Recovering cross-border debts

Seeking to recover monies due from a defaulting debtor is no easy task. The task becomes even more arduous when the debtor hails from another EU country. Assistance to traders seeking to recover a cross-border debt is now on its way in the form of a new legal tool being proposed by the European Commission to freeze the bank accounts of debtors residing in an EU country other than that of the creditor.

The Commission is seeking to establish an EU-wide preservation order similar to the warrants which are already available as part and parcel of the national legal systems of most European countries, including our own. This means that once a creditor is able to demonstrate that his/her claim is well-founded and that there is a real risk of not recovering the monies due, he/she would be able to request the issuance of a European account preservation order.

In this way, it would be possible for creditors to preserve the amount due in a debtor’s bank account, irrespective of in which EU country such account is located. Debtors would be prevented from disposing of the assets in such an account during the time it takes to obtain and enforce a judgment on the merits. Furthermore, the European Account Preservation Order would be issued without any form of notification of the debtor, thus allowing for a ‘surprise effect’.

The proposed regulation also contains a number of safeguards for the debtor. If the latter is able to demonstrate that a claim is unfounded, the alleged creditor would be forced to cover the costs of the procedure. The court may also request the creditor to provide security to ensure compensation for any damage suffered by the debtor if the order was subsequently set aside as unjustifiable. Exemptions from the amount to be frozen are also envisaged in order to protect the livelihood of a debtor and his family or in order to permit a company to continue its ordinary course of business. This new proposed legal procedure is an interim protection procedure. This means that it will only block the debtor’s account but will not allow money to be paid out to the creditor. To actually obtain the debt due, the creditor would still have to obtain a final judgment on the case in accordance with national law or by using one of the simplified European procedures, such as the European small claims procedure.

The new European order will allow creditors to preserve funds in bank accounts under the same conditions in all member states of the EU. The instrument therefore provides common rules relating to, for example, jurisdiction or the conditions and procedure for issuing an order.

This new legal tool serves simply as an alternative to a creditor seeking to recover a cross-border debt. In fact, such an order will only apply to cross-border cases. It therefore complements the legal instruments which are currently already available at national level.

This proposal, however, has its own rippling effects particularly on one of the major players involved in the implementation of such an order, namely, the banking industry. The European Banking Federation voiced the opinion that such a European order would inevitably impose additional administrative burdens and costs for banks. Indeed, in the wake of the regulatory frenzy in which this industry has found itself, such new measures are being seen as the straw which will break the camel’s back.

Banks will be obliged to block an amount corresponding to that indicated in the order. Within eight days, they will have to issue a declaration stating whether sufficient funds are available in the bank accounts of a debtor. In so far as fees are concerned, the proposed regulation maintains that banks can only charge a fee for the implementation of a European account preservation order where they are entitled to do so when implementing equivalent measures under national law.

Statistics show that around one million small and medium-sized enterprises encounter difficulties when they seek to recover cross-border debts. Indeed, it is estimated that around 2.6 per cent of small businesses’ yearly turnover is lost to bad debts. Considering that SMEs constitute 99 per cent of businesses in the EU, such figures surely do not augur well for Europe’s economy. Harmonisation of the legal tools available in order to assist recovery of cross-border debts will go a long way in abating traders’ concerns when they seek to enforce their rights against a rogue trader in a country other than their own.

mariosa@vellacardona.com

Dr Cardona, M’Jur, LL.D. is a practising lawyer and a freelance consultant in EU, intellectual property, consumer protection and competition law. She is the deputy chairman of the Malta Competition and Consumer Affairs Authority as well as a member of the National Commission for the Promotion of Equality.