Cross-border debt recovery based on the new EU Account Preservation Order procedure

“How do I recover money owed to me by a business partner in default?”. This is a question that concerns many companies each day.

In principle: the creditor will only gain access to the debtor’s assets when a court has issued a judgment stating that the debtor must pay. Whether the money is ever actually recovered therefore depends on the duration of the court proceedings.

Even in Germany, where court proceedings are completed fairly quickly, legal proceedings can take two to three years just in the first instance. In other EU Member States, it can take up to six years for creditors to obtain a judgment from the court on its outstanding receivables. As regards the enforcement of the judgment by the court of first instance, the creditor must usually make security payments if the debtor appeals the decision. Matters become even more complicated and time-consuming where the debtor’s assets are maintained in another State.

If the debtor is domiciled in an EU Member State that is different from the one in which the court issuing the decision is located, the judgment can still be enforced there with certain provisions. The procedure is governed by an EU Regulation (Regulation on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters No. 1215/2012). The debtor, however, must be informed of the enforcement measure (Art. 43(1) Regulation on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters) and under certain circumstances will have sufficient time to move its assets. In particular cases of fraudulent activities (such as CEO fraud), action must generally be taken quickly in order to enforce claims to repayment. In addition, “habitual debtors” often attempt to stop creditors from accessing their assets by means of the limited opportunities provided by cross-border enforcement.

If the debtor is a person or company domiciled in a non-EU Member State, enforcement may almost be impossible or may involve considerable expenditure of time and effort unless there is an appropriate agreement in place between the States (for example, Germany - India). In case of contracts involving third-party countries, it is therefore recommended to always check whether court decisions can also be enforced at the location of the contractual partner.

Preservation Orders and their meaning for practical purposes

Account attachment is usually the most efficient and secure manner by which a creditor can obtain money from a non-paying debtor.

The problem, however, is that creditors frequently do not know at which bank the debtor holds an account. Usually, this can only be guessed based on the debtor’s location (place of residence). To prevent creditors attempting to do research on the debtor and thus to circumvent banking secrecy regulations, only three bank institutions, at which the creditor suspects the debtor may have an account, may be contacted in accordance with German case law. This, however, certainly does not apply to all EU Member States. In some Member States, the creditor has no right to request information from banks at all because of banking secrecy rules.

In addition, under normal circumstances, the creditor cannot usually access the accounts of the debtor without authorization from a court.

German instrument of account preservation

With the account preservation order, German law, however, provides for protective measures by the court, which make it possible to access the accounts of a debtor before a decision is issued by the court on the question of whether the creditor actually owes the receivables (“decision in the principal proceedings”). If the creditor submits the account preservation order to a bank, the latter must state whether it maintains accounts of the debtor and initially “block” (preserve) that account in the amount of the receivables.

The court issues account preservation orders only on two conditions: firstly, the creditor must simply show in a credible manner that a payment claim exists against the debtor (“claim to account preservation”). Secondly, there must be a special need for urgency which justifies an intervention into the debtor’s assets by means of protective measures before a decision in the principal proceedings has been issued (“grounds for account preservation”). The latter is usually the major hurdle because the creditor for must show in a credible way that there is concern that the enforcement of the judgment will be prohibited or significantly impeded by events or actions by the debtor. Simple unwillingness to pay or the risk of the debtor’s insolvency is not sufficient.

The decision by the court is issued in principle by means of an order, so that no participation by the debtor is necessary and the debtor will not receive any prior notice of the application for account preservation. This ensures the intended “surprise effect”. Without the aforementioned EU proceedings, account preservation can, however, only be used for the attachment of accounts maintained with German banks.

The European decision on account preservation

Effective January 18, 2017, a new EU Regulation establishing a European Account Preservation Order procedure to facilitate cross-border debt recovery in civil and commercial matters entered into force (EU Account Preservation Order Regulation No. 655/14). The Regulation is binding on all Member States of the EU with the exceptions of Denmark and the UK. The German Federal government has already commenced drafting a law to govern and ensure the application of the Regulation in Germany.

The particular aim of the EU Account Preservation Order Regulation is to make it possible for a creditor to access the bank accounts of a debtor in another Member State in an individual case even prior to the initiation of court proceedings.

Several European States have a similar procedure as Germany for provisionally securing a creditor’s rights. The contents of these, differ significantly, however. In some Member States, on the other hand, the creditor is almost left without rights. Or the enforcement of a recognized foreign judgment will entirely fail as a result of the mandatory notification of the debtor about the initiation of the proceedings.

The EU Account Preservation Order Regulation addresses precisely these points. It is intended to create an instrument that makes account preservation possible beyond the borders of a Member State, without warning the debtor in advance. Of course, creditors who have already obtained a judgment in the main proceedings, may also proceed in accordance with the EU Account Preservation Order Regulation.

Above all, there are three key points that the new Regulation addresses:

• It does not limit account preservation to the debtor being located (place of residence/company headquarters) in the EU. Instead, the decisive factor is whether the debtor’s relevant account is located in the EU. In theory, this means that access may also be gained in this way to accounts held by U.S. or Chinese companies (or citizens) with their company headquarters (place of residence) outside of the EU. In particular, it is currently impossible to enforce a German judgment in China.
• All participating Member States are obligated to create central bodies, which must provide information to the court to which the creditor has made an application about whether a branch of a bank maintains an account for the debtor.
• A decision by a court in a Member State must be recognized by a bank in another Member State, i.e., the bank will be obligated to carry out account preservation of the relevant bank account on the basis of the decision.

Court will only issue the decision for account preservation only, however, when similar conditions have been met to those required for the German account preservation order (claim and grounds). The benchmark that the individual national courts will apply in their evaluation will largely be up to the discretion of the relevant judge.

Facts and Outlook:

While the EU Account Preservation Order Regulation is a step in the right direction, it does not go as far as was expected. It therefore remains to be seen whether this compromise solution is a great success for the EU. The key factor will be how quickly and efficiently the individual Member States transpose the Regulation, create central information bodies, and impose obligations on both banks and courts. Practice will also show whether a common approach can be taken on the issuing of account preservation decisions by the national courts of the participating 26 Member States and whether any resistance by judges against the application of the imposed Regulation can be overcome. In individual cases, creditors must always consider whether to proceed in accordance with the EU Account Preservation Order Regulation or whether to use the national protective measures of the State in which the debtor is located.