Geraldine Elliott Sarah Trimmings November 8 2011 Government opts out of European account preservation orders RPC | Litigation - United Kingdom Geraldine Elliott, Sarah Trimmings Litigation IntroductionPost-consultation debateCommentIntroductionOn October 31 2011 the government published its decision that the United Kingdom would not opt into the European Commission's proposed regulation to establish the power to grant a European account preservation order (EAPO). The EAPO regulation is intended to facilitate cross-border debt recovery by enabling the courts in one EU member state to freeze a defendant's bank accounts in another member state. A claimant would be able to obtain this freezing order by completing a simple application form, proving that it has a well-founded debt claim or existing judgment and that without an EAPO, enforcement would be substantially more difficult. The commission contends that businesses would stand to gain €600 million a year if the courts were given powers to grant EAPOs. However, the provisions of the proposed regulation have been widely criticised in the United Kingdom. This update examines the commission's proposal and the objections to it.Post-consultation debate During the consultation period for the proposal, which took place in Summer 2011, a number of concerns were raised. The regulation's aim has been applauded by many, as the existing regime for creditors involved in cross-border disputes is regarded as unsatisfactory, costly and complex. However, the overall proposal has been widely condemned as too draconian, offering limited protection for defendants and too little in the way of legal recourse. The regulation's critics, which include the United Kingdom's Financial Markets Law Committee, argue that the proposed EAPO is too rigid and that the relevant court would be unable to provide discretionary relief for a defendant if the requirements for issue were met. These factors, it is argued, raise a real risk of injustice to defendants and serious damage to businesses, particularly small and medium-sized enterprises.Criticism has mainly focused on the following points.Ease of granting EAPOsUK commentators have noted that the threshold for granting an EAPO is not high. The application form requires the presentation of "relevant facts, reasonably corroborated by evidence", yet the court cannot test the evidence and would hold a hearing only in "exceptional circumstances". No indication is given as to what constitutes an 'exceptional' circumstance, so the scope of the court's discretion is unclear.The claimant must show that without the issue of an EAPO, the subsequent enforcement of an existing or future title against the defendant is likely to be impeded or made substantially more difficult. Deliberately removing, concealing or disposing of assets would clearly satisfy the test, but it has been argued that the claimant could satisfy the test merely by stating that it would be substantially more difficult for it to search for assets after judgment than it would be if the funds were already frozen in a defendant's bank account.The apparent simplicity of the application and the absence of a duty on the claimant's part to give full and frank disclosure have led critics to claim that there is a danger of inequality between the parties, and that a potentially highly damaging measure against a defendant could be secured too easily. This would have a particularly detrimental effect on small and medium-sized enterprises.The ease of the application process contrasts markedly with the requirements for obtaining a freezing order from an English court where the applicant must demonstrate a strong arguable case, provide full and frank disclosure and give a cross-undertaking in damages. Thus, it would be easier for a foreign applicant to obtain a freezing order over a UK debtor than for an English applicant.Implementation, enforcement and challengeWhen presented with an application for an EAPO, the court would have to give a decision within seven days (or only three days if the claimant had already obtained judgment). By contrast, the defendant would have only limited grounds of challenge, which would have to be raised within 45 days of the EAPO being granted, after which the court could take up to 30 days to rule. During this time, the defendant's assets would remain frozen.Again, this differs significantly from the English process for obtaining an injunction, where applications are normally dealt with at a hearing attended by both parties, unless the case is one of exceptional urgency, in which case no notice is given to the respondent. However, where a freezing order is made without notice, the judge will fix a prompt return date for the hearing at which the respondent has the opportunity to challenge and seek a discharge or variation of the order.Misuse Concerns have been raised that EAPOs will be open to misuse and even fraud or blackmail. There appear to be no safeguards to prevent a claimant raising a spurious claim and applying for an EAPO with limited or no evidence. For example, an order could be used with a view to denying a defendant the means to fund an appeal or application to set aside a default judgement.Furthermore, obtaining an EAPO is inexpensive compared to the cost of seeking a freezing order from an English court. The cost is therefore unlikely to act as a deterrent against vexatious applicants.SecurityThe court would have discretion to order security from the claimant, which could be used to compensate the defendant in the event that an order was later deemed to be unjustified. However, this provision would apply only if national law permits the ordering of security. No guidance is given as to when the court should require security or what the level of such security should be given.This provides a substantially lower level of protection for respondents than English freezing orders, where the court requires the applicant to give an undertaking in damages to compensate the respondent if it subsequently transpires that the injunction was wrongly granted.Bank accounts EAPOs are principally targeted at bank accounts. Major concerns have been raised about the administrative burden and costs that EAPOs would place on banks.The proposed definition of 'bank account' extends beyond normal convention to include "financial instruments". The proposals provide no procedural guidance to banks faced with the choice of different accounts held by a defendant, even in circumstances where one account contains financial instruments and the other contains cash. Once an EAPO is granted, a bank would have to implement the EAPO "immediately" and would have to issue a declaration within three days, stating that it had done so. The EAPO would provide a further burden on banks to assist the claimant by identifying whether a defendant holds an account.Protection of third parties and domestic creditors The proposals are silent on the approach to bank accounts that are encumbered by a charge in favour of the bank or a third party. Should a defendant's bank account become subject to an EAPO, there is nothing in the proposals that would clearly protect third parties or the bank itself.It seems that if a defendant were to become insolvent with an EAPO already in place, under English law the EAPO would not be discharged and would instead take effect in rem as a fixed charge, thus ranking ahead of a prior floating charge. The proposed regulation would also put UK creditors of UK debtors at a disadvantage, as an EAPO would be available only to foreign creditors. A defendant could therefore be more inclined to pay foreign creditors first, to the detriment of UK creditors.Comment Notwithstanding the UK government's decision to opt out of the proposed regulation at this stage, the intended implementation of the regulation in its current form in other EU member states could significantly affect parties involved in cross-border trade. Moreover, the government has stated that it agrees with the aims of the regulation, and intends to participate fully in the ongoing negotiations with the commission, in the hope that sufficient changes will be made to enable the United Kingdom to opt in after adoption. Thus, a variation on the EAPO could be adopted by the United Kingdom in future.For further information on this topic please contact Geraldine Elliott or Sarah Trimmings at RPC by telephone (+44 20 3060 6000), fax (+44 20 3060 7000) or email ([email protected] or [email protected]).