Insolvency body says EU asset freeze plans will undermine debt recovery

Out-Law News | 28 Sep 2011 | 12:30 pm | 1 min. read

European Commission plans to allow courts to freeze business assets in UK bank accounts deal a "severe blow" to UK insolvency laws, a trade body has said. The UK is yet to decide whether or not to opt in to the proposals.

Insolvency trade organisation R3 noted that the plans did not contain the protections built in to existing procedures under English law.

The European Commission recently published plans to create a European Account Preservation Order (EAPO) (51-page, 303KB PDF)  which will allow courts anywhere in the EU to freeze funds in UK businesses' bank accounts without warning.

A party could apply for an EAPO before judicial proceedings begin or after a judgement has been obtained in any case where the court, parties and their bank accounts are located in different member states, the Commission said.

If an EAPO is granted then any judgement or ruling will be automatically recognised in any member state without having to go through enforcement procedures in the national courts, it said.

Frances Coulson, President of R3, said 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.

R3 warned that although the intent of the plans was to help creditors protect assets from concealment or removal by directors when a company got into difficulty, the way the proposal is drafted could result in an EAPO being "routinely granted" in cross-border debt recovery cases.

"The UK is seen as an international leader in business rescue, benefitting creditors who usually receive higher returns in rescue than terminal procedures. If EAPOs are supposed to protect assets from dodgy directors, the new regulation should reflect this objective," Coulson said.

"Policymakers must take great care, before forming a final view on these proposals, to understand their impact in the UK," said banking law specialist Alastair Lomax of Pinsent Masons, the law firm behind Out-Law.com. "The focus for policy behind UK insolvency law has for many years been about business rescue. We have a regime which is far stronger in this respect than many others in Europe."

"The consequences of these proposals on distressed businesses could be extremely serious.  This could, in turn, drive other stakeholders to take protective action which might be destructive of value and counter to the rescue culture," said Lomax.

A Government consultation on whether the UK should opt in to the proposals and how best they should be implemented closed earlier this month.

The consultation document noted that the Commission's proposal included a number of safeguards, such as limiting the amount covered under an EAPO to the amount being claimed plus any interests and costs. Businesses will also be able to have an order set aside or suspended in certain circumstances, the document said.