13 European Account Preservation
Order
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13260/11
+ ADDs 1-2
COM(11) 445
| Draft Regulation creating a European Account Preservation Order to facilitate cross-border debt recovery in civil and commercial matters
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| Legal base | Article 81(2) TFEU; co-decision; QMV
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| Department | Ministry of Justice
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| Basis of consideration | Minister's letter of 11 December 2012
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| Previous Committee Reports | HC 428-xlii (2010-12), chapter 14 (23 November 2011); HC 428-xxxvii (2010-12), chapter 10 (12 October 2011)
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| Discussion in Council | No date set
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| Committee's assessment | Legally important
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| Committee's decision | Cleared; further information requested
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Previous scrutiny
13.1 The aim of this proposal is to establish a self-standing
European procedure for a protective measure, the European Account
Preservation Order (the Order) to freeze the bank accounts of
debtors in cross-border cases.
13.2 We first reported on it on 12 October 2011,
and asked to be informed of the Government's decision whether
or not to opt into the proposal.
13.3 The then Secretary of State for Justice
(Mr Kenneth Clarke) wrote on 31 October 2011 to say that the Government
had decided not to opt into the proposal. Although the Government
welcomed, in principle, the Commission's proposal, because action
in this area has the potential to be "a very valuable tool
in the working of the internal market", the majority of responses
to the consultation raised significant concerns about the Commission's
text.
13.4 During the six week period from 3 August
to 14 September 2011 departmental officials contacted over 130
individuals and organisations including academics, the legal profession,
judiciary, the banking sector, debt charities, consumer organisations
and court users. The consultation paper and impact assessment
were also available on the Ministry's website. Fifty responses
were received. Of those, 13 (26%) recommended that the UK should
opt-in to the proposal, 25 (50%) thought the UK should not opt
in and 12 (24%) did not comment on or did not express a firm opinion
either way on the opt-in. However, six of those recommending
an opt-in and four of those who did not express a firm view, raised
significant concerns which they believed needed to be addressed
during negotiations. Therefore 35 of those consulted (70%) believed
that the proposal as drafted presented difficulties for the UK
legal systems.
13.5 The main concern raised in the consultation
was that, unlike the UK domestic systems, the Commission's proposal
was weighted too heavily in favour of claimants. As an order
which freezes the bank account of an individual or a business
could have serious consequences to reputation and livelihood most
respondents believed there should be more safeguards for defendants.
In particular the following concerns were highlighted:
- The threshold for obtaining
orders was too low. While a court must be satisfied that there
was a well founded claim (similar to, an English freezing injunction
where there needs to be a good arguable case), unlike in domestic
procedure there was no requirement to show that there was a real
risk that the defendant would frustrate payment of the debt by
dissipating assets. This was just one of the issues a court could
consider and the test was omitted entirely when a creditor already
had a judgment which was enforceable in the Member State of enforcement.
- Orders would be available without notice to the
defendant. The expectation was that they would be considered
on paper and there was no requirement that the claimant should
make full and frank disclosure of all relevant facts. This was
to be compared with domestic procedure where orders were usually
made without notice but a return hearing date was set to enable
a defendant to respond. The duty of full and frank disclosure
under domestic law meant that the creditor must provide all relevant
information, including issues that may adversely affect his/her
application.
- There was no requirement for the claimant to
provide any security to compensate a defendant for losses suffered
from the wrongful grant of an order. Too much discretion was
left to the courts of the Member State issuing the order. This
was to be compared with domestic procedure where, in all but the
most exceptional circumstances, a claimant was required to provide
an undertaking to the court to pay any damages which the defendant
sustains.
- While there are grounds on which a defendant
could challenge an order, in many situations this would require
a defendant having to apply to a court in another Member State
with the extra cost and difficulties that would entail and, given
the time limits in the proposal for claimants and courts, it could
be a couple of months before an order was set aside. In the meantime
the defendant would have no access to the amounts frozen.
13.6 Given the potential benefits of this procedure,
however, the Government intended to participate fully in the negotiations
with the hope of being able to opt in after adoption if sufficient
changes are made to the text that resolve our concerns. The Minister
undertook to keep the Committee informed of significant developments
during the negotiations.
Minister's letter of 11 December 2012
13.7 The Secretary of State for Justice (Chris
Grayling) now writes with an update on negotiations, which he
says have moved slowly. The Council's Civil Law Committee did
not finish its first consideration of the text until the end of
September. The Cypriot Presidency has so far revised about two-thirds
of the text. The European Parliament has only had an initial
consideration of the proposal. The Minister's letter sets out
the main changes.
SCOPE
Cross-border restriction
13.8 The Cypriot Presidency has recast the definition
of what constitutes a cross-border case in Article 3. Under the
revised text a cross-border case will be one in which at least
one of the bank accounts to be preserved is located in a Member
State other than (a) the court hearing the substantive dispute
to which an application for an Order has been made; (b) the Member
State in which the creditor has obtained a judgment or other enforceable
decision which has been used as the basis for an Order; or (c)
the State in which the creditor is domiciled. The moment for
determining whether there is a cross-border case will be the date
on which the application for an Order is received by the court
with jurisdiction. The Civil Law Committee is still considering
all the implications of this revised definition but the Minister
believes this is a significant improvement over the Commission's
text.
Inclusion of financial instruments
13.9 There has been a lot of discussion about
whether/how financial instruments should be included within scope.
The UK has joined with other Member States that have raised many
concerns about how easy it will be for an Order to freeze a financial
instrument given the fluctuating value and the often complex ownership
arrangements. Others have pointed out the risk that such Orders
will fall disproportionately on those less financially astute
if financial instruments are excluded altogether. The Presidency
has narrowed the scope by excluding over-the-counter derivatives
but all involved in the negotiations recognise that more consideration
needs to be given to this issue to strike the right balance between
the effectiveness of these Orders and their practical application.
Impact on company restructuring and rescue
13.10 The Minister reminds us that a number of
respondents to the consultation feared that the introduction of
these Orders could be of particular concern to businesses in the
process of restructuring or rescue where the freezing of a bank
account could undermine the rescue and make insolvency more likely.
Some wanted to ensure that companies in the process of restructuring
were excluded from the scope of the proposal. The Government
is continuing to explore whether such a restriction is possible
but it has become clearer during further consultation with those
respondents that for many if such a restriction in scope cannot
be achieved, their concerns would be significantly alleviated
by higher thresholds being applied to the granting of such Orders.
IMPROVED PROTECTION FOR DEBTORS
13.11 The lack of adequate protection for debtors
in the procedure was the most significant concern raised in the
Government's consultation. The Minister is pleased to report
progress on this point in the following areas.
Threshold tests for obtaining an Order
13.12 In Article 7 the text has been clarified
to explain that for a pre-judgment Order a court must be satisfied
that the creditor is likely to succeed on the substance of his
claim against the debtor. The majority of Member States has agreed
the principle that the court must also be satisfied that in such
circumstances an Order should be granted only where the creditor's
claim is likely to be impeded or made subsequently more difficult
as a result of a real risk of dissipation of assets. In the Commission's
text this was only one of the issues that might be considered.
The final wording has yet to be agreed, but the Minister believes
this is significant movement in the right direction. He would
also like to see this risk of dissipation extended to circumstances
where an Order is requested post-judgment. While the UK has some
support for this position not all Member States are yet convinced
of the need for this.
13.13 The Government has also called for a requirement
that the creditor make full and frank disclosure in his/her application
form. This has also been accepted in both Articles 8 and 15 with
the inclusion of a declaration that the information provided by
the creditor is true and correct to the best of his/her knowledge
and that any deliberate false statements might lead to sanctions.
More work is needed on what these sanctions might be and how
they might work.
SECURITY
13.14 The Commission's text in Article 12 said
that a court "may" require a security deposit or an
equivalent assurance by the claimant to ensure compensation for
any damage suffered by the defendant. The Presidency has proposed
that in all but exceptional circumstances there should be a presumption
of security. They have also proposed a new provision which spells
out the liability of the creditor. There are mixed views about
both of these Articles but the Minister is encouraged by the Presidency's
suggestions.
Competence for issuing Orders
13.15 There has been majority support within
the Civil Law Committee, including from the UK, for the ability
to issue Orders to be limited only to courts. However, the ability
for another authority to be able to issue an Order where the claimant
has a judgment, court settlement or authentic instrument which
is enforceable in the Member State of enforcement remains in the
text in Article 14, at least for now. The Government will monitor
this carefully together with its preference for the test of the
risk of dissipation to be extended to such applications.
The use of an ex parte procedure
13.16 Most Member States accept that the Order
should be issued without notice to the debtor although exactly
how that is done has yet to be resolved. The Government has argued
that while there should be a presumption of such an ex parte
procedure, in appropriate circumstances a court should be able
to decide whether to notify the debtor. It has also raised the
possibility of a later opportunity to hear the debtor after an
Order is made ex parte.
Challenges to an Order
13.17 The Government has called for debtors to
be able to challenge an Order in a local court to be extended
beyond the limited categories of debtor in Article 36. There
has been some support for this suggestion but this is another
area where more discussion is needed.
13.18 More helpfully the Presidency has suggested
that where an Order has been obtained prior to the initiation
of proceedings if those proceedings are not started within the
set period an Order will automatically be revoked without the
need for an application by the debtor. Where a judgment has been
obtained a creditor will be required to initiate enforcement proceedings
within a given period to ensure that the Order is not prolonged
unnecessarily.
PROVISION OF INFORMATION ABOUT BANK ACCOUNTS
13.19 Many Member States have been concerned
about the burdens that would be placed on both States and banks
by the requirements of Article 17. The Cypriot Presidency has
suggested that Member States could use "other appropriate
and reasonable means" to provide information on bank accounts.
More work is needed to clarify what this will mean for Member
States. The Minister is hoping that the UK might be able to use
its own system of obtaining the required information from the
debtor with appropriate sanctions if the debtor uses advance knowledge
of the possibility of the Order to then try and dissipate his/her
assets.
13.20 The danger that this provision might encourage
fishing expeditions has also been acknowledged. The Presidency
has suggested that a creditor should have to specify the Member
State in which the bank account is located. During the negotiations
there was general agreement that creditors should also provide
reasons as to why they believe an account is in a particular Member
State.
AMOUNTS EXEMPT FROM AN ORDER
13.21 The Presidency has removed from Article
32 references to specific items which should be exempt from an
Order. Instead they have used more general wording to state that
"where the law of the Member State of enforcement provides
that certain amounts are exempt from seizure, those amounts shall
be exempt from preservation". That will allow legal costs
to be included, unlike in the Commission's draft. The text no
longer requires Member States to inform the Commission of the
relevant rules for exemption which makes it easier for legal systems
like ours where courts make decisions on a case-by-case basis,
but exactly how our system will comply with this revised provision
still needs to be clarified.
MECHANISM FOR NOTIFICATION OF ORDERS
13.22 The Presidency has streamlined the notification
provisions for orders to allow greater flexibility in the way
that courts and other authorities forward the orders between themselves
and the ways they communicate with banks. This should speed up
the process of implementing the Orders. This means that formal
service of documents should be required only when the bank and
debtor are notified of the Order. The text now clarifies the
rules on service that should apply where the debtor is domiciled
outside of the EU.
Conclusion
13.23 We thank the Minister for his helpful
letter.
13.24 We noted when we last reported in November
2011 that the Government supported the principle behind the proposal,
and would seek to opt in if a better balance between the rights
of the claimant and of the defendant were struck during negotiations.
13.25 We note from this latest letter that
several developments have gone the UK's way, with "significant
improvements" in restricting the scope of the proposal to
cross-border cases, in introducing a higher threshold for the
granting of an Order, and in requiring security from a claimant
to ensure compensation for any damage suffered by the defendant.
But it appears to us that the Government should still have significant
concerns about what type of financial instruments are included,
on the safeguards for companies which are restructuring, on whether
there should be exceptions to the presumption that an Order should
be granted ex parte, on whether only courts should be able
to issue an Order, on the scope for challenging an Order, and
on the burdens placed on States and banks by the provision of
information obligations.
13.26 Whilst we are content to clear the proposal
from scrutiny now, because the UK has not elected to opt into
it, we ask the Minister to write again with a further update once
the negotiations in the Council and with the European Parliament
have finally concluded. In the letter we also ask the Minister
to say whether the Government is still considering opting-in post-adoption
and, if so, whether it would re-consult fully on the final version
of the proposal, the initial consultation having been overwhelmingly
against it.[60]
It is a course of action we would strongly recommend the Government
take.
13.27 We now clear the proposal on the understanding
that a decision by the Government to opt in post adoption would
trigger a new scrutiny reserve.
60 See para13.5 above. Back
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