Thirtieth Report of Session 2012-13 - European Scrutiny Committee Contents


13   European Account Preservation Order

(33051)

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

Legal baseArticle 81(2) TFEU; co-decision; QMV
DepartmentMinistry of Justice
Basis of considerationMinister's letter of 11 December 2012
Previous Committee ReportsHC 428-xlii (2010-12), chapter 14 (23 November 2011); HC 428-xxxvii (2010-12), chapter 10 (12 October 2011)
Discussion in CouncilNo date set
Committee's assessmentLegally important
Committee's decisionCleared; further information requested

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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