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UK still undecided about endorsing Europe-wide freezing orders

Out-Law News | 11 Mar 2014 | 3:10 pm | 4 min. read

The UK Ministry of Justice has confirmed that it has still to decide whether to opt in to a proposed EU regulation which would allow courts anywhere in the EU to freeze funds in business bank accounts in other EU states without warning.

The European Justice Council has endorsed a proposal to introduce Europe-wide freezing orders which are designed to make it easier for companies and individuals to recover cross-border debts. The European Account Preservation Order would allow creditors to preserve the amount 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.

An EAPO raised in one EU country would be automatically recognised and enforced in another member state. It would be issued without the prior hearing of the debtor, a situation the European Commission has said would safeguard "the 'surprise effect' of the measure".

The Commission believes the EAPO would benefit both businesses and citizens in Europe, where it said  up to €600 million is unnecessarily 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 proposal has met with resistance in some quarters of the UK, with insolvency trade body raising concern at the time that the measure would deal a "severe blow" to UK insolvency laws.

The UK government has confirmed that it has yet to make a final decision on whether to opt into the proposal. A spokesman for the UK Ministry of Justice yesterday told Out-Law.com that the UK would wait to examine the final text of the EU proposals before deciding whether it is "in the national interest" to opt in. This leaves the UK's stance unchanged since it announced that it would not opt in to the EAPO at that stage. 

Restructuring specialist Alastair Lomax of Pinsent Masons, the law firm behind Out-Law.com said: "These proposals are significant and risk being buried in the recent glut of announcements on insolvency law reform. 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."

Currently companies rely on national laws to require a bank to pay the money from a client’s bank account to a creditor, a situation the European Commission has described as "legally complicated, time consuming and expensive." A statement issued by the Commission earlier this week, said: "Procedures for recovering debts from another country's jurisdiction are complex, multiplying the costs for businesses that wish to trade across EU borders. Typical problems range from differences in national law to the costs of hiring an additional lawyer and translating documents."

In July 2011 the Commission published its proposals for the EAPO, which it says would put an end to "the fragmentation of national rules on enforcement" in Europe and increase confidence in trading across the single market. It would be available to businesses and citizens as an optional alternative to legal measures which already exist under national law in each of the 28 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 – it would not allow money to be paid out to the creditor. The EAPO would be an ex parte procedure, that is to say it would not require the presence or prior knowledge of the debtor – the Commission says this would safeguard the "surprise effect" of the measure.

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. However, national rules would continue to apply concerning exemptions for ensuring the livelihood of the debtor or for allowing a company to continue its ordinary course of business. 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.

Viviane Reding, the EU's justice commissioner, said that the EAPO would benefit small and medium-sized enterprises (SMEs) in particular.

"Small and medium-sized enterprises are the backbone of European economies – making up 99% of businesses in the EU," she said. "Around one million of them face problems with cross-border debts. After two and a half years of work on this proposal, the European Account Preservation Order is now close to a final adoption. This is good news for Europe's SMEs - in these economically challenging times, companies need quick solutions to recover outstanding debts."

In September 2011, UK insolvency trade organisation R3 noted 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.

“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 European Account Preservation Order at that stage," said a spokesman for the UK Ministry Of Justice.

"Our consultation on the proposal highlighted widespread concern that it contained inadequate protection for defendants," he 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."

"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," he said. "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.”

In May last year the European Parliament’s Legal Affairs Committee (JURI) voted to back the Commission’s EAPO proposal and the European Parliament is expected to endorse the plans in April.