Europe-wide freezing orders win European Parliament backing – but UK still undecided

Out-Law News | 17 Apr 2014 | 12:54 pm | 3 min. read

The European Parliament has backed proposed new rules which would allow courts anywhere in the EU to freeze funds in business bank accounts in other EU states without warning.

MEPs have endorsed proposals for a regulation 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.

The proposed freezing orders are designed to make it easier for companies and individuals to recover cross-border debts within the EU trading bloc, the European Commission has said. According to the Commission up to €600 million is written off annually by companies because they are daunted by the prospect of pursuing debt recovery lawsuits in foreign countries and the associated additional costs.

"The Preservation Order will be effective Europe-wide and will greatly improve the prospects of successfully recovering cross-border debt," said a statement issued by the European Commission after the parliamentary vote. In order to become law, the proposal must be adopted by the European Council, which the Commission expects to happen in June this year.

The proposal has met with resistance from the UK government. Following the European Parliament's endorsement of the measure this week, a spokesman for the UK ministry of Justice (MoJ) confirmed that the UK government has yet to decide whether to opt in to the proposal.

Re-issuing a statement released after the European Justice Council endorsed the EAPO proposal last month, the MoJ said that the UK has "serious concerns about the details of this proposal" following widespread consultation on the issue in the UK which found "widespread concern that it contained inadequate protection for defendants".

"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," said the statement.

"While progress was made during the negotiations the Government will consider the final text once it is agreed and make a decision about whether it is in the UK national interest to opt in. It will consider if the concerns identified earlier in the process have now been addressed and, in particular, whether the rebalance in protecting the rights of debtors is sufficient.”

The proposals have also met resistance from the UK insolvency trade organisation R3. In September 2011 R3 said that the plans did not contain the protections built in to existing procedures under English law. Frances Coulson, president of R3, said at the time that the plans would "drive a coach and horses" through attempts to rescue businesses from insolvency. "Cash flow is critical during delicate rescue work. Removing access to substantial funds without notice gives a single creditor the right to jeopardise hopes of business preservation, harming creditors as a whole," she said at the time.

Restructuring specialist Alastair Lomax of Pinsent Masons, the law firm behind Out-Law.com said: "Banks and restructuring professionals should keep an eye on 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."

The Commission published its proposals for the EAPO in 2011, with the aim of putting an end to "the fragmentation of national rules on enforcement" in Europe and increasing confidence in cross border trading within the EU. If the proposals become law, businesses and citizens would be able to employ it as an optional alternative to legal measures which already exist under national law in each of the 28 EU member states.

Outlining the proposals, the Commission said the EAPO would concern cross-border debt recoveries. To secure an EAPO, the creditor would be required to show that his claim was well-founded, and that the debtor "risks to remove or dissipate his assets if the measure is not granted". The measure would only block the debtor's account, and would not allow money to be paid out to the creditor. The EAPO would be an 'ex parte' procedure, meaning that it would not require the presence or prior knowledge of the debtor. This is designed to safeguard the "surprise effect" of the measure, according to the European Commission.

Should an EAPO be granted to the creditor, the bank holding the account should implement the order immediately by blocking an amount corresponding to the amount of the order, according to the proposals. However, national rules concerning exemptions for ensuring the livelihood of the debtor or for allowing a company to continue its ordinary course of business would continue to apply. Debtors would have the right to contest the preservation order both on substantive and on procedural grounds. In principle the defendant would be required to raise the objections before the court which issued the order, although in some cases it would be possible for the debtor to appear before the courts of the state of enforcement.