Legal Alert – Enhanced EU Debt Recovery Measures
Creditors soon to be able to freeze debtor bank accounts
The implementation of measures enabling the freezing of debtor bank accounts has moved a step closer. European Justice Ministers have reached an agreement on the European Commission’s European Account Preservation Order (EAPO) proposal which will become law following adoption by the European Parliament and Member States.
The need for EAPOs
The background to these account freezing proposals is that European companies, mostly small and medium-sized enterprises (SMEs), lose around 2.6% of their turnover a year to bad debts. SMEs are vital to the European economy and make up 99% of the businesses in the EU. It is estimated that about one million SMEs encounter problems with cross-border debts meaning that up to 600 million euros in bad debt is written off on an annual basis.
Pursuing cross-border debts is currently a complicated process as asset preservation methods vary greatly within Member States. It is often very difficult and sometimes impossible to obtain debtor account information and the time and costs involved are often prohibitive. The EAPO will address these issues as it will allow easy and quick access to account preservation orders via a process which is uniform throughout the EU, thereby reducing costs and delays.
Vice-President Viviane Reding, the EU’s Justice Commissioner, highlighted these points by describing the successful Justice Council negotiations as a breakthrough for Europes small businesses. She went on to refer to SMEs as the backbone of the EU’s economy and added that EAPOs will help them deal with the challenging economic climate by affording quick solutions to recover outstanding debts. It is envisaged that this added security for creditors will in turn increase trading confidence within the EU’s single market.
The EAPO in summary
The EAPO will be a useful tool for creditors allowing them to preserve the debt amount owed to them in a debtor’s bank account until a court has reached a decision regarding repayment. EAPOs will be issued in an ex parte procedure, meaning that they will be granted without the debtor’s prior knowledge. This is of crucial importance and will increase recovery success rates as it will prevent debtors from dissipating their assets during the time required to obtain and enforce a judgment.
The EAPO will complement, rather than replace, national debt recovery methods. Furthermore, EAPOs will be protective in nature and will only block the debtor’s account.
The format agreed upon by the Justice Council retains the main points of the Commission’s EAPO proposal but also includes some amendments from the original version. For example, EAPOs will not apply to financial instruments (such as shares or bonds). Nor will they apply to wills or matrimonial property. Furthermore, in order to take advantage of an EAPO the creditor concerned must be domiciled in a Member State bound by the rules. In order to prevent abuse of the account freezing mechanism creditors will be liable for unjustified uses of EAPOs.