The European Commission will today propose a new legal tool to freeze the bank accounts of debtors in a bid to facilitate the recovery of cross-border credit and boost the EU-wide activities of small and medium-sized enterprises (SMEs).

Brussels reckons around one million SMEs face problems with recovering cross-border debts, estimating that a total of some 2.6% of small businesses’ yearly turnover is lost to bad debts.

This owes to the fact that when companies provide a service an EU member state other than their own, they are more at risk of not being paid because they have less legal protection to recover the credit.

As anticipated by EurActiv in February, in a bid to address the problem EU Justice Commissioner Viviane Reding will today unveil proposals for a new European procedure to complement national measures.

Reding is seeking to enable creditors “to prevent the transfer or withdrawal of [a] debtor’s assets in any bank account located in the European Union,” according a draft regulation seen by EurActiv.

Under her plan, once creditors are able to demonstrate that their claims are well-founded and that there is a concrete risk of not recovering the credit, they can request the issuance of a ‘European account preservation order’, which would block the amount of money owed in the bank accounts of the debtor, no matter where in the EU they are located.

The order will be applicable only to cross-border cases, as they are covered by EU legislation. It will be applied to debtors’ accounts with no prior notice. “This will allow the ‘surprise effect’ of the measure to be preserved,” reads the text to be unveiled by Commissioner Reding today.

Safeguards for debtors

Obviously, if the debtor is able to demonstrate that a claim is unfounded, the alleged creditor will be forced to cover the costs of the procedure. As a further safeguard for fairness, “the court may 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,” reads the text.

Exemptions from the amount to be frozen are also envisaged to protect “the livelihood of a debtor and his family” or “for allowing a company to continue its ordinary course of business”. National rules will be applied to determine when these exemptions can kick in.

The regulation must be approved by a qualified majority of EU governments in the Council and backed by the European Parliament. It would not be directly operational in Denmark, Ireland or the United Kingdom, because those countries have opted out of legal provisions related to justice.

An extra burden for banks?

The proposal comes as the EU institutions target banks amid a regulatory frenzy that is set to increase the capital requirements, risk-assessment capacity and liabilities of Europe’s banking sector. Levies and taxes aimed at the financial sector are also in the European Commission’s pipeline.

Clearly, the effects of the proposal on bank attachments are less significant than other measures proposed, but could nevertheless result in soaring administrative costs for banks.

A European order to recover cross-border debts “would inevitably imply important [sic] additional administrative burden[s] and costs for banks. We thus support that these burdens and costs should be minimised and that the banks’ charges and fees relating to an attachment should be effectively paid,” reads a statement issued by the European Banking Federation (EBF) before the publication of the final EU proposal.

Indeed, 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.

As for fees, “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,” reads the text drafted by the EU executive.

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