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EU sanctions prevent creditors from attaching frozen assets
EU sanctions prevent creditors from attaching frozen assets
3 October 2022
Series
Blogs
3 October 2022
By two judgments issued on 7 September 2022 (here and here), the French Court of Cassation ruled that EU sanctions law prevents the attachment by a creditor of circa USD 1 billion worth of assets frozen pursuant to EU sanctions – despite the creditor being granted an arbitral award against the debtor.
The facts surrounding the two cases before the French Court of Cassation are highly similar in many respects. In essence, both cases concerned creditors of the Libyan State who tried to enforce a claim of approx. USD 1 billion (on the basis of an enforceable arbitral award) by attaching approximately USD 300 million worth of assets of a Libyan sovereign wealth fund named the Libyan Investment Authority (“LIA”). LIA is a designated entity under Regulation (EU) 2016/44 concerning restrictive measures in view of the situation in Libya (“Libyan Sanctions Regulation”) and its assets are therefore frozen.
After a failed initial attempt to join LIA to the arbitral proceedings, the creditors attempted to attach assets of LIA (and a wholly-owned subsidiary) held at different banks in France (through a so-called third-party attachment) as well as shares owned by LIA in a wholly-owned subsidiary. Following challenges by LIA against those attachments, the Paris and Versailles Courts of Appeal issued conflicting judgments, with one allowing the attachment and one lifting it on the basis of state immunity from enforcement. Both the creditors and LIA then appealed the decisions before the French Court of Cassation.
The main argument raised before the Court of Cassation was that the asset freeze imposed on LIA under the Libyan Sanctions Regulation prevented the creditors from attaching LIA’s assets. Rather than tackling this issue on its own, the Court of Cassation decided to stay the proceedings to wait for a preliminary ruling from the Court of Justice of the EU (“CJEU”) on a similar question in relation to an asset freeze under Regulation (EC) 423/2007 (abrogated), Regulation (EU) 961/2010 (abrogated) and Regulation (EU) 267/2012 (in force) concerning restrictive measures against Iran (“Iran Sanctions Regulations”).
The CJEU rendered its decision on that reference for a preliminary ruling in the Bank Sepah case. That case concerned the question whether two creditors could attach receivables, shareholder rights and transferable securities held by a French bank for a debtor, Bank Sepah, whose assets are frozen under the Iran Sanctions Regulations. More specifically, the referring court asked whether a creditor can take measures, without prior authorisation, which do not have an earmarking effect, such as judicial liens and preventive attachments. The CJEU answered in the negative.
In the reasons given, the CJEU first looked into the definitions of ‘freezing funds’ and ‘freezing of economic resources’ under the Iran Sanctions Regulations, holding that those concepts were defined very broadly. The Court held that such a broad interpretation is even more necessary considering the importance of the objectives of asset freezes (i.e. preventing the proliferation of nuclear weapons).
On that basis, the CJEU ruled that measures which establish a right to be paid on a priority basis over other creditors in favour of the creditor making the attachment have the effect of changing the destination of frozen funds, and are hence liable to permit the use of frozen economic resources to obtain funds, goods or services. The Court held this to be the case even though the measures do not have the effect of removing assets from the debtor’s estate.
Consequently, the CJEU held that an asset freeze under the Iran Sanctions Regulations must be understood as precluding the implementation of preventive attachments made without prior authorisation from the competent national authority (“NCA”).
On the basis of the CJEU’s responses in the Bank Sepah case, it came as no surprise that the French Court of Cassation reached the same conclusion under the Libyan Sanctions Regulation, and hence held that LIA’s assets could not be attached.
The French Supreme Court first observed that the definition of ‘freezing of funds’ is similar in both regulations. It then found that the objective pursued by the asset freeze under the Libyan Sanctions Regulation (i.e. prevention of threats to peace, stability, security in and to the political transition of Libya) is as important as the objective pursued by the Iran Sanctions Regulations.
Therefore, following Bank Sepah nearly verbatim, the French Court of Cassation ruled that the creditors could not attach the funds owned by LIA without prior authorisation of the French NCA.
Given the clear rulings of both the CJEU and the French Court of Cassation, it appears likely that other Member State courts will in the future see attachments and other types of right of priority (whether civil, administrative, or criminal) on assets subject to an asset freeze as contrary to the relevant sanctions regulations.
However, this does not leave creditors of debtors subject to an asset freeze entirely in the cold. Both the Libyan Sanctions Regulation and the Iran Sanctions Regulations, as well as other similar sanctions regulations imposing asset freezes (notably Regulation (EU) 269/2014 concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine), allow NCAs to grant authorisation to make payments using assets subject to an asset freeze. It will then be key for creditors to obtain such authorisation prior to any enforcement actions.