In 2006, by the Green Paper on Improving the Efficiency of the Enforcement of Judgments in the European Union: The Attachment of Bank Accounts, the European Commission proposed the creation of a European Attachment Order (EAO) over defendants’ bank accounts in Member States.1 A public consultation process on the scope and operation of the proposed EAO regime has been ongoing since 2006. The European Commission is expected to publish its draft regulation in summer 2011, which means the regulation could well be in force by 2013.
EAO – key points at a glance
With likely implementation in 18 months to four years, an EAO:
- Should allow a creditor to attach a debtor’s European bank accounts without the need for a declaration of enforceability
- Will have the effect of freezing a debtor’s bank account – but without creating a proprietary right or giving any right of transfer
- Will most likely be obtained by a process similar to an application for an English freezing order and subject to a similar test – but will not allow a debtor to examine the creditor or obtain information as to his assets
- Is unlikely to be effective where the location of the proceeds of fraud is unknown or the proceeds are outside the EU, or where the proceeds are held in a nominee or joint account
- Applying for a Europe wide freezing order – what will be involved?
The process of obtaining an EAO is expected to be similar to obtaining a freezing injunction in England and Wales. Whilst the terms are still being finalised, the European Commission’s publications indicate the procedure and scope of the EAO will be along the following lines:
- Attachment proceedings will need to be commenced where the substantive claim will be heard. The priority of competing creditors will be determined as a matter of national law although as yet no detailed consideration has been given to competing creditors in different jurisdictions or creditors who are domiciled in the same jurisdiction but commence proceedings in another Member State.
- Applications will be able to be made from before the commencement of proceedings through to the point at which a claimant obtains a declaration of enforceability. Where an EAO is sought prior to the launch of an action, a claimant will be required to commence proceedings shortly thereafter.
- Presumably, most applications will be without notice, to preserve the element of surprise and ensure that the debtor takes no steps to drain the account prior to attachment. If so, a claimant will be under a duty to provide full and frank disclosure.
- A claimant will not be entitled to interrogate a debtor or seek disclosure of a debtor’s assets. If the bank account details (at least the account name and branch) are not known, the court will be unlikely to grant the EAO. An EAO is also unlikely to be granted in circumstances where the funds sought to be frozen are held in a nominee account. Whilst there is scope for joint accounts to be frozen, only the debtor’s proportional ownership of funds will be affected and notice will need to be given to the other account holders.
- No EAO will be granted unless the claimant has a prima facie case and a prospect of a difficult recovery, such as a risk of dissipation. The EAO will be able to be enforced against several bank accounts but the creditor will not be entitled to freeze more than the amount of his claim plus interest and costs.
- In most cases a creditor will be obliged to provide security for any loss which may be suffered by the debtor or a third party such as a bank. A creditor will also be required to pay a fee to the bank(s) freezing the debtor’s account(s).
- There will be scope for a debtor to challenge the grant of the EAO shortly after his account has been frozen. Most likely, such a challenge must be made in the court in which the EAO was issued.
- The debtor will almost certainly be entitled to deduct sums from the frozen account to pay his and his family’s living and legal expenses.
- Problems for victims of fraud
Evidence suggests that in a debt recovery context, a creditor will often seek an attachment order to exert commercial pressure on the debtor and there is considerable concern to ensure that a debtor is not unduly prejudiced by an EAO. Whilst such concern is understandable in the context of debt recovery, the opposite is often true in fraud claims, where a fraudster may well attempt to inflate his costs to further whittle away the victim’s funds, thereby emphasising the need for a robust attachment regime.
Large scale or sophisticated frauds inevitably involve the hiding of funds in offshore jurisdictions where enforcement is difficult. The advent of the EAO will only serve to encourage this: a fraudster will be able to immediately render the EAO a toothless tiger by diverting all funds to accounts outside of the EU. If this presents difficulties for the fraudster, there remains the option of placing the funds in a nominee account in the EU, several entities removed from the fraudster.
is also difficult to see how an EAO in isolation will assist a victim of fraud. In many cases, the victim will have a suspicion, but no proof, as to where his funds have been routed and/or who to. Victims are often reliant upon the remedies offered in England which entitle a claimant to obtain a freezing order requiring extensive disclosure of assets and allowing cross examination of the fraudster where the disclosure is insufficient, or Norwich Pharmacal relief.
- More cost to banks
There is a lot to concern banks and practitioners about what is coming. Other European jurisdictions have very quick and easy methods by which bank accounts can be searched centrally and with no cost or expense to the bank. Any legal adviser to a bank in England, however, will know just how inconvenient the process of searching can be. In the past the consequent expense has been something that English banks have been prepared to “take on the chin”, often not even troubling to charge the claimant for the cost of their search, despite being entitled to. That cost may, however, now be multiplied. It is one thing to accept as an overhead the freezing injunctions granted by the courts of England. It is quite another to accept as a matter of routine the cost of searching under the freezing injunctions granted by the courts of every other Member State.
How will the Europe wide freezing order work – in rem or in personam?
- Anyone who has tried to freeze assets in Europe will know that freezing orders fall into two broad categories.First, there are attachments “in rem”. These work effectively by declaring that once the attachment has been granted any further dealing with the asset is of no legal validity. Most civil law jurisdictions operate this form of attachment. It has certain similarities with, for example, the English order nisi.
- Secondly, there are attachments “in personam”. These do not have any immediate effect upon the legal validity of any dealings by the defendant with his assets. They merely prohibit him (usually subject to limited exceptions) from giving effect to them. If a defendant deals with an asset that is subject to a freezing injunction, the transaction will be prima facie valid but the defendant will be at risk of contempt of court. Some European countries (for example, France and Germany) operate a combination of attachments in rem and in personam such that not only is a transaction involving the attached asset void, but the defendant is also liable for a punishment if he effects it.
- There are significant issues as to how in rem and in personam injunctions operate internationally. Each has its limitations. The courts of most countries are prepared to make court orders that have some impact upon people outside the borders of that country. However, countries that operate in rem attachments will not generally seek to make orders invalidating dealings with property in other countries. Aside from the usual conflict lawyers’ jargon about “judicial comity”, “judicial chauvinism” and “extra territoriality”, the simple fact is that the order is likely to be ignored without any difficulty and the court that grants it will have its authority undermined.
- Similarly, whilst in personam freezing injunctions are granted by courts over defendants who are outside the jurisdiction of the court granting them, unless there is any real sanction against the defendant for breach of the injunction, the court is unlikely to grant it. Freezing injunctions are not gestures – they must be capable of being enforced. Whenever a defendant is present within the jurisdiction, however, or a default judgment can be granted against him, that sanction is usually deemed to exist.
- Amongst the number states of the European Union, the vast majority of injunctions are exclusively or predominantly in rem. We can therefore expect that the EAO will be akin to an in rem procedure.