Europe-wide freezing orders to take effect from June, but UK still considering whether to opt in

Out-Law News | 14 May 2014 | 10:50 am | 3 min. read

Courts in European Union countries are to gain the power to freeze funds in business bank accounts in other EU states without warning from June this year, after the EU Council Of Ministers' General Affairs Committee voted in favour of the new regulation.

Ministers have agreed to adopt plans to establish European Account Preservation Orders (EAPOs) which would allow creditors to preserve the amount they are owed in a debtor's bank account located anywhere in the EU by preventing debtors from moving their assets to another country while procedures to obtain and enforce a judgment are ongoing.

According to the European Commission the Europe-wide freezing orders, which will only apply to cross-border business disputes, will make it easier for companies and individuals to recover debts across borders within the EU trading bloc.

"In economically challenging times companies need quick solutions to recover outstanding debts," said Johannes Hahn, EU commissioner with responsibility for justice while EU vice president Viviane Reding is on electoral leave ahead of the European elections on 25 May. "Today's adoption is good news for Europe's small and medium-sized enterprises and the economy. Thanks to these new rules, small businesses will no longer be forced to pursue expensive and confusing lawsuits in foreign countries."

The EAPO regulation is expected to be published in the Official Journal of the EU, which is the EU's statute book, in June this year, after which it will be directly applicable in 26 of the 28 member states. The UK and Denmark have not opted in to the measure, and a spokesman for the UK Ministry of Justice (MoJ) told Out-Law.com that the UK Government will consider its position further in light of the adoption by the General Affairs Committee.

"The final text has been agreed and the Government will consider whether it is in the national interest to opt in," said a statement from the MoJ. “We want to make it easier for businesses and citizens to resolve disputes and enforce judgments across borders, but serious concerns about the details of this proposal meant that in October 2011 the UK announced our decision not to opt in to the EAPO at that stage."

"Our consultation on the proposal highlighted widespread concern that it contained inadequate protection for defendants," the MoJ statement said. "In particular, the threshold for obtaining an order was too low, there was no requirement to compensate a defendant for losses suffered from the wrongful grant of an order and defendants should not have to challenge orders in foreign courts."

There is no deadline by which the UK Government must decide whether or not to opt into the EAPO.

The proposals have also met resistance from the UK insolvency trade organisation R3. In September 2011 after the proposals were first put forward, R3 said that the plans did not contain the protections built in to existing procedures under English law.

Restructuring specialist Alastair Lomax of Pinsent Masons, the law firm behind Out-Law.com has previously said that banks and restructuring professionals should keep an eye on EAPO developments.  "The aims of the proposals are laudable but their limits must be clearly prescribed. It would be grossly inappropriate were individual creditors to be given the power to hold to ransom a viable business rescue that is in the interests of all creditors," Lomax said.

According to the Commission, around one million companies in the EU face problems relating to cross-border debts, with businesses writing off up to €600 million annually because they are daunted by the prospect of pursuing debt recovery lawsuits in foreign countries and the associated additional costs.

The EAPO will offer creditors an alternative to procedures existing under national law. The regulation provides common rules relating to jurisdiction, conditions and procedure for issuing an order and a disclosure order relating to bank accounts, the Commission said. It also outlines how the regulation should be enforced by national courts and authorities as well as remedies for the debtor and other elements of defendant protection.

A statement by the Commission said that the "protective nature" of the EAPO means that while it will block the debtor's account, it will not allow money to be paid out to the creditor.

"Importantly, there will be no change to the national systems for preserving funds," said the statement. "The creditors will be able to choose this European procedure to recover claims abroad in other EU countries. The new procedure is an interim protection procedure. To actually get hold of the money, the creditor will always have to obtain a final judgment on the case in accordance with national law or by using one of the simplified European procedures, such as the European Small Claims Procedure."