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  • Writer's pictureThomas W. L. Chin

The Significance of Default Clauses in Post-Judgment Compromises

Updated: Mar 21

In the realm of legal proceedings, compromises can significantly alter the course of actions both before and after judgments are obtained. This article delves into the legal ramifications surrounding post-judgment compromises, particularly emphasizing the absence of default clauses.

Traditionally, a judgment debtor might propose to settle the judgment sum through periodic instalments. For the judgment creditor, it becomes imperative to safeguard their interests by incorporating a default clause within the terms of compromise. An example of such a clause could stipulate that in case of default, the entire judgment sum, minus any partial payments received, would immediately become due and payable.

This provision becomes especially crucial in scenarios involving Judgment Debtor Summons (JDS) proceedings. JDS entails summoning a judgment debtor to court for an examination regarding their ability to pay the debt and disclose available assets. Following an assessment of the debtor's financial capacity, the court typically orders repayment through monthly instalments. Remarkably, these instalments can be as minimal as RM 100 per month, even for substantial judgment sums exceeding RM 100,000. This protracted repayment schedule may span the debtor's lifetime.

Now, you wouldn't want to accept such an order without incorporating a default clause. You might think that, even without a default clause, you can still present a bankruptcy petition against the debtor if the defaults. 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 and there had been a default. If there is no default clause in a post-judgment compromise, the judgment creditor may not execute the entire judgment sum but may only do so with respect to instalments that have become due.

In conclusion, the paramount lesson from this discourse underscores the importance of including robust default clauses in compromise terms. Beyond preventing impediments to bankruptcy or execution proceedings, such clauses serve as a motivating factor for debtors to comply diligently with compromise terms, thus ensuring effective debt resolution.

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