View from Europe: Europe-wide asset freezing to increase – banks must be ready
From 18 January 2017 claimants will be able to apply for a European Account Preservation Order (EAPO), a new, and potentially potent, weapon in their litigation armoury. EAPOs are available in "cross-border" civil and commercial proceedings to enable a claimant to freeze funds in a defendant's bank account across 26 Member States by submitting a standard form paper application to a court in just one of those Member States.
International banks operating in the participating Member States will have to get to grips with implementing EAPOs. The administrative requirements and obligations on banks are potentially significant.
More European accounts likely to be frozen
A claimant faced with a defendant who has multiple accounts across Europe will no longer have to incur the cost and delay of making separate national freezing applications. For example, a Belgium claimant in proceedings in Milan will be able to seek an EAPO from the Italian court and that Italian order will be effective for freezing monies held in a defendant's Spanish, German, Luxembourg and French bank accounts. The claimant no longer needs to go through the process of prioritising from which jurisdictions relief might most effectively and efficiently be sought. This may mean that more European accounts are frozen in future.
Obligations on banks
International banks operating in the participating Member States will have to freeze accounts "without delay" and (unless there are exceptional circumstances) issue compliance declarations within three working days of implementation. For post-judgment EAPOs, banks may also be required to conduct searches to identify any accounts it holds for a defendant. Banks will therefore need to understand which accounts and funds may be caught in each participating Member State. They will also need robust internal processes to ensure compliance within tight time periods, with any EAPOs or information requests.
This burden is compounded by the fact that banks will not be able to adopt a uniform pan-European policy in response to this legislation due to its numerous references back to national law. Instead, specific local law advice will be required on its implementation and impact in different Member States with potentially the force of any EAPO granted varying from one jurisdiction to another.
Set-off for banks
The EU Regulation which introduces EAPOs1 does not expressly address a bank's right of set-off (eg what happens to a bank's right of set-off where a defendant has two accounts at a bank, one account in credit and the other in debit, and the account in credit is attached by an EAPO). The Regulation simply provides that the EAPO has the same rank as an "equivalent national order" in the Member State of enforcement. Member States have had to inform the Commission about any ranking conferred on equivalent national orders under national law. For example, in Belgium, contractual set-off provisions stipulated by banks will be protected by the provisions of the Financial Collateral Law (the Law of 15 December 2004) and remain unaffected by an attachment.
This is an issue that banks will wish to have clarified in all relevant jurisdictions.
Banks may potentially have liability to the claimant and defendant for performing their obligations under the Regulation defectively (eg erroneously preserving more funds than specified in the EAPO or the wrong funds or incorrectly issuing its declaration of implementation). Any liability of the bank for failure to comply with its obligations under the Regulation is governed by the law of the participating Member State of enforcement. In addition, the bank may also have liability to the defendant, the claimant and third parties pursuant to other statutory or contractual provisions or other obligations.
UK and Denmark
EAPOs are not available to all claimants or from all Member State courts. The UK and Denmark took the decision not to opt into this Regulation. Accordingly, the UK and Danish courts will not issue EAPOs and bank accounts held in these jurisdictions will not be subject to these orders. Unusually, Recital 48 to the Regulation seeks to introduce a nationality restriction on claimants. Only those claimants domiciled in participating Member States can apply for an EAPO (thereby excluding UK, Danish and non-EU claimants). However, the Regulation still impacts UK, Danish and non-EU businesses as their accounts in the 26 participating Member States may be frozen. The accounts of UK (at least pre-Brexit) and Danish consumers are not subject to pre-judgment EAPOs.
Are Member States ready?
The Regulation requires participating Member States to have certain national measures in place to enable EAPOs and information requests to be implemented in practice (eg to have designated which authorities are able to obtain account information and receive, transmit and serve EAPOs). In some jurisdictions (eg France) this is relatively straight forward as the existing national preservation system is quite similar to that found in the EAPO regime. By contrast, in other jurisdictions, where there is not such alignment, it may well be that the 18 January 2017 deadline for such measures to be in place won't be met.
The Regulation is likely to increase the burden on banks operating across Member States. They will have to implement and respond to such orders and will need to do so expeditiously. Banks will need to review their customer terms and conditions as well as their systems and processes for implementing such orders.
Much will depend on the volume of orders sought and how Member State courts exercise their numerous discretions under this ambitious legislation.
Regulation (EU) 655/2014 of the European Parliament and of the Council of 15 May 2014 establishing a European Account Preservation Order procedure to facilitate cross-border debt recovery in civil and commercial matters:
Commission Implementing Regulation (EU) 1823/2016 of 10 October 2016 establishing the forms referred to in this Regulation:
1 Regulation (EU) 655/2014 of the European Parliament and of the Council of 15 May 2014 establishing a European Account Preservation Order procedure to facilitate cross-border debt recovery in civil and commercial matters (Regulation). See also Commission Implementing Regulation (EU) 1823/2016 of 10 October 2016 establishing the forms referred to in this Regulation.
This case summary is part of the Allen & Overy Legal & Regulatory Risk Note, a quarterly publication. For more information please contact Karen Birch email@example.com, or tel +44 20 3088 3710.