Compromise of Monetary Judgments: Why You Need Default Clauses

A compromise can take place either before or after judgment is obtained. This article will explore the legal implications of post-judgment compromises without default clauses.

A judgment debtor would usually offer to pay the judgment sum by way of monthly instalments. If you are the judgment creditor, you would want to ensure that the terms of compromise include a default clause e.g. "in the event of default, the entire judgment sum, less any part payment received, shall immediately become due and owing."

This is crucial especially in Judgment Debtor Summons (JDS) proceedings. JDS is a summons issued against a judgment debtor to attend court to be examined respecting his ability to pay the judgment debt and for the discovery of his assets available for such payment.

The court, after ascertaining his ability to pay, would usually order the judgment debtor to pay the judgment sum by way of monthly instalments. The monthly instalments can go as low as RM 100 per month even where the judgment sum is RM 100,000.00 or more. This may take the entire lifetime of the judgment debtor before it is fully settled.

Now you wouldn't want to accept such an order, without more. You might think that you can still apply to declare the judgment debtor a bankrupt. This is especially so when Section 8 of the Debtors Act 1957 provides that "...any order for the payment of instalments of a judgment debt under this Part shall not be a bar to proceedings in execution unless and except to the extent that the court shall so direct."

The Federal Court in Mohd Kamal bin Omar v United Overseas Bank (M) Bhd and other appeals [2018] MLJU 600 was posed with the following question of law: -

“Whether the making of an Order on a judgment debtor summons pursuant to the Debtors Act 1957 for the satisfaction of an original Judgment by payment of instalments, constitutes a variation or modification of the said original Judgment, thereby barring the presentation of a Bankruptcy Notice founded on an original said Judgment having regard to the decisions in Montgomery & Co v de Blumes [1898] 2 QB 420 and Re H.A. Pereira [1932] MLJ 112?”

Question 1 - Does it constitute a variation of the original judgment. The Federal Court’s answer is yes.

Question 2 - Does it therefore bar the presentation of a bankruptcy notice founded on the original judgment? The Federal Court’s answer is yes, unless there is a default clause in the order for payment by instalments and there had been a default.

In dealing with Section 8 of the Debtors Act 1957, the Federal Court further held that ‘execution’ does not extend to bankruptcy proceedings. This means that an order for payment by instalments pursuant to JDS proceedings (“JDS Order”) does not prevent the judgment creditor from pursuing other modes of execution e.g. seizure and sale and garnishee. However, if the compromise is not pursuant to JDS proceedings, the agreement to pay the judgment debt by way of instalments would still amount to a variation of the original judgment. Unless there is a default clause and there had been a default, the judgment creditor may not then execute the entire judgment sum but may only commence execution proceedings with respect to instalments that have become due.

What if the judgment debtor consistently pays RM 100 for the rest of his life? In other words, what if there is no default of the terms of compromise by the judgment debtor?

With respect to compromises pursuant to JDS proceedings, Section 13 of the Debtors Act 1957 provides that “The court may discharge or vary any order made under this Part, or may suspend its operation.”

I would say this is similar to divorce law pertaining to variation of orders relating to maintenance of spouse and children. In divorce law, the husband or wife may, at any time after the divorce decree, apply to court for a variation of a maintenance order. Usually, the husband would be ordered to pay maintenance to his former wife or children. If there has been a material change of circumstances (usually his financial circumstances), the husband may apply to decrease the amount of maintenance to be paid, or the wife may apply to increase the amount of maintenance to be paid.

Similarly, the judgment debtor or judgment creditor may apply to court under Section 13 of the Debtors Act 1957 to vary the JDS Order by decreasing or increasing the instalments to be paid. In my opinion, the courts would consider the judgment debtor’s current financial circumstances in deciding whether or not to vary the JDS Order, or even to discharge it altogether.

With respect to compromises NOT pursuant to JDS proceedings, unfortunately a judgment creditor will not be able to rely on Section 13 to seek for a higher instalment payment, unless the judgment debtor otherwise agrees of course.

The key takeaway from this article is that a judgment creditor should ensure that a well-written default clause is always included as part of the terms of a compromise. Aside from preventing bars to bankruptcy or execution proceedings with respect to the full judgment sum, the default clause would serve as motivation for the judgment debtor to strictly adhere to the terms of the compromise.