The European Account Preservation Order (EAPO) aimed to freeze the bank accounts of debtors to help settle disputes across the EU.
However, the Ministry of Justice (MoJ) decided against accepting the order after a business consultation raised several concerns about the proposed legislation.
Frances Coulson, president of R3 - which has warned of the potential threat to the UK’s rescue culture – said: "Although they were designed to make it easier to recover debts in cross-border cases, in practice the plans would give courts anywhere in the EU power to freeze funds in UK businesses’ banks accounts without warning.
"The rigorous checks and balances over the validity of the claim that we have in the UK were sorely missing from the proposals.
"We are pleased this threat to the UK’s rescue culture has been recognised by today’s decision."
According to the MoJ the consultation process identified doubts about the proposal’s 'lack of adequate safeguards' for defendants.
The threshold for obtaining an order was feared to be too low and concerns were raised about the claimant not needing to provide any security to compensate a defendant for losses suffered from the wrongful granting of an order.
Consultation feedback also warned it would be too easy to grant an order, increasing the possible dangers posed to companies in the process of restructuring or rescue.
Despite deciding not to accept the proposal the MoJ admitted it hopes to opt in at a later stage.
The Minister of State, Lord McNally, said: "The Government welcomes the Commission’s objective. It supports measures which make it easier for both businesses and citizens to resolve disputes and enforce judgments across borders.
"Although the Government has decided that the UK should not opt in to the proposal now, it intends to participate fully in the negotiations with the hope that sufficient changes will be made to enable a post-adoption opt in."
By Andy Pearce