count of checks that were refused in h/her account and included for the purposes of the restriction, thereby bringing on the restriction. The court is not asked to rule on the validity or invalidity of the restriction itself because it is empowered not to cancel a restriction but only to remove checks from the count of checks that triggered the restriction.
Process of appeal at the restriction of an account – Instance
An appeal under Section 10 of the Checks Without Cover Law shall be presented to the magistrate’s court in the municipal jurisdiction closest to the location of the bank branch on which the check was drawn (hereinafter: the bank branch).
The appeal application
The appeal is presented in writing, using the form set forth in Checks Without Cover Regulations (Jurisprudence), 1981 (hereinafter: the application).
The application shall include a detailed presentation of all the facts, claims, and rationales on which the applicant bases h/herself.
The respondent
The respondent to the application is the bank on which the refused checks were drawn, and said bank shall note the address of the bank branch as its address.
Supplemental documentation
Appellants shall attach the following to their application:
- A detailed statement that corroborates all the facts on which they base themselves;
- A copy of any document or other evidence on which they base themselves;
- A copy of a request from the applicant or from another member of the account to the respondent, seeking cancellation of the inclusion of the check being appealed in the count of checks refused, and the respondent’s reply.
If the check being appealed was drawn on a joint account—a copy of the notice under Form 2 in the Addendum to the Checks Without Cover Regulations (Jurisprudence), 1981.
Deadline for submission of application
A restricted customer shall present the appeal application within 20 days of having received notice from the bank (i.e., the day on which the letter reached its destination by ordinary mail).
A customer who is restricted under aggravated circumstances shall present the appeal application within 20 days of having been advised by the bank of being a restricted customer or within 10 days of having been advised by the Supervisor of being a restricted customer under aggravated circumstances—whichever is later.
What are the implications of a court order for a stay of restriction?
If the court issues an order against the onset of the restriction, the following provisions shall apply:
During the stay of restriction, the customer is not allowed to open a new checking account and the bank shall not open such an account for h/her.
During the stay of restriction, the customer may perform transactions in h/her account and may even draw checks on it.
Checks that are refused during the stay of restriction shall be counted among refused checks in a count that starts over on the day the stay of restriction order is handed down. If the statutory conditions for said restriction are present, the account will be restricted once again, as required.
What happens if a bank restricts an account by mistake?
The law states that if a bank restricts an account by mistake, it must advise the Bank of Israel of this and the restriction will be lifted.
What happens if a third party mistakenly deposits a check that s/he was not supposed to deposit?
The law discusses only an error by the bank in imposing a restriction, as opposed to an error by an account holder or a third party.
Such errors may occur if for example: An account owner cancels a check and pays the recipient of the check in some other way such. The parties reach agreement that the check will not be deposit but despite this agreement, the third party presents the check for payment at a time when the payer’s account does not have sufficient funds. In this case, the check is counted among the refused checks in the account; the drafter of the check may bring claim against the third party only.
Termination of restriction of account and implications of restriction for customer activity – After the restriction is over, does the customer’s situation vis-à-vis the bank revert to the status quo ante?
Once the restriction period is over, the customer may perform transactions in h/her account as h/he had before the restriction. This means that there is no legal impediment to drawing checks and opening a checking account. However, it should be remembered that issuing checks and credit are not services that a bank must provide a customer; they are provided at the bank’s business discretion. The fact that the customer had been restricted may affect the bank’s decisions in these matters.
How long does the bank retain information about restriction of an account?
Banks that receive restriction information because the Bank of Israel is required to disseminate it among all banks may not retain or use this information after 3 years from the end of the restriction period. A bank that restricts a customer may retain the information with no time limit
Cashing a check that was returned due to insufficient funds
Whom should I contact if I hold a check that was returned due to insufficient funds?
One who holds a check that was returned due to insufficient funds may ask the Bailiff’s Service to execute a note (a check) and/or may bring a civil suit against the drafter of the check.
What identifying particulars are given to the holder of an unpaid check?
The draftee bank must provide the recipient of a check that has not been paid, for any reason whatsoever, with the following particulars:
- The name, ID number, and registered address of the account holder;
- The name, ID number, and registered address of a holder of power of attorney or an authorized signatory who actually signed the check, if the bank believes that it can identify the signatory.
