It's time to say 'freeze'

By Emily Lew, October 11, 2011

The European Commission has proposed the introduction of a Europe-wide bank account freezing order, known as a European Account Preservation Order (EAPO).

The EAPO will provide creditors with a quick and easy process to obtain a court order that can freeze bank accounts belonging to a debtor in any country in the European Union (EU). This will be as an alternative to remedies already available to creditors under national law. In England for example, creditors can apply, in some circumstances, for a freezing order which freezes a debtor's assets.

In trying to make the process widely available, the proposal does not provide many safeguards for debtors. It also has serious implications for banks, which will have to implement the orders made by courts.

There are concerns that the new regime will place significant demands on banks as the potential number of EAPOs is high and banks only have a short time from receiving notice of the order to freeze the accounts.

There is also concern that if EAPOs are made against banks as debtors, it could affect the amount of capital they have to hold, which is particularly worrying in the current financial climate.

Some of the key features of the proposed regime are:

● It applies to all disputes with a cross-border element.

● "Bank account" includes accounts containing financial instruments (transferable securities, options, futures, swaps and derivatives) as well as just cash.

● "Bank account" includes accounts held in the name of a third party on behalf of the debtor.

● Applications are made without notifying the debtor in order to preserve an element of surprise.

● The creditor can only freeze the amount of the debt. The debtor will usually be entitled to living expenses or enough money to continue business activities.

● If a creditor does not know the debtor's bank account details, they can request that the state obtain them either directly from banks or from a central register.

● A debtor can challenge the order on certain specified grounds.

The proposal has been submitted to the European Parliament and the Council of the European Union for consideration. The UK government has until 24 October to decide whether to opt in. If it does not, it will not be able to participate in the negotiations that take place before the proposal is finalised. If it does, although the proposal is not likely to come into effect for a few years preparatory changes will have to be made in advance.

Emily Lew is a litigation associate at Herbert Smith LLP.

Last updated: 10:49am, October 11 2011