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Could undertakings given by the debtor to the court be varied and how?

2024-07-31

Introduction

It is a common practice for the Court to make an order subject to conditions and undertakings – the same is especially prominent in bankruptcy and winding-up cases. In Re Lau Wang Chi, Barry, unrep., 13 May 2024, CACV 147/2024, the Court of Appeal (the “CA”) deals with an appeal seeking to vary a condition that the Court imposes in the first hearing of a bankruptcy petition where the debtor was ordered to pay the whole of the petition debt into Court.

Brief facts

The subject petitioning debt is a judgment debt for summary judgment entered in favour of the Petitioners (the “O14 Judgment”). Although the O14 Judgment was subject to appeal to the Court of Appeal at the time the bankruptcy petition was heard for the first time, the Petitioners sought an immediate bankruptcy order in the first hearing based on the fact that the O14 Judgment was obtained more than 19 months ago and the Debtor’s application for stay was dismissed. While counsel for the Debtor submitted that there was credible evidence that the liabilities of the Debtor were discharged already and the O14 Judgment was obtained by fraud, the judge at the first hearing (the “Bankruptcy Judge”) granted an adjournment on the condition that the Debtor provides security in the amount of the petitioning debt and on the Debtor’s undertaking that he would not oppose the petition if he failed to comply with the condition within time (the “Order”). The Debtor appealed against the Order.

Issue(s) on appeal

The Debtor raised 12 grounds in the notice of appeal against the Order, and one of the grounds of appeal concern whether the Bankruptcy Judge has power to make the Debtor undertake not to oppose the petition if he failed to make payment into court.

CA’s ruling

The Petitioner’s legal representatives submitted that no appeal lies against an undertaking, since the giving of an undertaking is a voluntary act of the litigant, and not a coercive order made by the Court. Rather than lodging an appeal against the undertaking, the party who wishes to cease to be bound by his undertaking should apply for release or discharge of the undertaking (either unconditionally or on condition of offering a new undertaking). The Petitioners argue that the Court’s power is only to grant or refuse the application for release upon the party’s application to unconditionally discharge the undertaking, or to offer a new undertaking, as applicable.

Case laws that the Petitioners cited however envisaged situations where the Court would entertain an appeal against an undertaking under extraordinary circumstances. In the present case, the Debtor’s appeal is against the condition imposed in the Order that the bankruptcy petition be adjourned upon his payment into court or providing security of the petitioning debt together with the undertaking (which he was asked to give) that he will not oppose the petition should he fail to comply with the condition.

The CA did not immediately dispose the appeal by directing the Debtor to seek relief by applying to the Bankruptcy Judge for a release or discharge of the undertaking, and instead consider it appropriate to allow him to bring up his complaint about the undertaking in the appeal and weigh the pros and cons of such an undertaking.

The CA rules that it is ultimately a balancing exercise – if the only practical advantage of such an undertaking is to save the Petitioner’s time and costs in a further court attendance, such advantage is arguably insignificant and do not justify such an undertaking to be ordered and given. However, on the other hand on the weighing scale lies the more significant considerations such as whether the Debtor would be precluded from bringing significant changes of circumstances that may impact on the making of a bankruptcy order by virtue of the undertaking to the attention of the Court. While one may run the procedural argument that it is highly unlikely to cause the Debtor any prejudice as he can apply to release himself from the undertaking if so required, the CA was of the view that the application for release itself (i.e. whether it shall be an unconditional release) would lead to complexity and arguments that are undesirable. If there is no undertaking and there is non-compliance with the condition, the Court would simply consider at the next hearing whether to exercise its unfettered discretion to make a bankruptcy order. In particular, the CA observes that the Debtor appeared to have little choice but to give the undertaking in order to avoid an immediate bankruptcy order. In the circumstances, the CA views that such an undertaking would not be of much benefit and had set aside the Order. The CA exercised its discretion afresh and ultimately ordered the Debtor to provide half of the amount of the judgment sum as security.

Takeaway

An undertaking given by debtors is quite a usual practice of the Court, seeking to address the prejudice which may be caused to petitioners when the Court decides to grant one last chance to debtors to pay the debt. However, as evidenced by this case, it is not strictly necessary for a party to ask for, and for the other party to provide the same in insolvency proceedings. For prudence’s sake, one shall consider carefully whether there are compelling circumstances to justify such an undertaking before asking for the same to avoid the waste of time and costs if the debtor brings an appeal.

 


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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.

Published by ONC Lawyers © 2024

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