At Anderson Strathern LLP, we have extensive experience in cross-border recoveries for our financial and commercial sector clients. A new proposal and draft Regulation of the European Commission (click here to access the proposal) may, if implemented, make the process of recovering debts within the EU much smoother and more cost-effective. The Commission have estimated that their proposal may result in the recovery of up to €600 million which is currently written off annually by businesses within the EU.

Whilst implementation of the proposal (even assuming that the UK adopts it) is some way in the future, the purpose of this note is to give a brief overview of how the proposal would work in practice.

Background

The stated aim of the proposal is to "make recovering cross-border debts as easy as recovering debts domestically". The Commission estimates that companies within the EU currently lose around 2.6% of their annual turnover to bad debts. The Commission sees the proposal as the logical extension of the existing framework for mutual recognition of court judgments throughout Europe, by creating a common framework for recognising the manner in which those judgments are enforced.

The basic proposal is that a new Court Order would be created, known as a "European Account Preservation Order" (EAPO), the purpose of which would be to allow a creditor in one EU member state to freeze the bank account(s) of their debtor in another member state in order to preserve the amounts at credit of those accounts. It is envisaged that this could be done before, during or after court proceedings are raised to recover the debt, thereby preserving the sums at credit of the account.

The proposals would be in addition to, and not a replacement of, existing national regimes. It would not therefore affect the law relating to arrestment in Scotland.

How would you get an EAPO?

As the draft Regulation currently stands, a creditor will require to have a pecuniary claim against a debtor having "cross-border implications" in order to apply for an EAPO. The draft Regulation specifically excludes claims arising from insolvency, social security and arbitration matters.

A "Bank Account" is defined as any account containing cash or financial instruments which is held with a bank in the name of the debtor. It is therefore somewhat wider than a mere current account. It also covers joint accounts and accounts "in the name of a third party on behalf of the defendants", which may be wide enough to encompass funds held for a client on a solicitors' client account.
The procedures for obtaining an EAPO differ slightly depending upon whether the application is made before or during court proceedings for recovery of the debt, or whether it is made after judgment is granted.

In the former case, the applicant will require to demonstrate to the court that they have a pecuniary claim which "appears to be well-founded" and that the lack of such an order may impede the recovery process because "there is a real risk that the [debtor] might remove, dispose of or conceal assets held in the bank account… to be preserved".

In the latter case, the procedure will be more straightforward – the creditor will have an automatic right to request that the court which issued the judgment also issue an EAPO.

In both cases, the form of application is set out in the Regulation, and gives guidance as to specific information to be included. In particular, the creditor will require to set out the sums which he seeks to preserve in the account, which are limited to the principal debt, interest and expenses recoverable in the court proceedings.

In order to deal with situations where the creditor has limited information and cannot accurately identify the debtor's Bank account, they can request in their application that the authorities within the member state of account's domicile obtain that information for them.

Importantly, the debtor will not be informed of the application prior to the issue of the EAPO unless the creditor requests otherwise. There is provision for an oral hearing on the application to be fixed in "exceptional circumstances", but it is clear that this is to be the exception and not the norm. The debtor does, however, have the right to challenge the EAPO within 45 days of the date upon which they were "effectively acquainted with the contents of the order and was able to react".

What is the effect of an EAPO?

The effect of the Order will be to prevent the amounts specified in the EAPO from being transferred, withdrawn or disposed of by the defendant or the defendant's creditors from the designated account or accounts. The reference to the defendant's creditors is notable, and suggests some form of preference in bankruptcy.

The Order merely freezes the account, it gives no right to payment from the account. In terms of the draft Regulation, it continues in force until it is either set aside by a court or is "replaced by an equivalent effect of an enforcement measure under national law". It can be seen that the EAPO is therefore concerned with preserving assets rather than enforcing payment per se.

Conclusions

Although some way from being implemented, the Commission's proposals will be welcomed by creditors who have experience of cross-border recoveries.

Uncertainty as to whether the debtor has assets in another jurisdiction is one of the primary reason why, in our experience, creditors choose to write off debts rather than pursue them on the continent.

Having the certainty that an asset has been ring-fenced at the outset will give the creditor confidence that they can proceed with action and potentially make a reasonable recovery at the end of the process.

For further information please contact Andrew Foyle or your usual contact within the Banking Litigation team at Anderson Strathern.

This bulletin is for general information only and does not constitute legal, investment or other professional advice. Please contact us should you require advice on any particular legal issue. Anderson Strathern LLP accepts no responsibility for any loss that may arise if reliance is placed on any information or opinions expressed in this bulletin.