European Regulation on the freezing of bank accounts

Transcription

1 European Regulation on the freezing of bank accounts November 2016 OVERVIEW From 18 January 2017 claimants will be able to apply for a European Account Preservation Order (EAPO), a new, and potentially potent, weapon in their litigation armoury. EAPOs will enable a claimant to freeze funds in a defendant s bank accounts across 26 Member States by submitting a standard form paper application to a court in one of those Member States. That application will then be considered on an ex parte basis. Once an EAPO is made, it will be transmitted ( passported ) from the issuing court to other participating jurisdictions where relevant accounts may then be frozen. A claimant faced with a defendant who has multiple accounts across Europe will no longer have to incur the cost and delay of making separate national freezing applications. For example, a claimant in proceedings in Milan will be able to seek an EAPO from the Italian court and that Italian order will be effective to freeze monies held in a defendant s Spanish, German, Luxembourg and French bank accounts. The claimant no longer needs to go through the process of prioritising from which jurisdictions relief might most effectively and efficiently be sought. This may mean that more European accounts are frozen in future. EAPOs will be available throughout the lifespan of a dispute; from before proceedings are initiated to after judgment is obtained. EAPOs cannot generally be used at the same time as a national protective measure, but rather they are a complete alternative to such measures in cross-border civil and commercial proceedings. Cross-border in this context means where a targeted bank account is located in a Member State other than that where the court seized of the application or the claimant is domiciled. EAPOs will only be issued where the court is satisfied that there is an urgent need for one because, without one, there is a real risk that subsequent enforcement will be impeded or made substantially more difficult. Although the test for issuance was tightened up as the legislative process progressed, the Regulation may still pose a number of risks for defendants. There may be concerns about the speed at which a wrongly granted EAPO may be set aside. National differences in the application of the EAPO regime may also mean that in some jurisdictions EAPOs are easier to obtain and cover more funds than in others. The Regulation allows a significant degree of discretion to the Member State court when considering an EAPO application. The process is further complicated by the Regulation reverting to Member State law on a number of important points (eg whether joint or nominee accounts can be frozen and amounts exempt from seizure). This lack of uniformity between jurisdictions in its application may be amplified by the fact that EAPOs will generally be granted by 1

2 Member State courts on just a paper application, without an oral hearing. EAPOs will also be granted before defendants are notified and have the opportunity to argue against the making of such orders. There are, however, protections for the defendant built into the regime. The claimant will generally be required to provide security for pre-judgment EAPOs (and, occasionally, for post-judgment EAPOs). Again, there may be significant differences between jurisdictions as to the form and amount of security required. Further and as noted above, a claimant must provide sufficient evidence there is an urgent need for such a measure and that without it there is a real risk that enforcement will be impeded or made substantially more difficult. EAPOs are not available to all claimants or from all Member State courts. The UK and Denmark took the decision not to opt into this Regulation. Accordingly, the UK and Danish courts will not issue EAPOs and bank accounts held in these jurisdictions will not be subject to these orders. Unusually, Recital 48 to the Regulation seeks to introduce a nationality restriction on claimants. Only those claimants domiciled in participating Member States can apply for an EAPO (thereby excluding UK, Danish and non-eu claimants). However, the Regulation still impacts UK, Danish and non-eu businesses as their accounts in the 26 participating Member States may be frozen. The accounts of UK and Danish consumers are not subject to pre-judgment EAPOs. International banks operating in the participating Member States will have to get to grips with implementing EAPOs. The administrative requirements and obligations on banks are potentially significant. They will be under an obligation to freeze accounts without delay and issue declarations as to compliance within three working days from implementation. For post-judgment EAPOs, banks may also be required to conduct searches in order to identify any accounts it holds for a defendant. Banks will therefore need to have an understanding of which accounts and funds may be caught in each participating Member State. They will also need robust internal processes in place to ensure compliance with any EAPOs or information requests received within quite tight time periods. This burden is compounded by the fact that banks will not be able to adopt a uniform pan-european policy in response to this legislation due to its numerous references back to national law. Instead, specific local law advice will be required on its implementation and impact in different Member States with potentially the force of any EAPO granted varying from one jurisdiction to another. The Regulation is complex. It spans 54 Articles, with some 51 Recitals (many of these Recitals contain text one might expect to find in operative provisions). It involves a complicated and delicate interplay between national and European law. The use of single application process and standardised forms should not disguise the fact that this is an enormously detailed piece of legislation and one that may be difficult for litigants, banks and the courts to apply in practice. We provide a more detailed review of the Regulation below. WHERE ON THE WEB Regulation (EU) 655/2014 of the European Parliament and of the Council of 15 May 2014 establishing a European Account Preservation Order procedure to facilitate cross-border debt recovery in civil and commercial matters: Commission Implementing Regulation (EU) 1823/2016 of 10 October 2016 establishing the forms referred to in this Regulation: 2

3 European Regulation on the freezing of bank accounts November 2016 The EAPO Process 1 PAPER APPLICATION BY CLAIMANT TO COURT POST-JUDGMENT, IT MAY INCLUDE ACCOUNT INFORMATION REQUEST 2 EAPO ISSUED BY COURT SECURITY, ESPECIALLY PRE-JUDGMENT, MAY BE A PRE-CONDITION 3A 3B IF ENFORCEMENT IN DIFFERENT MEMBER STATE,TRANSMISSION TO ENFORCEMENT COMPETENT AUTHORITY COMMUNICATION TO AND IMPLEMENTATION BY BANK 4B IF ENFORCEMENT IN DIFFERENT MEMBER STATE TO ISSUANCE, TO ENFORCEMENT COMPETENT AUTHORITY 4A 4C BANK ISSUES AND TRANSMITS A DECLARATION OF PRESERVATION TO ISSUING COURT AND CLAIMANT *Enforcement bank can also disclose the EAPO to defendant Obtaining an EAPO 5 DISCLOSURE TO DEBTOR BY CLAIMANT, ISSUING COURT OR COMPETENT AUTHORITY* EAPOs are available throughout the lifespan of a claim (including before substantive proceedings are issued and after a judgment is obtained) (Article 5). EAPOs are only available to those claimants, courts and accounts located within the 26 participating Member States (ie all EU Member States other than the UK and Denmark) (Article 1and Recital 48). They are a tool available to support pecuniary claims in civil and commercial matters in, crucially, crossborder cases. Cross-border cases are widely defined (ie where a targeted account is located in a Member State other than where the EAPO application is made or where the claimant is domiciled) (Article 3). Significantly the Regulation carves out from its scope a number of areas. It does not apply to rights in property arising out of a matrimonial relationship (or equivalent under the applicable law), wills and succession, claims against defendants where certain insolvency proceedings have been commenced or arbitration (Article 2). In relation to the arbitration exclusion, there is some ambiguity as to whether a claimant seeking to enforce a judgment made following recognition of its arbitral award is excluded from seeking an EAPO in support. The Regulation simply provides that it does not apply to arbitration. Reading this exclusion alongside the jurisdictional requirements for a court to be able to grant an EAPO, it is arguable that the Regulation was not intended as a tool to support the enforcement of such judgments (Articles 2 and 6). This is likely to be an area of future debate. 3

4 In relation to the exclusion of claims against defendants where certain insolvency proceedings have been commenced, Recital 8 makes clear that the insolvent entity will still be able to use an EAPO when looking to secure the recovery of detrimental payments (ie transaction-avoidance actions). The Regulation also only applies to certain accounts in participating Member States and certain funds (see further below). INTERPLAY WITH RECAST REGULATION One of the main attractions to claimants in obtaining an EAPO is its efficiency. Rather than obtaining a string of national freezing orders, an EAPO is generally enforced across all participating Member States without the need for further applications before the courts of enforcement. The Brussels Recast introduced (on 10 January 2010) a simplified mechanism for the recognition and enforcement of Member State judgments. The revised rules eliminated the need for a declaration of enforceability in the courts of the Member State of enforcement (exequatur). However, carved out of this streamlined process are protective measures (such as freezing orders) granted without the defendant being summoned to appear (unless the order has been served on the defendant prior to enforcement). Many national freezing orders and most EAPOs would be excluded measures as they are issued before the defendant is notified of the application and are not served on the defendant until after the declaration of preservation is issued. TEST FOR ISSUANCE The test for issuing an EAPO has been the subject of much debate since the Commission first published its draft legislation in As a result, the final text of the test has been made more stringent, apparently in an effort to protect the interests of defendants. The test will still generally be applied without an oral hearing and will therefore, arguably, lack the rigorous application that follows from oral examination in some jurisdictions. The Regulation provides that an EAPO will be granted if the claimant presents sufficient evidence to satisfy the court that there is an urgent need for such an EAPO because without such a measure there is a real risk that subsequent enforcement of the claimant s claim against the defendant will be impeded or made substantially more difficult. In addition, where the claimant makes an application before obtaining judgment against the defendant, the claimant must also submit sufficient evidence to satisfy the court that it is likely to succeed on the substance of its claim (Article 7) and generally provide security (see further below). This test is similar to that for the equivalent national remedy under, for example, German and Belgium law. The two stage test Stage 1 The court shall issue the EAPO when the claimant has submitted sufficient evidence to satisfy the court that there is an urgent need for a protective measure in the form of an EAPO because there is a real risk that, without such a measure, the subsequent enforcement of the claimant s claim against the defendant will be impeded or made substantially more difficult. 4

5 European Regulation on the freezing of bank accounts November 2016 Stage 2 Where the claimant has not yet obtained in a participating Member State a judgment, court settlement or authentic instrument requiring the defendant to pay the claimant s claim, the claimant shall also submit sufficient evidence to satisfy the court that he is likely to succeed on the substance of his claim against the defendant. Recital 14 adds some flavour to the tests, suggesting how courts must interpret them. On urgency, it says that in every case the claimant must demonstrate that without the EAPO there is a real risk that by the time the claimant is able to have the judgment enforced, the defendant may have dissipated, concealed or destroyed his assets or have disposed of them under value, to an unusual extent or through unusual action. Depending on one s national perspective, this may be seen as a limitation on the availability of EAPOs. However, this wording is not replicated in the body of the Regulation (although it is in the standard application form). Recital 14 also provides guidance as to what sort of defendant conduct can be taken into account in the court s overall assessment of this risk, including the debtor s credit history and poor financial circumstances. Note this is an overall assessment and therefore, according to Recital 14, it seems that a debtor s poor financial circumstances should not by itself constitute a sufficient ground for issuing an EAPO. Something more is needed. Accordingly, the court has a significant degree of discretion as to whether the test for issuance is met (eg what level of urgency is necessary? What constitutes substantially more difficult?). There is a risk that, at least initially, there may be a degree of divergence in the approaches between 26 Member State courts. Although uniform application will be required, courts may tend to use criteria they are familiar with from the equivalent national law measures. Belgium case law on the urgency requirement for its equivalent national remedy provides, for example, that there is a presumption of urgency when the debtor is in financial distress. Some courts may take a more formulaic and less factsensitive approach to applications than others. Eventually, the CJEU will need to shed light on the practical application of the urgency requirement. Insolvency practitioners have expressed concerns as to how courts will exercise their discretion in the context of a business rescue. While there is an insolvency exclusion in the Regulation, arguably this will not cover all formal rescue procedures and does not cover informal financial restructurings. A restriction on managing cash resources, even for a matter of days, can be disastrous for a company already in distress and could destroy value to the detriment of creditors as a whole. Much will turn on the degree of rigour with which courts apply Recital 14 s dissipation requirement. Differences with equivalent national remedy The test for obtaining an EAPO is very similar to what is required to obtain the equivalent national measure in Germany and Belgium, but in other jurisdictions the alignment will not be so close. In some jurisdictions it may be easier to obtain an EAPO than the national equivalent; in others not. For example, in the Netherlands and in Belgium security is generally not required even for prejudgment EAPO equivalents. In Belgium, bank accounts may even be frozen without a prior court injunction, but on the basis of documents establishing a payment entitlement, such as unchallenged invoices. Timescales for issuing EAPO and substantial proceedings The timescales for issuing an EAPO after the application is made are relatively generous (given that the situation is often urgent). The length of time depends on whether it is a pre- or postjudgment application, the claimant needs to provide security, an oral hearing is required and/or account information is ordered to be sought. For example, on a paper application where security is not required and account information is not ordered, the court generally has ten working 5

6 days to issue its decision from the application being lodged for a pre-judgment EAPO and five working days for a post-judgment EAPO (Articles 18 and 45). Within these limits certain Member States courts might be quicker than others at issuing EAPOs. Where an EAPO is issued before proceedings are initiated, the claimant must start proceedings within 30 days from the date on which the EAPO application was lodged or within 14 days of the date of issue of the EAPO, whichever is the later (Article 10). National legislation will then determine the speed at which those substantive proceedings progress, which will again clearly vary between jurisdictions. WHAT CAN BE PRESERVED? An EAPO preserves specified amounts in an identified bank account located in a participating Member State (ie all other than the UK or Denmark) containing the defendant s funds. Amount to be preserved For pre-judgment EAPOs, a claimant is able to secure the amount of the claim, as well as any interest accrued on the claim. For post-judgment EAPOs, a claimant can secure the amount of the judgment, any interest accrued on the judgment and the costs of obtaining that judgment (to the extent that the defendant has been held liable for those costs) (Articles 8 and 15). Banks, accounts and funds within scope The definition of bank account extends to any account containing funds which is held with a bank in the name of the [defendant] or in the name of a third party on behalf of the [defendant] (Article 4). Whether the Regulation bites and there is a possibility of obtaining an EAPO therefore depends on whether the bank, account and funds are all within scope. Is the bank/account within scope? The definition of bank account requires it to be held in the name of the defendant or a third party on behalf of the defendant. This suggests it is the deposit-taking institution which determines the location of the account (rather than any subcustodian) as that is who holds the account in the name of a person or entity. It is therefore that institution which needs to be located in a participating Member State for the defendant s account to be potentially caught by an EAPO. The types of deposit-taking institutions caught by the Regulation are credit institutions (including branches) located within participating Member States. Credit institutions are defined by reference to the Capital Requirements Regulation (CRR) with their business being to take deposits or other repayable funds from the public and to grant credits for their own account (Article 4 and Recital 9). A list of the banks and branches within the CRR regime can be found on the European Banking Authority s website (although this list includes entities located in the UK and Denmark which will be outside the direct scope of the Regulation). It seems, therefore, that a French branch of a retail bank with a U.S. head office would fall within the Regulation s territorial scope but the U.S. head office would not. Likewise, if the head office was located in France but the branch was in the U.S., the head office and not the branch would be caught. Are the funds within scope? Funds is defined as money credited to an account in any currency, or similar claims for the repayment of money, such as money market deposits (ie the principal sum is always repayable) (Article 4). It seems, therefore, that positions are not included within the definition and will not be subject to an EAPO. In earlier drafts of the Regulation, financial instruments were included within the definition of bank account. Their omission from the final text is to be welcomed. It should be noted, however, 6

7 European Regulation on the freezing of bank accounts November 2016 that what may be preserved by an EAPO may be expanded in due course as the European Commission is to produce (by January 2022) an evaluation as to whether financial instruments should be included within the Regulation s scope (Article 53). Joint and nominee accounts? Another area of complexity and national divergence in this Regulation is that joint and nominee accounts may only be preserved to the extent permitted under the national law of their location (ie the place of enforcement) (Article 30). This means that there may be some important distinctions in approach between Member States in this regard. Jurisdictions that recognise trusts and concepts of beneficial interest, for example, may seek to impose EAPOs on a wider range of accounts than elsewhere (or, indeed, a narrower range if the accounts in question are beneficially owned by someone other than the defendant). Monies owned by a defendant beneficially and in nominee accounts may therefore be frozen in some jurisdictions but not others. To compound such divergence some jurisdictions may require particular processes to be followed before such accounts can be frozen (which potentially deviates from the objective of a single application mechanism). In Germany, for joint accounts, it depends on whether the account holders can only dispose together or each account holder can dispose separately. For the former, the claimant must obtain an EAPO (and therefore have a claim) against all account holders. The latter type of account can be attached but the bank can still pay to the innocent account holders. Nominee accounts as such cannot be attached under German law as the defendant has no claim against the bank; instead the claim of the defendant against the account holder would have to be attached but this cannot be obtained by an EAPO. In Belgium, it is possible to attach joint and nominee accounts and such attachment applies to the full balance of the account. Member States have had to notify the Commission of the extent to which joint and nominee accounts can be preserved (Article 50). We understand that these communications will be published by the Commission before 18 January Immune accounts The Regulation does not apply to bank accounts which are immune from seizure under the law of the Member State in which the account is maintained or to accounts maintained in connection with the operation of payment and securities settlement systems. It does not apply to bank accounts held by or with central banks when acting in their capacity as monetary authorities. Pending transactions The final amount preserved may be subject to the settlement of transactions which are already pending at the moment when the EAPO (or corresponding instruction) is received by the bank. However, such pending transactions may only be taken into account when they are settled before the bank issues its declaration of preservation (see below) (Article 24). How is a currency mismatch dealt with? Where the currency of the funds held in the attached account(s) is not the same as that in the EAPO, the bank shall convert (on the day and at the time of implementation) the amount specified in the EAPO into the currency of the funds (Article 24). Hierarchy of accounts Where the EAPO covers several accounts held by the defendant with the same bank, the bank shall implement the order only up to the amount specified (Article 24). The Regulation provides for a hierarchy of attachments. Savings accounts in the defendant s sole name are to be attached first, followed by current accounts in the defendant s sole name. Joint accounts (if capable of being preserved) are then to be attached, with savings accounts being attached first, followed by current accounts (Article 24). Exempt amounts The Regulation provides that amounts that are exempt from seizure under the law of the Member State of enforcement shall also be exempt from 7

8 preservation under the EAPO (eg the defendant s necessary living expenses). This is another layer of complexity, where there will be national divergence. Both the type and amount of exempt amounts will therefore vary across Member States. Such exempt amounts might include living expenses for an individual, amounts necessary to pursue a normal course of business for a company and legal fees. These items are often hotly contested aspects of freezing orders. No detail is given as to exactly how these exempt amounts are to be communicated to the bank. All that is said is that, depending on the procedural system of the Member State of enforcement, the relevant amount should either be exempted by the body responsible for exempting such amounts or be exempted at the request of the defendant after implementation of the EAPO (Article 31 and Recital 36). As a result there are a number of uncertainties as to how this will work in practice. JURISDICTION Pre-judgment Jurisdiction to grant pre-judgment EAPOs lies with the courts of the Member State which have jurisdiction over the substance of the matter (Article 6). It is anticipated this provision may give rise to some difficulties in practice; for example, what is the status of an EAPO where there is a successful jurisdictional challenge? The exception to this general rule is where a defendant is a consumer. Jurisdiction then lies only with the courts of the Member State in which the defendant is domiciled (Article 6). This provision provides some comfort to Member State consumers that in the pre-judgment context only the courts of their domicile may issue EAPOs against their accounts wherever they are located. This suggests that, pre-judgment, as the UK and Denmark have not opted into the Regulation, accounts of UK and Danish consumers will not be subject to EAPOs (even if they have accounts in other Member States). Unhelpfully, the Regulation does not address the position of non-eu domiciled consumers. This means the status of UK consumers accounts in participating Member States post Brexit is unclear. Post-judgment Jurisdiction to grant post-judgment EAPOs lies with the courts of the Member State in which the judgment was issued, irrespective of whether the defendant is a consumer or not. Consumers domiciled in a Member State will take comfort from the rules in the Brussels Recast which provide that proceedings must be brought against consumers in the courts of their domicile. The position of non EU domiciled consumers (where the Brussels Recast may not apply) is less clear. PREVENTING DUPLICATIVE ATTACHMENTS The Regulation is intended to provide an alternative to the protective measures available under national laws. It endeavours to prevent funds being attached more than once, by stipulating that: only one EAPO against the same defendant aimed at securing the same claim may be made; and the claimant must declare whether he has made any applications for an equivalent national order against the same defendant aimed at securing the same sum and whether those applications are still in process or have been unsuccessful or successful. The issuing courts will then consider whether it is still appropriate to issue the EAPO in full or in part (Articles 8 and 16). 8

9 European Regulation on the freezing of bank accounts November 2016 THE PROCESS WHAT INFORMATION DO YOU NEED TO COMPLETE THE FORM? As mentioned, EAPOs are available throughout the lifespan of a claim (including before substantive proceedings are issued and after a judgment is obtained). They are obtained by way of a uniform application process before just one participating Member State court. The application for an EAPO will be made on paper by submitting a standard application form to the relevant Member State court and without notifying the defendant. In keeping with the desire for pan-european uniformity, the form (although not its lanuguage) will be the same no matter where the application is made (Article 8). The standard forms have now been published. A claimant in the application form must provide certain information about the defendant and the targeted accounts: the name and contact details of the defendant (and, if applicable, his representative); if available, where the defendant is a natural person, his date of birth and identification or passport number or, where the defendant is a legal person, the country of its incorporation, formation or registration and its identification or registration number or, where no such number exists, the date and place of its incorporation, formation or registration; a number enabling identification of the bank (such as the IBAN or BIC) and/or the name and address of the bank with which the defendant holds account(s) to be preserved (see Information about bank accounts below for how the claimant can request such information in relation to a post-judgment EAPO); and if available, the number of the account(s) to be preserved and an indication as to whether any other accounts held by the defendant with the same bank should be preserved (Article 8). The claimant completes the application form with a statement that the information provided is true and complete to the best of the claimant s knowledge. Information about bank accounts The Regulation provides a mechanism to allow claimants post-judgment to make a preliminary request for information about a defendant s bank account. If a claimant is not able to identify the bank(s) with which the defendant holds account(s) (eg by an IBAN, BIC or another bank number and/or the name and address of the bank), he can request in his EAPO application form that such information is obtained by the court of issuance from the Information Authority (IA) in the Member State of proposed enforcement. The claimant must substantiate why he believes that the defendant holds account(s) with a bank in a specific Member State and provide all relevant information available to him about the defendant and the account(s) to be preserved. Such requests will only generally be allowed where an enforceable judgment has been 9

10 obtained (but, exceptionally, may be allowed before the judgment has been made enforceable) (Articles 8 and 14). If the court of issuance considers that the claimant s request is sufficiently substantiated and that all conditions for issuance of the EAPO are met other than the identification of the relevant bank(s) (and, if applicable, the provision of security) it will transmit the information request to the IA of the Member State of enforcement. The IA then expeditiously attempts to obtain this information by a method available under its national law. This provision may require new legislation to be introduced in some jurisdictions. For instance, in Germany the draft bill for implementing rules on the EAPO suggests using a mechanism by which the Federal Central Tax Office can retrieve account information from databases held by the banks. This method is already available for preparing enforcement under national law, but only if the defendant fails to provide information on its financial status and assets, or if the assets according to this information are insufficient. By contrast, when obtaining the account information for an EAPO the defendant does not need to be asked first which might make an EAPO an attractive option for post-judgment claimants in Germany. Information obtained in this way is not provided directly to the claimant, but only to the requesting court. Notification of the data subject of the processing of his data by such request is to take place in accordance with national law. However, any notification of the defendant is to be deferred for 30 days to avoid jeopardising the effect of the EAPO (Article 14 and Recital 46). Banks are likely to have to assess their terms and conditions in this regard. How is an EAPO implemented? A bank served with an EAPO is subject to a number of obligations, all of which it must comply with expeditiously. The Recitals indicate that the courts are expected to take a firm line on delay, stating that derogation from specified timeframes will only be allowed in exceptional circumstances, for instance in cases which are legally or factually complex (Recital 37). First, the bank must, without delay, identify the account(s) subject to the EAPO. It is thought this will generally be done via IBAN numbers. Identification may be difficult where a bank needs to consider whether to preserve funds in joint or nominee accounts or where bank account numbers are not given. Where the EAPO does not specify the relevant account number(s) and it is not possible to identify with certainty an account of the defendant (eg because there are two account holders with the same name) the bank may be required to request information from the relevant IA in the Member State of enforcement (Article 24). Secondly, once the relevant accounts are identified, the bank must without delay preserve the amount specified in the EAPO either (a) by ensuring that that amount is not transferred or withdrawn from specified/identified account(s) or (b) where national law so provides, by transferring that amount to an account dedicated for preservation purposes (Article 24). Thirdly, a recipient bank then has three working days from implementation of an EAPO to issue a declaration (in a standard form) indicating whether and to what extent funds in the defendant s account(s) have been preserved and, if so, on what date(s). This might be considerably less time than the bank has to comply with the equivalent national 10

11 European Regulation on the freezing of bank accounts November 2016 provision (eg in Belgium the bank has 15 calendar days to comply with the equivalent national provisions). The Regulation provides that a bank s liability for failure to comply with its obligations under the Regulation is to be governed by the law of the Member State of enforcement (Article 26). Fourthly, the funds preserved by the EAPO will remain preserved as provided for in the EAPO until the EAPO is revoked, its enforcement is terminated or the judgment to which it relates has been successfully enforced. Banks are only able to seek payment of the costs of implementing the EAPO if they are entitled to this under the law of the Member State of enforcement in relation to equivalent national orders. Banks may need to categorise the type of EAPO to claim the appropriate level of costs. Recoverable costs must take into account the complexity of the implementation of the EAPO and should be no SERVICE ON THE DEFENDANT higher than the fees charged for the implementation of equivalent national orders (Article 43). Banks are also entitled to charge a fee to cover the costs of providing account information. The fee must not be higher than the costs actually incurred and (where applicable) not higher than the fees charged for the equivalent national orders.this is the case despite the administrative burden of the EAPO potentially being higher than the national order (Article 43). Banks may find that their administrative expenses exceed the amount allowed. The Regulation also contemplates authorities in the Member State of enforcement recovering a fixed fee for administering an EAPO (Articles 44 and 50). The court of issue can also charge a fee (Article 42). After the EAPO has been implemented, the defendant is served with the EAPO (and also the bank s declaration of preservation and all documents submitted by the claimant in support of the EAPO) (Article 28). Translations of certain documents will also need to be served on the defendant if they are not in the language of the Member State of the defendant s domicile (Article 49). It is unclear what happens regarding translations where the defendant is not domiciled in a Member State. Who serves the documents on the defendant depends on the location of the defendant. It might be the claimant, issuing court or Competent Authority (Article 28). Where EAPOs need to be served in another Member State, the Regulation does not require service pursuant to the Service Regulation which may avoid the delays associated with service under that Regulation. A DEFENDANT S RIGHT TO REVIEW A defendant does have several remedies for an incorrectly issued and/or enforced EAPO. Again, the Regulation contains some quite detailed rules in this regard (Articles 33 to 36). A defendant can challenge an EAPO in the Member State of issuance or enforcement. However, the grounds available for challenge are more limited in the Member State of enforcement. Of course, this may be where the defendant is domiciled and have the easiest access to the courts. Crucially, if the defendant seeks to challenge an EAPO on the ground that the test for issuance (Article 7) has not been met, that challenge can only be made to the courts in the Member State of issue. 11

12 Although potentially inconvenient for a defendant, this mechanism is understandable as otherwise it would involve one Member State court scrutinising the discretion exercised by another Member State court. EU consumers can also take comfort that the court of issuance for pre-judgement EAPOs will be in the participating Member State of their domicile. Defendant s rights to challenge In the Member State court of issue the defendant can challenge an EAPO on the basis that the requirements of the Regulation were not complied with (a type of sweep-up ground) as well as that the required documents were not served on the defendant correctly, over-preserved amounts were not released correctly, the required security has not been provided, the underlying claim has been satisfied in full or in part or has been dismissed, the underlying judgment has been set aside or other change of circumstances relating to the basis on which the EAPO was issued. The courts of the Member State of issue will also revoke or terminate a pre-judgment EAPO if substantive proceedings have not been initiated within 30 days from the date on which the application for the EAPO was lodged or within 14 days of the date of issue of the EAPO (whichever is later) (Articles 10 and 33). The courts of the Member State of enforcement (or where national law so provides, the Competent Authority in that jurisdiction) the grounds of challenge for the defendant go to the enforcement of the EAPO. For instance, the execution of an EAPO can be terminated by those courts on the grounds that the account preserved was not within scope, the underlying judgment has been refused, suspended or the enforcement of the EAPO is contrary to public policy. Enforcement can also be limited on the grounds that certain amounts should not have been frozen because they are exempt amounts or not caught by the EAPO. Third parties rights to contest The right of a third party to contest an EAPO is governed by the law of the Member State of issuance, and the rights of a third party to contest enforcement is governed by the law of the Member State of enforcement (Article 39). Security An important safeguard for a defendant to any freezing style order is to require the claimant to provide some form of security to compensate the defendant at a later stage for any damage caused to him. The Regulation provides that the issuing court may order that an EAPO will only be granted if the claimant provides security for an amount sufficient to prevent abuse of the EAPO procedure and to ensure compensation for any damage suffered by the defendant for which the claimant is liable pursuant to Article 13 (Article 12). Article 13 provides that the claimant is liable for any damage caused to the defendant by the EAPO where the claimant is at fault (the claimant may also have additional liability under the law of the Member State of enforcement). The amount and form of security is in the discretion of the court of issue. The Recitals do note, however, that in the absence of specific evidence as to the amount of potential damage it is open to the court to consider the amount in which the EAPO is to be issued as a guideline for determining the amount of security (Recital 18). It is anticipated that there may therefore be wide variations between Member States in the form (and possibly the amount) of security to be provided. 12

13 European Regulation on the freezing of bank accounts November 2016 Whether security will be ordered depends largely on whether the application is for a pre- or postjudgment EAPO. It seems that security will almost always be ordered for a pre-judgment EAPO but only occasionally ordered for a post-judgment EAPO (Article 12). Recital 18 envisages that an exception to the security requirement in the prejudgment context might be where the creditor has a particularly strong case but does not have sufficient means to provide security or that the size of the claim is such that the [EAPO] is unlikely to cause any damage to the debtor, for instance a small business debt. Set-off for banks An EAPO will only be made once this security has been provided (Article 12). The Regulation is silent on when any security will be released. The general requirement for security in respect of pre-judgment EAPOs may lessen the attractiveness of this measure for claimants (although as noted, SMEs may escape this requirement). It may be that if the available equivalent national measure does not require such security this is the preferable option (such as in the Netherlands and Belgium). By contrast the general lack of a requirement for security post-judgment may make this a very popular enforcement tool, particularly for claimants with limited resources. The Regulation does not expressly address a bank s right of set-off (eg what happens to a bank s right of set-off where a defendant has two accounts at a bank, one account in credit and the other in debit, and the account in credit is attached by an EAPO). The Regulation simply provides that the EAPO has the same rank as an equivalent national order in the Member State of enforcement (Article 32). Member States have had to inform the Commission about any ranking conferred on equivalent national orders under national law (Article 50). In Belgium, contractual set-off provisions stipulated by banks will be protected by the provisions of the Financial Collateral Law (the Law of 15 December 2004) and remain unaffected by an attachment. This is an issue that banks will wish to have clarified in all relevant jurisdictions. Over-preserved funds and other liability Claimant liability Obtaining an EAPO is not without risk to the claimant. The claimant shall be liable for damage caused to the defendant by the EAPO where the creditor is at fault. The claimant s fault is presumed in a number of circumstances (ie where substantive proceedings are not started, the process to release over-preserved funds is not initiated, where the EAPO is defective because the claimant has not complied with his obligations in relation to parallel freezing orders and the claimant has not complied with his obligations in relation to service (including translation) of the EAPO). The liability of the claimant shall generally be determined under the law of the Member State of enforcement. Where the accounts preserved are in more than one Member State the law applicable will 13

14 be the Member State of enforcement, where the defendant has his habitual residence, or failing that the one which has the closest connection with the case. In addition to liability under the Regulation the claimant may also have liability to the defendant under the applicable national law (Articles 13 and 27 and Recital 29). The claimant may also have liability towards the affected banks and other third parties under the applicable national law (Article 13 and Recital 19). For example, if the defendant defaulted on its debts to third parties as a result of an incorrectly obtained EAPO. Bank liability Banks may potentially have liability to the claimant and defendant for performing their obligations under the Regulation defectively (eg erroneously preserving more funds than specified in the EAPO or the wrong funds or incorrectly issuing its declaration of implementation). Any liability of the bank for failure to comply with its obligations under the Regulation is governed by the law of the participating Member State of enforcement (Article 26). In addition, the bank may also have liability to the defendant, claimant and third parties pursuant to other statutory or contractual provisions or other obligations. Position outside participating Member States (including UK and Danish parties) The UK and Denmark have not opted into the Regulation and are therefore not bound by the Regulation or subject to its application. This means that bank accounts located in the UK and Denmark (and non-eu countries) cannot be attached via an EAPO. The Regulation appears to restrict the availability of EAPOs to claimants domiciled in a participating Member State (Recital 48). This means British, Danish and presumably third-country (eg U.S. or Swiss) claimants who may wish to bring proceedings in a participating Member State would be unable to obtain EAPOs. EAPOs can however be obtained against funds in accounts held by UK, Danish and non-eu parties in participating Member States. As discussed above, the Regulation provides protection to UK and Danish consumers who will not be susceptible to pre-judgment EAPOs (at least whilst the UK remains in the EU). Recital 48 does give rise to some apparent inequalities. In German proceedings a Spanish claimant could obtain an EAPO in circumstances where a Danish co-claimant might not. The inclusion of this nationality restriction is only found in the Recitals and may possibly be subject to legal challenge on the basis that such a nationality requirement is discriminatory and contrary to EU law (Article 18 TFEU).

15 European Regulation on the freezing of bank accounts November 2016 Conclusion The Regulation will undoubtedly enhance opportunities for claimants seeking to track down and secure a defendant s assets across participating Member States pending the outcome of litigation or, as EAPOs can be applied in respect of a defendant s judgment debt, to aid enforcement. However, the requirement for security in almost all pre-judgment applications, coupled with the inherent complexity of the instrument may detract from its attractiveness for the less affluent claimant. It may be that in certain circumstances the available national remedies offer speedier, easier and less risky alternatives for a claimant. This is a novel and innovative piece of EU legislation. It remains to be seen how national and European courts will interpret its provisions in practice. Over time there may be certain courts that establish a reputation for applying the test for issuance more flexibly than others. We may see associated forum shopping, with claimants initiating substantive proceedings on the merits in courts where EAPOs are thought to be more easily granted. There will no doubt be a lack of uniformity in application given the multiple national law carveouts in this EU law. There will inevitably be some controversial decisions whereby the bank accounts of innocent defendants are wrongly frozen. During the currency of any appeal and remedy process there may be considerable uncertainty as to the exposure for defendants, claimants and the banks involved. The Regulation is likely to increase the burden on banks operating across Member States. They will have to implement and respond to such orders and will need to do so expeditiously. Banks will need to review their customer terms and conditions as well as their systems and processes for implementing such orders. Much will depend on the volume of orders sought and how Member State courts exercise their numerous discretions under this ambitious legislation. Key contacts If you require advice on any of the matters raised in this document, please contact any of the Litigation and Dispute Resolution experts mentioned below or your usual contact at Allen & Overy. 15

16 Belgium Czech Republic England & Wales Werner Eyskens Partner Litigation Brussels Tel werner.eyskens@allenovery.com Robert Pavlů Senior Associate Litigation Banking Prague Tel robert.pavlu@allenovery.com Mona Vaswani Partner Litigation Banking, Finance & Regulatory London Tel mona.vaswani@allenovery.com Sarah Garvey Counsel Litigation London Tel sarah.garvey@allenovery.com France Germany Italy Erwan Poisson Partner Litigation Paris Tel erwan.poisson@allenovery.com Wolf Bussian Partner Litigation Frankfurt Tel wolf.bussian@allenovery.com Massimo Greco Partner Litigation Milan Tel massimo.greco@allenovery.com Amilcare Sada Senior Associate Litigation Milan Tel amilcare.sada@allenovery.com Christabel Constance Senior Professional Support Lawyer Litigation London Tel christabel.constance@allenovery.com Luxembourg Thomas Berger Counsel Litigation Luxembourg Tel thomas.berger@allenovery.com The Netherlands Richard de Haan Partner Litigation Amsterdam Tel richard.dehaan@allenovery.com Slovakia Martin Magál Partner Litigation Bratislava Tel martin.magal@allenovery.com 16

17 European Regulation on the freezing of bank accounts November 2016 Poland Paweł Mruk-Zawirski Senior Associate Corporate Warsaw Tel Spain Antonio Vazquez-Guillen Partner Litigation Madrid Tel

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21 European Regulation on the freezing of bank accounts November 2016 Allen & Overy LLP One Bishops Square, London E1 6AD, United Kingdom Tel Fax Allen & Overy maintains a database of business contact details in order to develop and improve its services to its clients. The information is not traded with any external bodies or organisations. If any of your details are incorrect or you no longer wish to receive publications from Allen & Overy please epublications@allenovery.com. In this document, Allen & Overy means Allen & Overy LLP and/or its affiliated undertakings. The term partner is used to refer to a member of Allen & Overy LLP or an employee or consultant with equivalent standing and qualifications or an individual with equivalent status in one of Allen & Overy LLP s affiliated undertakings. Allen & Overy LLP or an affiliated undertaking has an office in each of: Abu Dhabi, Amsterdam, Antwerp, Athens (representative office), Bangkok, Barcelona, Beijing, Belfast, Bratislava, Brussels, Bucharest (associated office), Budapest, Casablanca, Doha, Dubai, Düsseldorf, Frankfurt, Hamburg, Hanoi, Ho Chi Minh City, Hong Kong, Istanbul, Jakarta (associated office), Johannesburg, London, Luxembourg, Madrid, Mannheim, Milan, Moscow, Munich, New York, Paris, Perth, Prague, Riyadh (associated office), Rome, São Paulo, Shanghai, Singapore, Sydney, Tokyo, Warsaw, Washington D.C., and Yangon. Allen & Overy LLP This document is for general guidance only and does not constitute definitive advice. LT: