The CJEU clarifies key issues on the adoption of enforcement measures in respect of sanctioned entities

Summary

On the 11 November 2021, the Court of Justice of the European Union (“CJEU”), in delivering a ruling in the case of Bank Sepah v. Overseas Financial Limited & Oaktree Finance Limited, clarified that a creditor of a sanctioned entity is precluded from applying enforcement measures (e.g., a garnishee order), without prior authorisation from the national competent authority, in respect of funds or economic resources that have been frozen in the context of the EU’s Common Foreign and Security Policy, which establish a right to be paid on a priority basis in favour of the creditor concerned in relation to other creditors, even if such measures do not have the effect of depleting the debtor’s estate’s assets.

Background

In April 2007, the Parisian Court of Appeal (the “Court of Appeal”) ordered Bank Sepah (“Bank”) liable to pay Overseas Financial Limited and Oaktree Finance Limited (collectively, the “Creditors”) approximately EUR1.8 million and EUR 1.1 million, respectively, together with interest at the statutory rate from the date of the Court of Appeal’s judgement.

Following the receipt of partial payments on account of such amounts up until 2011, the Creditors requested that the French Minister for the Economy (the “Minister”) authorises the release of the respective outstanding amount due to the Creditors pursuant to Council Regulation (EC) No 423/2007, as subsequently amended (the “Regulation”), which had imposed sanctions in respect of the Bank.

As this request was rejected by the Minister, the Creditors subsequently sought to annul the decision of the Minister before the competent tribunal in Paris. However, the relevant tribunal also dismissed the Creditors’ action.

In May 2016, the Creditors requested another adjudicating body, this time the Parisian Regional Court (the “Regional Court”), to authorise the issuance of enforcement measures (e.g., a garnishee order) in respect of a number of the Bank’s assets. In January 2017, the Regional Court acceded to the Creditors’ request and authorised the issuance of the relevant enforcement measures.

The Bank contested the Regional Court’s decision to issue the relevant enforcement measures on the grounds, inter alia, that it had been prevented from paying its outstanding debt due to the Creditors by a case of force majeure, i.e., as a result of its assets having been frozen following the imposition of sanctions by the EU on the Bank in terms of the Regulation.

In the course of the proceedings, two fundamental questions arose before the French courts. The first was whether the relevant provisions of the Regulation are to be interpreted as precluding an enforcement measure with no earmarking effect (such as a judicial lien or preventive attachment) from being implemented, without prior authorisation from the national competent authority, in respect of frozen assets pertaining to the Bank. Then second question was whether it is relevant to the answer to the first question that the grounds for the Creditors’ claim are unrelated to the scope of the Regulation (i.e., Iran’s nuclear and ballistic programme) and occurred prior to the entry into force of the Regulation.

The CJEU’s Considerations

With respect to the first question referred to it, the CJEU started by noting that the Regulation provided that all funds and economic resources belonging to, owned, held, or controlled by the persons, entities and bodies listed in Annex IV to the Regulation (including the Bank) were to be frozen.

It then delved into the meaning of the concepts of ‘freezing of funds’ and ‘freezing of economic resources’ for the purposes of the Regulation. The CJEU noted that the Regulation defines such concepts very broadly and explained that the concept of ‘freezing of funds’ encompasses any use of funds which results, inter alia, in a change in the destination of those funds (including in the circumstances of the case under consideration, where the enforcement measures establish a right of preference for the Creditors to be paid in priority to any other creditors of the Bank), or which may permit the use of frozen economic resources to obtain funds, goods or services, even if such use of the funds does not have the effect of depleting the debtor’s estate’s assets.

Moreover, it noted, the definition of the concept of ‘freezing of economic resources’ specifically captures the mortgage of such economic resources, which measure does not have the effect of removing assets from the debtor’s estate.

In its considerations on the matter, the CJEU also made reference to the Advocate General’s opinion who made it amply clear that in order to ensure that the Regulation’s aims are achieved, it is not only legitimate, but also indispensable, that the definitions of the concepts of ‘freezing of funds’ and ‘freezing of economic resources’ are interpreted broadly. In the eyes 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.

Insofar as the second question referred to it is concerned, the CJEU noted that the concepts of ‘freezing of funds’ and ‘freezing of economic resources’ do not make any distinction as to the grounds for a claim brought before a court against a sanctioned entity. According to the CJEU, the Regulation does not refer to situations where the grounds for such a claim are considered to be unrelated to the scope of the Regulation (i.e., Iran’s nuclear and ballistic programme) and/or would otherwise be permissible on the basis that they pre-date the entry into force of the restrictive measures.

As a concluding remark on this point, the CJEU reiterated the importance of the objectives pursued by the Regulation, namely that of establishing a system of restrictive measures which imposes negative consequences, even of a substantial nature, on designated operators, including those who are in no way responsible for the situation leading to the adoption of the measures in question.

The CJEU’s Ruling

In the light of the above considerations, the CJEU ruled as follows (i) the freezing of funds and economic resources provided for in the Regulation precludes the implementation of protective measures in respect of frozen assets which establish a right to be paid on a priority basis in favour of the creditor concerned in relation to other creditors, even if such measures do not have the effect of depleting the debtor’s estate’s assets, and (ii) the fact that the grounds for a creditor’s claim are unrelated to the scope of the Regulation (i.e., Iran’s nuclear and ballistic programme) and occurred prior to the entry into force of the Regulation is not relevant to the answer to the first question referred for a preliminary ruling.