Monday, 25 July 2011

Cross-border debt recovery to be made easier for consumers and SMEs

What caught my interest today was news that are not pertaining to the core of the consumer law, but then I think that many subjects can be connected to the legal situation of consumers and we should not be too traditional in looking at consumer law, since we might miss lots of interesting relations and new insights. Of course, there is also this little fact of there not always being news to report on that are connected to the core of consumer law and my wish to keep this blog active. ;)

For some time now there have been voices raised in the legal academic world comparing the situation of SMEs (small and medium enterprises) to the position of consumers and asking why we are not offering the same protection to the SMEs as we do for consumers. After all, consumer laws were introduced in order to protect the 'weaker' contractual parties, i.e. consumers. But if we look at businesses entering into contracts we might quite clearly see that one business is not alike the other. Especially these companies that employ only a few people, have a small revenue, etc. may be seen as 'weaker' parties when they conclude contracts with big suppliers, distributors, producers. If the aim of legal systems is to protect weaker contractual parties and to restore the balance between contractual parties, would it not make sense to start either adjusting consumer laws to apply to SMEs or adopting new laws that would regulate SMEs situation?

Well, the new Consumer Rights Directive had a chance to extend (a bit) the protection granted by it to parties who purchase goods/services not only for their private use, but mainly for their private use. This broad definition of a 'consumer' was introduced by the European Parliament and was complying to the popular demand of granting consumer protection to more parties than it does now. However, the final (so far) version of the Consumer Rights Directive (from 23 June 2011) restored the narrow definition of a notion 'consumer'. Opportunity lost.

Well, today the European Commission notified that they intend to introduce a new regulation that would protect mostly interests of the SMEs (but you should not miss the fact that it would apply to consumers, as well!). This regulation would regulate cross-border debts. Imagine purchasing a good online from a trader in another country, paying for it, but never receiving the good. The thought of having to figure out how to claim their money back stops many consumers from concluding such online transactions, just in case something went wrong... The situation might be even more drastic when we are talking about an SME, i.e. a small, local shop that delivered its goods to a big distributor located in another country and at a certain time it stopped receiving payments for delivered goods. The amount of money that would be owed in this case would be much higher and might be crucial for the survival of this local business. From the estimations of the European Commission around 1 million SMEs have problems with cross-border debts and up to 600 million euro each year in debt is unnecessarily written off because businesses find it too daunting to pursue expensive (costs of translating documents and hiring lawyers), confusing and complicated (different national requirements) lawsuits in other countries.

The new regulation would establish a new European Account Preservation Order that would allow cross-border creditors (not only SMEs, even though the focus with this regulation is on them, but also consumer-creditors) to preserve the amount owed in a debtor's bank account. What would it change in practice? It would prevent debtors from removing their assets from a bank account during the time it takes to obtain and enforce a judgement on the merits of the case. This means that the debtor will not be allowed to empty or liquidate the bank account. Moreover, the same rules would apply to all Member States which would limit the legal costs that need to be made in order to recover the debt. Finally, the European procedure would exist alongside available national procedures, with the creditor having a choice which legal action to take. The only downside is that it would be an interim procedure, which means that creditors would not receive their money until they obtained a final judgement on the case in accordance with national law or e.g. by using European Small Claims Procedure. This new regulation will therefore not provide immediate financial release to the creditors, it would rather serve to safeguard their rights for the future. Interestingly, the debtor would not be notified of this procedure which means that such an order to block an amount of money on the debtor's account would have a necessary 'surprise element'.

Viviane Reding said on this subject:
I want to make recovering cross-border debts as easy as recovering debts domestically," said EU Justice Commissioner Viviane Reding. "Companies lose around 2.6% of their turnover a year to bad debts. This is a weakness of our single market which we must remedy swiftly and energetically! Businesses need a simple solution – an account preservation order effective Europe-wide – so that the money stays where it is until a court has taken a decision on the repayment of the funds. In these difficult economic times, companies need quick answers. Every euro counts, especially for small businesses.” 

Press release on the introduction of the new regulation may be found here. FAQ on the new regulation (with examples when it might apply) may be found here. Statement on Commissioner's Reding website might be found here, together with a video. Finally, here you may find a European Business Test Panel on Commercial Disputes and Cross Border Debt Recovery.

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