The new European account preservation order - A nightmare for defendants and a litigant's dream?
11 February 2014
This article considers the EU Regulation creating European Account Preservation Orders (EAPOs), in particular the test for an EAPO and the challenges that are likely to be faced by banks operating in Member States.
Contributed by Sarah Garvey
New legislation imminent
The European Commission's plan for a Regulation creating EAPOS has progressed and looks set to become a reality. After two years of debate, this highly technical legislation has now been approved in Council and the text is currently before the European Parliament for approval. It is thought this new Regulation may be agreed as early as May 2014 although it is understood that it will not be applied until two years after that.
What is an EAPO?
The Regulation will enable a claimant/creditor to make a single application to the courts of one Participating Member State1 for an order which will "freeze" funds held by a debtor/defendant in bank accounts in other Participating Member States without a further court order being required in those Member States. Applications will usually be made on a "without-notice" basis, meaning the defendant will not be aware of it. Applications will be made on standard form documentation generally without any requirement for a hearing. For pre-judgment orders, claimants will need to provide details of a defendant's bank accounts as part of their application. In respect of post-judgment applications, if this information is not available, the Regulation enables claimants to request such account information from banks (via enforcement authorities) in other Member States. Applications must specify the amount sought to be frozen. For pre-judgment orders it is thought this will usually be the amount of the claim plus interest. Such orders can be granted before proceedings on the substantive claim have been initiated, as well as during the course of proceedings or after a judgment has been obtained.
As noted in previous Risk Notes, the UK has decided not to opt into this Regulation following consultation conducted by the Ministry of Justice. Denmark has not signed up to this Regulation either. The overriding concern of the UK Government at that time was that the Regulation was weighted too heavily in favour of creditors. While changes have been made to the text during the negotiation period (in particular the test for granting such an order at Article 7 has been strengthened and security is now usually required from a claimant), overall the instrument remains resolutely pro-creditor. There may be concerns that defendants do not have sufficient protections under the Regulation and that the instrument, whilst useful to creditors, may give rise to forum shopping and potential injustice.
The test for an EAPO – more detail
For a pre-judgment order, as part of any application a claimant has to provide "sufficient evidence" to satisfy the court that it is likely to succeed on the substance of his claim. For pre- and post-judgment orders, a claimant must provide "sufficient evidence" to satisfy the court that there is an "urgent need for a protective measure in the form of a Preservation Order because there is a real risk that, without such a measure, the subsequent enforcement of the creditor's claim against the debtor will be impeded or made substantially more difficult".
For claimants concerned that their counterparties might move assets out of their reach and thereby render any judgment toothless, this may well be a very useful device. However, parties are likely to be concerned that, if proceedings are commenced against them, they could find their assets frozen across Member States and their businesses effectively paralysed without having had an opportunity to make representations to the court granting the order. They may also struggle to appeal the order, or otherwise set it aside in a timely way, if the courts in question are slow-moving and there are delays in scheduling an appeal. Further, the Article 7 test may be interpreted and applied differently by different Member States and it may be some years before there is clear ECJ authority as to the meaning of this test. One potential protection for defendants is that security needs to be provided by a claimant (although the court may dispense with this requirement). It is unclear what form this security should take but it is thought this requirement may deter some claimants from pursuing such an application.
Challenges for third party banks
This instrument imposes many obligations on banks operating in Participating Member States. Banks are not only required to freeze relevant accounts, but also to produce "declarations" to competent authorities/courts within three days of the implementation of the order confirming that relevant accounts have been frozen. Further, in respect only of post-judgment orders, they may be required to search for and provide information about a debtor's account (Article 17).
The complexity of the legislation is striking and will be a further challenge for banks (as well as the parties to any proceedings). One aspect of this complexity is the intricate interplay between European law, as provided for in the Regulation (and elsewhere), and the national law of Member States. There are detailed conflicts of law provisions that banks (and courts and litigants) will have to get to grips with. For example, the liability of the bank for failure to comply with obligations under the Regulation will differ from Member State to Member State. The ability of banks to recover their costs of dealing with applications will also vary across Member States.
One area of particular uncertainty relates to the treatment of joint or nominee accounts. Under the Regulation, banks have to ascertain whether, according to their records, funds held in an account are not exclusively held by the debtor, or are held by a third party on behalf of the debtor, or are held by the debtor on behalf of the third party. Again, the assessment as to whether or not to freeze such accounts will vary from Member State to Member State, as Article 29 provides that such accounts may be frozen "to the extent to which they may be subject to preservation under the law of the Member State of enforcement". For any jurisdictions that recognise a trust concept, this provision may throw up challenges. On a practical level, banks will need to be certain that these records are accessible (and up-to-date) and they may need legal advice in each relevant jurisdiction as to their position with regard to such accounts.
Banks may also be concerned that there are no express provisions dealing with a bank's right of set off against funds in any frozen account.
The text agreed in Council provides that EAPOs will only be available in respect of accounts in Participating Member States, ie it will not apply to accounts held in the UK or in Denmark. However the text goes on to state that only claimants domiciled in Participating Member States can take advantage of this procedure in any proceedings before a Participating Member State. This is a curious restriction. It means that a British or Danish claimant (or indeed a Swiss or a U.S. claimant) cannot obtain an EAPO in proceedings in circumstances where a French, German or Cypriot claimant would be able to. This inequality exists notwithstanding the fact that British, Danish, Swiss and U.S. defendants would nevertheless be subject to the downside of any order – as their accounts in Participating Member States would be susceptible to such an attachment.
It will be interesting to see if claimants (for example, a syndicate of banks from France, England and Switzerland) will seek to take advantage of this procedure when pursuing claims against a defendant before a Participating Member State court, perhaps with the claimant domiciled in a Participating Member State making such an application, thereby securing protection for all co-claimants.
It will also be interesting to see if parties seek to structure their financial affairs in such a way as to avoid the risk of such an attachment in a Participating Member State. Whether this initiative is considered a risk or opportunity – a nightmare or a dream – it is clear that detailed consideration will need to be given to this legislation by businesses (and in particular banks) very soon.
1 As discussed below, the UK and Denmark are not Participating Member States.