Is your cross-undertaking adequate?

When making applications for freezing orders, the applicant has a duty to provide full and frank disclosure and the all-important cross-undertaking in damages must be provided. However, parties still fall foul of the requirements, as seen in Hunt (as provisional liquidator of Black Capital) v Ubhi [2023] EWCA Civ 417. The applicant was found to have provided an ‘inadequate’ cross-undertaking in damages. Also, what the judge in the underlying case had been told about the proposed cross-undertaking was not just inadequate; it was misleading. 

The appeal arose out of a petition to wind up Black Capital, pursuant to article 7 of the Insolvent Partnerships Order 1994, on the basis that Black Capital was a partnership between the respondent, Mr Ravneet Ubhi and Mr Sarju Patel. At the same time, without notice applications were made for the appointment of a provisional liquidator and a freezing order. Both applications came before Mellor J and were successful. At the petitioner’s behest, the applicant, Mr Hunt, a licensed insolvency practitioner with Griffins, was appointed as provisional liquidator, the petitioners having given a cross-undertaking in damages subject to a limit of £200,000. In turn, Hunt applied immediately for freezing orders to be made against Ubhi and Patel, which Mellor J granted, specifying the maximum sum as £19m.

Hunt gave a cross-undertaking in damages, but in a restricted form as follows: ‘If the court later finds that this order has caused loss to the respondent, and decides that the respondent should be compensated for that loss, the applicant will comply with any order the court may make, save that this undertaking shall be limited to the amount of monies and the net realisable value of the unpledged assets of Black Capital (in provisional liquidation) taken into the custody or under the control of the applicant in the course of the liquidation less the costs, expenses or other disbursements of the liquidation.’

The petitioners also presented bankruptcy petitions against Ubhi and Patel. The winding-up and bankruptcy petitioners were all the subject of a hearing before deputy insolvency and companies court judge Raquel Agnello KC last October and November, together with an application by Ubhi to set aside a statutory demand which had been served on him. The deputy ICC judge dismissed the petitions against Ubhi and set aside the statutory demand. A further hearing took place before Mr Robin Vos, sitting as a deputy High Court judge (the judge), where it was determined that Hunt remained provisional liquidator until the deputy ICC judge had dealt with matters arising from her judgment. The hearing was otherwise concerned with whether the freezing orders (and, in particular, that against Ubhi) should be continued. The judge held that the orders should continue.

Ubhi appealed against this decision. The issues for consideration by the court were: (i) was the judge wrong to accept a limited cross-undertaking from Hunt? (the first issue); and (ii) should the judge have set aside the freezing order and refused further relief on account of breaches of the duty of full and frank disclosure (the second issue).

On the first issue, Newey LJ analysed the decision in JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev [2012] EWCA Civ 139, specifically the principle that ‘[t]he default position is that an applicant for an interim injunction is required to give an unlimited cross-undertaking in damages’, with the possible exception ‘where the applicant has no personal interest in the litigation and is bringing the action on behalf of others’ and that ‘the burden is on the applicant to show why they should not be required to give an unlimited cross-undertaking in damages’.

Newey LJ stated that ‘the key factor which led the judge to accept a cross-undertaking of that kind was evidently that Mr Hunt was acting in the interests of all the creditors while the petitioners were likely to be “in the minority both in terms of the number of creditors and the amount owed”.’ He went on to say that it was clear from Pugachev that the fact that an applicant is a liquidator did not of itself excuse the absence of an unlimited cross-undertaking. The judge also held that he did not think the fact that Hunt was acting in the interests of all creditors, of whom the petitioners were a minority, constituted a sufficient reason to depart from the ‘default position’. Newey LJ also noted that it was not apparent that the judge appreciated quite how worthless Hunt’s cross-undertaking was. In view of the above, he held that ‘the ‘judge’s decision on the cross-undertaking issue was wrong in principle and could not stand and that, exercising the discretion afresh ourselves, we should allow the appeal and set aside the freezing order as against Mr Ubhi’.

On the second issue, Newey LJ cited the principles summarised by Ralph Gibson LJ in Brink’s Mat Ltd v Elcombe [1988] 1 WLR 1350, and stated that the underlying judge should have been told of the principles which emerge from Pugachev and commented on the application of those principles to the particular facts, drawing attention to matters bearing on whether the petitioners might be expected to stand behind Hunt and to the fact that they were providing him with funding. It followed that the duty of full and frank disclosure had not been complied with.

Important take-away points from this case include that cross-undertakings supporting freezing injunctions cannot easily be capped. Pugachev is the leading authority on the provision of cross-undertakings in damages and attention should be given to the key points which Newey LJ helpfully summarised at paragraph 29. Put simply, the burden is on an applicant for a freezing order to show exactly why it is appropriate to depart from the ‘default position’ that an unlimited cross-undertaking in damages is required. Practitioners must ensure clients provide full and frank disclosure of all potentially relevant issues, whether or not they believe them to be important. The burden on an applicant is heavy and it is better to disclose something than assess and conclude it is not relevant.

Georgina Squire is a committee member of the LSLA