The European Account Preservation Order The Future of Freezing Injunctions.

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1 August 2011 The European Account Preservation Order The Future of Freezing Injunctions. The European Commission has unveiled a proposal to create a powerful new tool for claimants involved in proceedings in the EU. Its draft EU Regulation to create a European Account Preservation Order (EAPO) will, if implemented, have a hugely significant impact on the operation of freezing injunctions within the EU which currently depend on national law for their effect. The UK Government is currently considering whether to opt into the Commission s proposal and has opened a consultation seeking views of interested parties. The closing date for responses is 14 September Banks and other parties likely to be affected should pay heed now while the UK Government s attention is focused on the proposals, and take the opportunity to make their views known. Introduction what s the big idea? Contents Introduction what s the big idea?... 1 What will the change be?.2 When would an EAPO be available?... 2 How will it affect banks where the defendant s account is held?... 3 Analysis & comment... 3 UK Government consultation... 4 On 25 July 2011 the European Commission issued a draft EU Regulation to create a standardised mechanism by which courts of EU Member States can grant an order to freeze a defendant s bank account within the EU in order to support a claim for payment of a debt or damages, interest and costs. At the moment, a claimant must rely on national laws if it wants to do this either by having an order of the adjudicating court enforced abroad, or by going directly to the courts in the place where the account is situated for such relief. In the UK, such relief is available to a claimant through a freezing injunction which may have purely domestic or, more unusually, worldwide effect. The European Commission is not happy with this state of affairs given the discrepancies between the availability of such remedies within the EU Member States and the potential difficulties that this creates for claimants in cross-border cases. It has therefore been considering such an initiative for a number of years, and this proposal is the culmination of its thinking. Although it is some way off from becoming law, as the next step is for the European Parliament and Council to consider it under the Ordinary Legislative Procedure. The draft Regulation, if passed in its current form, would have a considerable impact. The European Account Preservation Order The Future of Freezing Injunctions 1

2 What will the change be? The Regulation will provide a prescribed set of circumstances which, if met, will entitle a claimant to have the bank account of a defendant frozen. Although national law remedies will be permitted to continue to exist alongside the EAPO, it will be a new, free-standing remedy subject to its own rules and requirements. Thus it will be crucial for both litigants and third parties likely to be served with an EAPO, such as banks, to be aware of these and how they differ from the national law remedies that they are currently used to. When would an EAPO be available? The Regulation will provide a prescribed set of circumstances which, if met, will entitle a claimant to have the bank account of a defendant frozen. An EAPO will be potentially available to a claimant involved in a civil or commercial matter having cross-border implications. The draft Regulation distinguishes between two types of EAPO; both to be obtained without notice unless a claimant requests otherwise. The first (available under Section 1 of Chapter 2) is for the preservation of a bank account (a) prior to or during the progress of proceedings in an EU Member State court i.e. an interim remedy or (b) once a judgment has been obtained but which, if required, has yet to be declared enforceable in the EU Member State of enforcement. A section 1 EAPO can be obtained either from the EU Member State courts with jurisdiction over the substance of the matter or the EU Member State court where the account is located, although in the latter case the EAPO can only cover accounts in that territory. The second type of EAPO (available under Section 2 of Chapter 2) would be available when a claimant s judgment from an EU Member State court is directly enforceable in the EU Member State of enforcement. A section 2 EAPO would be available from either the court that issued the judgment, or where the bank account is located. In order to obtain a section 1 EAPO a claimant would need to show that its claim is well-founded and that future enforcement of a judgment is likely to be impeded or made substantially more difficult without such an order, including because there is a real risk that the defendant might dissipate the contents of the relevant accounts. The issuing court may also require the provision of a security deposit or undertaking to compensate damage arising from the EAPO. No such conditions attach to a section 2 EAPO which would be available once a claimant has obtained a directly enforceable judgment. In both cases the claimant will make its application on the basis of prescribed information set out on a standard form. This will include full information regarding the defendant and the accounts to be frozen. In order to assist a claimant to provide such information the draft Regulation provides a mechanism for a claimant to request that the EU Member State of enforcement obtain such information. This will be done either by obliging banks to disclosure relevant information or by access to a register of the information. The European Account Preservation Order The Future of Freezing Injunctions 2

3 A defendant s position is ameliorated somewhat by provisions in the Regulation which will exempt, to the extent that the law of the EU Member State of enforcement allows, amounts from the EAPO to be used for living or normal business expenses. In addition, a defendant, once served with the EAPO, would be able to apply to challenge it on particular grounds mainly going to whether the conditions for grant were properly met. Alternatively, payment of a security deposit would result in the termination of the order. How will it affect banks where the defendant s account is held? The draft Regulation contains detailed provisions regarding implementation of the EAPO which are of direct relevance to banks. First, it should be noted that the definition of bank account is wide. It is not limited to accounts containing cash. It extends to those holding other financial instruments such as transferable securities, options, futures, swaps and other derivatives as well as units in collective investment undertakings. Therefore, a wide variety of financial services entities may find themselves having to administer an EAPO. The draft Regulation provides for an EAPO to be served on a bank in accordance with national law or by the competent authority under the EU Service Regulation where it is issued in an EU Member State other than that of enforcement. Upon being served with an EAPO the bank will be obliged to ensure that the amount specified therein remains in the relevant account. Any excess remains at the disposal of the defendant. The bank served will then have three days to submit a declaration in a prescribed form confirming whether the funds have been preserved. Issues of the bank s liability for any failure to comply with these obligations are to be left to relevant national law. Finally, in respect of costs associated with an EAPO, banks will be entitled to seek reimbursement to the extent that they are entitled to be paid under national law in relation to orders of equivalent effect. For these purposes the Regulation provides, however, that any fee charged shall be a single fixed fee determined in advance by the EU Member State where the account is located. Analysis & comment From the perspective of English lawyers used to the operation of domestic freezing injunctions, there is no doubt that the EAPO represents a radical proposal. In particular: It is significantly pro-claimant Given that the Commission s stated aim is to help claimants to recover debts, this perhaps should not be a surprise. Nevertheless there are elements to the proposal which arguably go too far. Certain safeguards that could mitigate the potentially draconian nature of a freezing order are absent. A claimant s undertaking in damages is not an automatic requirement and, perhaps of even more difficulty for defendants, the ability to use frozen funds for reasonable expenses is not a free-standing right but is contingent upon Certain safeguards that could mitigate the potentially draconian nature of a freezing order are absent. The European Account Preservation Order The Future of Freezing Injunctions 3

4 whether the law of the Member State of enforcement allows. Although common practice in the UK, there is no guarantee that this is the case elsewhere and, where it is not, defendants may face real difficulties. The conditions of grant of an EAPO also hold a few surprises. Although section 1 EAPOs set some familiar and sensible hurdles in the path of a claimant, it is not clear that, when establishing that these preconditions are met, a claimant will have to make full and frank disclosure about the strength of its case. Moreover, in section 2 EAPOs there are effectively no conditions to be met at all, save from having a directly enforceable judgment in hand. One might question why a defendant who cannot be shown to be planning deliberately to hide away assets should be, in effect, automatically subject to such a measure. These factors only serve to create the impression that a class of remedy which has until now been regarded as fairly exceptional is about to become far more mainstream in particular in section 2 circumstances. There are ramifications for banks Just as the parties to litigation will have to adjust to a new regime, banks and other institutions holding accounts will also have to ensure their compliance procedures are able to deal effectively with the new requirements. In this regard the potential implications include increased costs. If the use of EAPOs becomes widespread then banks will have to devote more resources to dealing with such orders and providing the information regarding accounts that the Regulation allows claimants to request. To ensure that the prescribed fees can come someway near to allowing banks to recuperate these costs, businesses may wish to submit their views to government in response to the current consultation exercise (see below). Of greater concern may be that the draft Regulation is also silent on the degree to which banks can use the money in the account for other legitimate purposes. Such issues have been given some consideration by English Law. For example, it has established that banks should be allowed to use the monies therein to exercise any rights of set-off that they may have against a defendant in respect of any facility given to it before the freezing injunction. These issues do not appear to have been addressed in the draft EAPO regime....banks and other institutions holding accounts will also have to ensure their compliance procedures are able to deal effectively with the new requirements. UK Government consultation The Government s initial view is broadly favourable to the proposal but it is keen to hear the views of all those, including banks, who may be particularly affected before deciding whether to participate in the proposed Regulation. Businesses with specific concerns, be they whether the UK should opt out entirely or whether the Government should put forward particular points in future negotiations on the proposal, should take this opportunity to make their views known. Linklaters intends to submit a response and would be pleased to receive any comments that interested parties may wish to make. The European Account Preservation Order The Future of Freezing Injunctions 4

5 The UK Government s consultation is available at: A copy of the Commission s proposal can be found at: Contacts For further information please contact: Patrick Robinson Partner (+44) patrick.robinson@linklaters.com Stephen Lacey Managing PSL (+44) stephen.lacey@linklaters.com Jane Larner Managing PSL (+44) jane.larner@linklaters.com This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts, or contact the editors. Linklaters LLP. All Rights reserved 2011 Linklaters LLP is a limited liability partnership registered in England and Wales with registered number OC The term partner in relation to Linklaters LLP is used to refer to a member of Linklaters LLP or an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP together with a list of those non-members who are designated as partners and their professional qualifications is open to inspection at its registered office, One Silk Street, London EC2Y 8HQ or on and such persons are either solicitors, registered foreign lawyers or European lawyers. Please refer to for important information on our regulatory position. We currently hold your contact details, which we use to send you newsletters such as this and for other marketing and business communications. We use your contact details for our own internal purposes only. This information is available to our offices worldwide and to those of our associated firms. If any of your details are incorrect or have recently changed, or if you no longer wish to receive this newsletter or other marketing communications, please let us know by ing us at marketing.database@linklaters.com. One Silk Street London EC2Y 8HQ Telephone (+44) Facsimile (+44) Linklaters.com The European Account Preservation Order The Future of Freezing Injunctions 5 A /0.5/26 Aug 2011