Law Report: CJEU clarifies issues relating to enforcement measures
On November 11, 2021, the Court of Justice of the European Union (“CJEU”), in rendering a judgment in the case Bank Sepah v Overseas Financial Limited and Oaktree Finance Limitedclarified that a creditor of a sanctioned entity is not allowed to apply enforcement measures (for example, a garnishment order), without the prior authorization of the competent national authority, to the regard to funds or economic resources which have been frozen under the common agreement of the EU foreign and security policy, which establishes a right to be paid in favor of the creditor concerned in priority to other creditors, even if these measures do not have the effect of exhausting the debtor’s assets.
In April 2007, the Paris Court of Appeal (the “Court of Appeal”) ordered Banque Sepah (“the Bank”) to pay Overseas Financial Limited and Oaktree Finance Limited (collectively, the “Creditors”) approximately 1.8 million euros and 1.1 million euros million, respectively, plus interest at the legal rate from the date of the judgment of the Court of Appeal.
Following the receipt of partial payments in respect of these amounts up to 2011, the creditors requested the French Minister for the Economy (the “Minister”) to authorize the release of the respective outstanding amount due to the creditors in accordance Council Regulation (EC) No 423/2007, as subsequently amended (the “Regulation”), which had imposed sanctions against the Bank.
This request having been rejected by the Minister, the creditors subsequently requested the annulment of the Minister’s decision before the competent court in Paris. However, the competent court also dismissed the action of the creditors.
In May 2016, the Creditors applied to another court, this time the Tribunal de Grande Instance de Paris (the “Tribunal de Grande Instance”), to authorize the issuance of enforcement measures (for example, a seizure -stop) in respect of a number of the Bank’s assets. In January 2017, the regional court acceded to the creditors’ request and authorized the issuance of the corresponding enforcement measures.
The Bank challenged the Regional Court’s decision to issue the relevant enforcement measures on the ground, among others, that she had been prevented from paying her outstanding debt due to creditors by a case of force majeure, that is, the fact that its assets were frozen following the imposition of sanctions by the EU against the Bank under the Regulation.
During the proceedings, two fundamental questions arose before the French courts. The first was whether the relevant provisions of the regulation must be interpreted as precluding an enforcement measure without affective effect (such as a judicial lien or a conservatory seizure) from being implementation, without prior authorization from the competent national authority, in respect of assets belonging to the Bank. Then, the second question was whether it is relevant to the answer to the first question that the reasons for the creditors’ request are unrelated to the scope of the regulation (i.e. the nuclear program and ballistics of Iran) and occurred before the entry into force of the Regulation.
With regard to the first question put to it, the CJEU began by noting that the regulation provided that all funds and economic resources belonging, possessed, held or controlled by the persons, entities and bodies listed in Annex IV of the settlement (including the Bank) were to be frozen.
She then looked at the meaning of the notions of “freezing of funds” and “freezing of economic resources” for the purposes of the regulation. The CJEU noted that the Regulation defines these concepts very broadly and explained that the concept of “freezing of funds” encompasses any use of funds that results, among others, in a change in the destination of these funds (including in the circumstances of the case in question, when the enforcement measures establish a preferential right for the Creditors to be paid in priority to all other creditors of the Bank), or which may allow the use of frozen economic resources to obtain funds, goods or services, even if this use of the funds does not have the effect of depleting the debtor’s patrimony.
In addition, she noted, the definition of the concept of “freezing of economic resources” specifically targets the mortgage of these economic resources, a measure which does not have the effect of subtracting assets from the debtor’s patrimony.
In its considerations on the matter, the CJEU also referred to the opinion of the Advocate General who amply specified that in order to ensure that the objectives of the regulation are achieved, it is not only legitimate, but also essential , that the definitions of the concepts of “freezing of funds” and “freezing of economic resources” are interpreted broadly. In the view of the Advocate General, this would serve to prohibit the circumvention of any sanctions imposed and the exploitation of any weaknesses in the sanctions framework.
With regard to the second question submitted to it, the CJEU noted that the concepts of “freezing of funds” and “freezing of economic resources” make no distinction as to the grounds for an action brought before a court against a sanctioned entity. According to the CJEU, the regulation does not refer to situations in which the grounds for such an allegation are considered to be unrelated to the scope of the regulation (i.e. the nuclear and ballistic program of the Iran) and/or would otherwise be admissible on the ground that they predate the entry into force of the restrictive measures.
By way of conclusion on this point, the CJEU recalled the importance of the objectives pursued by the regulation, namely that of establishing a system of restrictive measures which impose negative consequences, even substantial ones, on designated operators, including those who are in no way responsible for the situation that led to the adoption of the measures in question.
The judgment of the CJEU
In light of the above considerations, the CJEU ruled as follows (i) the freezing of funds and economic resources provided for by the Regulation precludes the implementation of precautionary measures in respect of frozen assets which establish a right to be paid in priority in favor of the creditor concerned compared to other creditors, even if these measures do not have the effect of exhausting the debtor’s assets, and (ii) the fact that the reasons for the request for a creditor are unrelated to the scope of the settlement (i.e. Iran’s nuclear and missile program) and occurred before the entry into force of the settlement is not relevant to the response to the first preliminary question.
Luigi Farrugia is a lawyer at Ganado Advocates.