knowledge 30 November 2016 |

Bankers Beware as European Freezing Orders Edge Ever Closer

The Regulation sets out a new procedure enabling a creditor to bring a court application “freezing” funds held by a debtor in a bank account in a participating Member State.² The aim is to prevent the subsequent enforcement of the creditor’s claim from being jeopardised. The EAPO is available as an alternative to existing preservation measures under national law, such as the Mareva injunction in Ireland, and does not affect these. The Regulation envisages a single standard court application to target account(s) in one or more Member States. The order will be available before proceedings are initiated, during the proceedings and post-judgment. Once made, an EAPO will be recognised in all the other participating Member States.

The EAPO is only available in a “crossborder” case where the creditor is in one Member State and the bank account in another. The definition of a “bank” under the Regulation will include a bank, building society and credit union in this jurisdiction.

How much can be frozen and for how long?

As a general rule, if the application is brought pre-judgment, the amount of the claim and any interest properly accrued may be frozen. Post-judgment, any costs ordered against the debtor can be added to this amount. The EAPO will remain in force until it is revoked, its enforcement terminated or a measure to enforce judgment has taken effect.

Procedure before the court

In order to maintain the element of surprise, the application for the EAPO will be made without notice to the debtor. The creditor must submit sufficient evidence to satisfy the court that there is an urgent need for an EAPO 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. The risk envisaged here is that the debtor may dissipate, conceal or destroy assets or dispose of them under value, to an unusual extent or through unusual action. Where the creditor has not yet obtained judgment, he must also satisfy the court that he is “likely to succeed” in his claim against the debtor.

A speedy decision on the application can be expected with the Regulation setting out usual time limits of 10 working days preand 5 working days post-judgment, from the date of lodgment of the application, for the court to take this step.

Will the court require security?

Pre-judgment the court will generally require security for an amount sufficient to prevent abuse of the procedure and to ensure compensation for any damage suffered by the debtor as a result of the EAPO to the extent that the creditor is liable for such. In the absence of specific evidence as to the amount of the potential damage, the court can consider the amount of the EAPO as a guideline for determining the amount of the security. Where the creditor has already obtained judgment, security will usually not be required unless the court considers this “necessary and appropriate”. This could arise where a judgment is not yet enforceable or is under appeal.

Identifying the debtor’s bank account

Where the creditor has obtained an enforceable judgment and believes that the debtor holds bank account(s) in a specific Member State but has no information to identify them, he can ask the court dealing with the EAPO to request the necessary information from the information authority of the Member State of enforcement. The creditor must substantiate why he believes the debtor to hold an account in a particular Member State eg the debtor may work or have property there. He must also provide all relevant information available to him about the debtor and the account(s) to be preserved.

In exceptional cases, the creditor can make the request notwithstanding that the judgment is not yet enforceable. In that case, the amount to be preserved must be substantial in the circumstances and the court must be satisfied that there is an urgent need for the information as there is a risk that, otherwise, the enforcement of the creditor’s claim is likely to be jeopardised with consequent substantial deterioration of the creditor’s financial situation.

Depending on what method is made available in a Member State, there may be an obligation on all banks in a territory to disclose, upon request by the information authority, whether the debtor holds an account with them. This information would probably have to be supplied within a short time period. Bearing in mind that requests could come from any of the participating Member States, the number of requests could be considerable and this could impose a significant administrative burden on banks. Once done, the bank is prohibited from notifying the debtor of the disclosure of his personal data for 30 days. This is to prevent an early notification from jeopardising the effect of the EAPO.

Some issues for the creditor

The Regulation imposes a number of specific obligations on the creditor:

• It prohibits a creditor submitting parallel applications for an EAPO before different courts. The creditor must also make a declaration in respect of any equivalent national remedies he may have sought;
• If the creditor has obtained an EAPO before the commencement of proceedings, he must initiate proceedings promptly and provide proof of such to the court or risk revocation of the order; and
• If amounts above that specified in the EAPO are preserved, the creditor must move promptly to have them released.

The creditor is liable to the debtor for damage caused by the EAPO which is due to the creditor’s fault. The burden of proof here is on the debtor. However, the creditor will be presumed liable where he fails to take any of the three steps set out above.

The Regulation states that it “does not deal with the question of possible liability of the creditor towards the bank or any third party.” This is another area of uncertainty for banks at the present time.

 The role of banks

The debtor’s bank plays a key role in the new procedure. An EAPO is sent to that bank for implementation. The bank must identify the relevant accounts and implement the order in a prescribed order of priority “without delay” following receipt. The bank must preserve the amount specified in the EAPO. The final amount preserved may be subject to the settlement of pending transactions. There is no guidance provided for the bank as to what constitutes a “pending transaction”.

Any funds which exceed the amount specified in the EAPO will remain unaffected by the implementation of the order. If the funds held are insufficient to preserve the full amount specified in the EAPO, the order will be implemented only in the amount available.

If the relevant account cannot be identified, the bank may be able to seek information from the information authority in the Member State of enforcement. However, if the account cannot be identified at all, the bank will not implement the order.

If funds are held in accounts that, are not exclusively held by the debtor or are held by a third party on behalf of the debtor or by the debtor on behalf of a third party, these may be preserved to the extent to which they may be subject to preservation under the law of the Member State of enforcement. This is another area for potential variation across the Member States and between subsidiaries/branches of the same bank depending on where they are located.

The bank must issue a declaration of implementation within 3 working days. This period may be extended in exceptional cases. Banks will be reimbursed for their costs only to the extent that this is possible for equivalent national orders.

Any potential liability of the bank for errors in implementation will be governed by the law of Member State where the bank account is maintained again with potential for variation across the Member States. Given the very tight timeframes involved and the onerous obligations placed on the banks, it is easy to envisage how errors in implementation could arise. A bank could erroneously preserve an amount greater or lower than that specified in the order. It could preserve the wrong account. It could fail to identify an account held by a debtor with it. It could fail to act in time. It might incorrectly issue a declaration of implementation.

The Regulation is silent on how any right of set-off of the bank against the debtor should be dealt with. This will be a matter of some concern for banks until it is clarified.

Options for the debtor

The debtor can apply to the court which issued the EAPO to have it set aside or modified on a number of grounds eg that the conditions for the order were not met. He can also seek to have the creditor provide additional security. He can apply to court in the Member State of enforcement to provide security in lieu of the EAPO or to release exempted amounts eg for normal living or business expenses. He can also seek to terminate enforcement on a number of grounds including that enforcement of the substantive judgment has been refused. The parties can apply together to revoke or modify the order where the case has settled.

Comment

The EAPO will undoubtedly be of assistance to some creditors and some aggressive use of the new remedy can be expected. However, the requirement for security prejudgment and the complexity of the new procedures may discourage uptake. There will be a certain level of confusion as the new procedure is rolled out, certainly until the CJEU has a chance to examine certain aspects of the Regulation.

There will undoubtedly be an increased burden on banks which will have the primary role in implementing the new procedures and depending on uptake could see the first requests arrive early in the new year. Up to now, the significant cost of applying for a Mareva injunction has limited the number of requests for banks to freeze accounts. However, this has the potential to now change and the number of EAPOs which financial institutions may face is very significant.

In some areas, the Member States are given a wide measure of discretion on implementation. This may lead to a difference of approach in certain Member States and may encourage forum shopping. It also means that banks will be prevented from pursuing a standard pan-European strategy in response to the Regulation and may be obliged to seek out local guidance on its implementation in different Member States.