What are cross-undertakings?
A cross-undertaking in damages is a legally binding promise to the court by the applicant to compensate the respondent to an injunction for any loss or damage it might suffer if the interim injunction is later discharged.
The ‘default position’
Although the courts cannot force an applicant to give an undertaking, the court’s starting point or the ‘default position’ is that the court will not grant an interim injunction unless an unlimited cross-undertaking is given.
Any person applying for an interim injunction must therefore be prepared to give an unlimited cross-undertaking in damages.
The cross-undertaking is considered to be the “price for interfering with the defendant’s freedom before he has been found to be liable for anything”.
The rationale for a cross-undertaking is rooted in the approach that the court takes to granting interim injunctions which is that the court considers the applicant’s cause of action without considering the full merits of the case. So if the applicant does not succeed at trial then the respondent may suffer loss in the intervening period by being restrained by the injunction. The respondent may not of course suffer loss but the purpose of the cross-undertaking is to introduce a level of fairness in the event that the respondent does suffer loss.
This area of law is full of established case law and cross-undertakings have been a requirement for interim injunctions since at least 1851.
Understandably, office-holders are reluctant to offer unlimited cross-undertakings as they have no personal interest in the outcome of the litigation which is generally for the benefit of the creditors as a whole.
Recent case
In the recent case of Hunt (as provisional liquidator of Black Capital v Ubhi [2023], Mr. Hunt applied for a freezing order in his capacity as a provisional liquidator of a partnership. There was evidence that the partnership was operating a Ponzi scheme. Mr. Hunt obtained freezing orders against the partners and gave a cross-undertaking in damages limited to the net realisations in the insolvent estate.
The injunctions were granted in the High Court but set aside by the Court of Appeal which held that the judge was wrong to accept the limited cross-undertaking in damages offered by Mr. Hunt as Mr. Hunt had not given any evidence to show why the court should depart from the ‘default position’. It was noted that there may be an exception where the applicant has no personal interest and is bringing the action on behalf of others but the burden is still on the applicant to show why he/she should not be required to give an unlimited cross-undertaking in damages.
There was no evidence that Mr. Hunt had even asked the petitioners for whom he acted for an indemnity even though the facts of the case suggest that the petitioners were in a position to supply Mr. Hunt with an indemnity even if a limited one. Also there was no evidence that Mr. Hunt had investigated the possibility of supporting the cross-undertaking with insurance.
Other relevant factors in this case include the fact that Mr. Hunt was a provisional liquidator and only acting for a section of the creditors and his role was limited to preserving the assets of the partnership pending the making of a winding-up order or the dismissal of the petition. On a winding up of the partnership, the partners would be liable to make up any shortfall in partnership property to satisfy the debts and liabilities of the partnership. The freezing order had the effect of freezing the partners’ personal assets but Mr. Hunt in his capacity as provisional liquidator was only concerned with preserving partnership property.
Why this case is useful?
The case is useful in that it sets out the steps which an office-holder would be expected to take before the court considers whether a limited cross-undertaking is acceptable which includes looking at the possibility of obtaining an indemnity from the creditors and also exploring the possibility of insurance to support the cross-undertaking. Further, it emphasises that the burden of proof is on the officer-holder to prove why the court should depart from the ‘default position’ of accepting unlimited cross-undertakings from the office-holder. In such cases, it would be prudent for the office-holder to explain his/her position fully in the evidence to support the application for the injunction.
If you have any queries on cross-undertakings, please do not hesitate to contact us.
