TELE ART INC. (IN LIQUIDATION) v. BANK OF CHINA (HONG KONG) LTD

HCA 2443/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2443 OF 2008

____________

BETWEEN

____________

______________

J U D G M E N T

______________

1.  By these proceedings, Tele-Art Inc. (“TAI”), a BVI company in liquidation, claims an account from Bank of China (Hong Kong) Limited (“the Bank”) in respect of the proceeds arising from a sale by the Bank of shares in Nam Tai Electronics, Inc. (“Nam Tai”), which TAI had pledged to the Bank as security for loans advanced by the Bank to TAI’s subsidiary, Tele-Art Limited (“TAL”), a Hong Kong company which is also in liquidation.

2.  By a Share Charge dated 10 November 1993, TAI charged 700,908 shares in Nam Tai to the Bank as security for TAL’s obligations to the Bank under credit facilities made available by the Bank to TAL.  By a further Share Charge of the same date, Mr Robert Yuen, who was then a director of TAL and the principal shareholder in TAI, charged a further 122,727 shares in Nam Tai (which were registered in his name, but beneficially owned by TAI) to the Bank, also as security for TAL’s obligations to the Bank.

3.  From about 1996 onwards, TAL defaulted on its obligations to the Bank under such credit facilities, and the Bank began to realise its security over the Nam Tai shares, leaving some 308,727 shares still charged to the Bank by about June 1996.  The proceeds of the shares sold were, however, insufficient to fully recoup the amounts then owing to the Bank by TAL.  Thereafter, between 1996 and 2007, the Bank, TAI and Nam Tai became embroiled in various litigation – initially in the BVI (where one piece of litigation culminated in an appeal to the Privy Council) and later in the United States and Hong Kong.  As a result of the litigation and other complications in relation to the sale of the remaining Nam Tai shares held by the Bank, it was not until 5 September 2007 that the Bank was able to sell sufficient Nam Tai shares to fully pay off TAL’s indebtedness to it, selling 539,830 Nam Tai shares, for net sale proceeds of US$6.936,709.36 received on 11 September 2007.  Following such sale, the Bank still held some 477,319 Nam Tai shares which had not been sold – these were returned to TAI’s liquidator, Mr Harrigan, on 18 September 2007.  The reason for the total number of shares sold or returned being greater than the number of shares over which security was originally granted in 1993, was because there had been a 1 into 3 stock split and 1 for 10 share dividend in respect of the charged shares between 1996 and 2007. 

4.  On 1 November 2007, the Bank’s solicitors, Messrs Deacons, sent to Mr Harrigan’s solicitors, Messrs Wilkinson & Grist, a letter setting out the Bank’s account in respect of the sale proceeds. According to this letter (see Table A on pages 2 to 3 of the letter), as at 10 September 2007, the principal debt and interest in respect of TAI amounted to HK$27,136,503.39 and US$26,184.17, while costs and expenses (and interest thereon) were said to total HK$12,860,534.89, US$561,382.90 and £448,578.29. After giving credit for dividends received of HK$3,331,903.41, the amounts said to be due under the share charges came to HK$36,665,134.87, US$587,657.07 and £448,578.29.  To these amounts were added sums of HK$5,552,436.10 and US$ 15,049.22, which were described as provisions for further costs and expenses. The effect of adding these provisions to the amounts stated as being already due was to exhaust the whole of the sale proceeds.

5.  The letter went on to provide an update in respect of costs and expenses incurred from 11 September 2007 to 20 October 2007 (see Table A, Part II on page 3 of the letter), stating that further costs and expenses of HK$216,273.00, US$15,049.22 and £13,612.98 had been incurred in that period, and giving credit for an amount of £117,694.50 received from Nam Tai in respect of costs.  These additional costs, expenses and receipt were accounted for by an adjustment to the provision, reducing the Hong Kong dollar element of the provision to HK$5,336,163.10, eliminating the United States dollar element of the provision altogether, but introducing a provision denominated in pounds of £104,081.52.  The overall effect was in fact to increase the level of the provision for future costs and expenses.

6.  Also included in the letter, as Table C (at pages 4 to 6 of the letter), was a brief description of the various legal proceedings in which costs and expenses were said to have been incurred by the Bank, and indicating in relation to each set of proceedings described the amounts paid to legal advisers.  This table referred to five sets of proceedings, namely:-

(1)   Proceedings in the BVI High Court (and appeals therefrom to the BVI Court of Appeal and the Privy Council) in relation to the enforcement of the share charges, winding up of TAI and the purported redemption by Nam Tai of shares charged to the Bank;

(2)   Proceedings in California in which Nam Tai sued the Bank for damages for conspiracy to steal the proceeds of sale of some 67,500 Nam Tai Shares charged under the share charges.

(3)   Proceedings in Hong Kong (HCMP 166 of 2005) relating to letters of request by which Nam Tai sought evidence for proceedings brought by Nam Tai in New York against a firm of US stockbrokers, Paine Webber, arising out of the sale by Paine Webber of 67,500 of the Nam Tai shares charged under the share charges.

(4)   Proceedings in Hong Kong (HCCW 974 of 2000) in which TAI unsuccessfully sought inspection of TAL’s books and records in TAL’s liquidation.

(5)   Proceedings in Hong Kong (HCA 1619 of 2007) by which the Bank sought a declaration that a purported assignment by Mr Harrigan to Nam Tai of certain alleged rights of TAI under the share charges was void, and other relief.

7.  Towards the end of the letter, the Bank explained its retention of a provision for future costs and expenses, stating that it considered that further costs and expenses would be reasonably likely to be incurred in continuing to vindicate its rights and in accounting under the share charges, having regard to the then ongoing proceedings (which included an appeal, ultimately also unsuccessful, against my decision in HCCW 974 of 2000, and HCA 1619 of 2007, which was then at an early stage).

8.  Although TAI does not dispute the amount of the principal debt and interest, it does dispute the Bank’s entitlement to deduct from the sale proceeds all of the costs and expenses allegedly incurred, and to withhold the balance of the sale proceeds by way of the claimed provision for future costs and expenses.  This led to the bringing of these proceedings, in which TAI (funded by Nam Tai which is now its only unsecured creditor) seeks various enquiries and declarations the purpose of which is to determine the basis on which the Bank is entitled to make deductions in respect of its costs and expenses, and to enable such deductions to be quantified so as to finalise the accounting between the Bank and TAI in respect of the proceeds of sale of the charged shares.

9.  In summary, TAI contended that:-

(1)   The Bank is not entitled (as a matter of construction of the share charges) to deduct any of its costs in respect of the proceedings referred to in the letter of 1 November 2007.

(2)   Alternatively, if the Bank is entitled to deduct its costs in respect of any such proceedings, it is not entitled (as a matter of construction of the share charges) to deduct such costs quantified by reference to the indemnity basis of taxation, and is entitled only to deduct such costs quantified by reference to the party and party basis of taxation.

(3)   In the further alternative, even if the Bank is entitled to deduct such costs on the indemnity basis, the amounts deducted are excessive and unreasonable.

(4)   In the further alternative, even if on the true construction of the share charges the Bank is entitled to deduct its costs on an indemnity basis, where a court has already made an order in any particular proceedings awarding costs to the Bank on a party and party basis, the contractual right to indemnity costs has been lost and the Bank can only deduct from the proceeds of sale an amount equivalent to its costs of the relevant proceedings taxed on a party and party basis.

(5)   In any event, the Bank is not entitled to make any deduction by way of a provision for future costs not as yet incurred.

10.  By agreement between the parties, three preliminary issues were directed to be heard, these being:-

(1)   Whether the Bank is entitled to recover from the proceeds of sale its costs and expenses incurred in any, and if so which, of the legal proceedings set out in Table C of the 1 November 2007 letter? (The objection mentioned in paragraph 9(1) above)

(2)   If the Bank is so entitled, whether such costs and expenses are to be deducted on a full indemnity basis, and, if not, on what basis? (The objections mentioned in paragraphs 9(2) and 9(4) above)

(3)   Whether the Bank is entitled to set aside from the proceeds of sale a provision for its future costs and expenses. (The objection mentioned in paragraph 9(5) above)

11.  Actual quantification of the amounts which the Bank could properly deduct from the proceeds of sale (which would encompass the objection mentioned in paragraph 9(3) above) was left to be determined at a later stage, in the light of the answers to these questions.

12.  To answer the first question, it is necessary to determine the extent of the Bank’s right to make deductions from the sale proceeds of the charged shares. 

13.  It was common ground between Mr Thomas, who appeared for TAI, and Mr Jat, who appeared for the Bank, that having exercised its power of sale, the Bank as charge is bound to account to TAI for the sale proceeds, and is a constructive trustee of the proceeds, which it holds for the use of the charger.  It must therefore establish its right to retain money out of those proceeds for its own use, and return any surplus and other securities, after payment of all sums due to it, to TAI as chargor (see e.g., Charles v Jones (1895) 35 Ch D 544 at 549, Fisher & Lightwood’s Law of Mortgage (11^th ed) at paragraph 20.45).

14.  So far as a chargee’s right to make deductions from the security is concerned, apart from deducting the principal debt and interest secured thereby, a chargee is entitled to recover out of the charged property costs and expenses reasonably and properly incurred by it in enforcing or preserving its security.  It will also be entitled to recover from the charged property other items provided for by the terms of the charge.

15.  Absent any other terms, the chargee’s right to make deductions in respect of costs and expenses incurred is as stated by Nourse LJ in Parker-Tweedale v Dunbar Bank plc (No. 2) [1991] Ch 26 at page 33 B-F:-

“A mortgagee is allowed to reimburse himself out of the mortgaged property for all costs, charges and expenses reasonably and properly incurred in enforcing or preserving his security. Often the process of enforcement or preservation makes it necessary for him to take or defend proceedings. In regard to such proceedings three propositions may be stated. (1) The mortgagee’s costs, reasonably and properly incurred, of proceedings between himself and the mortgagor or his surety are allowable. The classical examples are proceedings for payment, sale, foreclosure or redemption, but nowadays the most common are those for possession of the mortgaged property preliminary to an exercise of the mortgagee’s statutory power of sale out of court. (2) Allowable also are the mortgagee’s costs, reasonably and properly incurred, of proceedings between himself and a third party where what is impugned is the title to the estate. In such a case the mortgagee acts for the benefit of the equity of redemption as much as for that of the security. (3) But where a third party impugns the title to the mortgage, or the enforcement or exercise of some right or power accruing to the mortgagee thereunder, the mortgagee’s costs of the proceedings, even though they be reasonably and properly incurred, are not allowable. …

“… The first and second propositions have together been called the general rule.  The third has been called the exception to it.”

16.  Later in his judgment (at page 39 B-E), Nourse LJ approved the judgment of Peter Gibson J in the court below, to the effect that there is an exception to the exception where it can be shown that the mortgagor concurred in or assisted the litigation by the third party against the mortgagee.

17.  Although this is the position as a matter of law, it is always open to the parties to a particular mortgage or charge to alter these basic entitlements by the terms of their contract, as Nourse LJ pointed out at page 37 H of his judgment.

18.  In this case, of the various proceedings in respect of which the Bank seeks to deduct its costs from the proceeds of sale, it is only in respect of one aspect of what is described in Table C of the 1 November 2007 letter as the BVI proceedings (Table C, item 1) that TAI accepts that the general rule described in Parker-Tweedale v Dunbar Bank is engaged.  The BVI proceedings in fact involved two separate sets of proceedings.  These were:-

(1)   Action No. 196/1993, in which FORFAS, an Irish government agency responsible for the provision of export credit insurance to Irish exporters, sought to enforce a debt owing to it by TAI.  FORFAS obtained judgment against TAI, and in 1996 went on to obtain an absolute charging order over TAI’s Nam Tai shares which were already charged to the Bank (the share charges were in fact granted on the same date that FORFAS commenced its action against TAI).  The Bank made an application in these proceedings to discharge the charging order absolute obtained by FORFAS, which was later directed to proceed as an application to determine priorities as between the Bank and FORFAS.  In these proceedings, the Bank was successful.

(2)   Action No. 69/1997, in which Nam Tai, having taken an assignment of FORFAS’ judgment debt arising in Action No. 196/1993, petitioned successfully for the winding up of TAI.  It was in these proceedings that TAI’s then liquidator, Mr David Hague, sought to have purported redemptions of the charged shares effected by Nam Tai in reliance on changes which Nam Tai made to its articles to permit itself to redeem shares held by a shareholder who was indebted to it (as TAI was, following the assignment of FORFAS’ judgement to Nam Tai) declared void.  The Bank became involved in these proceedings, and incurred substantial costs, particularly when they reached the Privy Council level.

It is accepted by Mr Thomas that the second of these sets of proceedings, involving as they did an attempt by Nam Tai to destroy the Bank’s security by in effect forfeiting TAI’s shares, came within the general rule, as they involved a threat to the mortgaged property itself. Mr Thomas, however, submitted that notwithstanding this, the Bank should not be allowed to recoup any of its costs incurred in respect of these proceedings as it did not appear to be either necessary or reasonable for the Bank to have intervened and become involved in the proceedings when they reached the Privy Council.

19.  In respect of all the other sets of proceedings, however, TAI contends that they either fall within the exception to the rule, being challenges by a third party, without the concurrence or assistance of TAI, to the validity of the Bank’s security, or the exercise by the Bank of its rights or powers thereunder, or a fortiori cases, in which the Bank became involved because of claims (whether substantive or procedural) made against it, which do not involve any such challenges.

20.  It is therefore necessary to consider whether or not the terms of the share charges enlarge the Bank’s rights in respect of the recovery of costs and expenses which it may incur.  Mr Jat says that the language of the share charges clearly does so.  He relies primarily on clause 2.1(j) of the share charges, which is in the following terms:-

“2.1 … [TAI] and [TAL] hereby jointly and severally covenant with [the Bank] that … they will … pay make good and discharge to [the Bank]:-

…

(j)    all costs, charges and expenses which may be incurred under or in connection with any other matter arising under or in consequence of this Share Charge or in connection with the Shares.”

21.  Clause 2.1(l) provides for interest to be paid on all sums advanced and other monies payable under the share charges at rates determined by the Bank. It is accepted by Mr Thomas that if any of the costs which the Bank seeks to deduct from the sale proceeds are recoupable by the Bank out of such proceeds, such interest may be added to the amount of such costs properly deductable.

22.  Clauses 11.6, 16.1, 24.1 and 31.1 are also relied upon by Mr Jat:-

(1) Clauses 11.6 and 16.1 are relied upon in the context of the proceedings under HCCW 974 of 2000 (item 3 of Table C in the 1 November 2007 letter).  Clause 11.6 states that:-

“[TAI] shall indemnify [the Bank] against all losses, liabilities, damages, costs and expenses whatsoever arising out of the exercise of the power of sale under this Clause 11 and/or any failure by [TAL] and [TAI] or any of them to perform any or all of their obligations under this Share Charge.”

(2) Clause 16.1, so far as relevant for present purposes, provides:-

“… until the obligations of [TAL] under the Facilities has [sic] been discharged in full, [TAI] shall not exercise or take any step to enforce any security, right or claim whatever against [TAL] or any other person who has guaranteed or given security in respect of the Facilities or have or exercise any rights as surety in competition with or in priority to any claim of [the Bank].”

(3)   Clause 24.1 is relied upon in relation to the proceedings in HCA 1619 of 2007, in conjunction with Clause 11.6.  It provides, so far as relevant, as follows:-

“… [TAL] or [TAI] may not ssign or transfer any of its rights, benefits, duties or obligations hereunder.”

(4)   Clause 31.1. is relied upon, in addition to clause 2.1(j), in relation to some of the other proceedings.  It is, so far as material, in the following terms:-

“[TAL] and [TAI] shall jointly and severally be responsible for and pay all costs, charges and expenses (including legal fees) incurred by [the Bank] in connection with the … enforcement of this Share Charge.”

23.  I shall deal first with the construction of clause 2.1(j).  This was the principal area of contention between the parties, so far as construction was concerned.  The other clauses were not the subject of any argument as to questions of construction, although points were taken as to their applicability to the costs in respect of which the Bank says that it is entitled to retain out of the sale proceeds.

24.  Mr Jat submitted that properly construed, clause 2.1(j) covered all of the costs incurred by the Bank in the various proceedings, other than those in relation to the application by TAI to inspect the books and records relating to TAL’s liquidation in HCCW 974 of 2000 (which he submitted were nonetheless recoverable by the Bank out of the proceeds of sale pursuant to clauses 11.6 and 16.1).

25.  He submitted that clause 2.1(j) is to be read as providing for recovery of all costs and expenses (it will be necessary to consider further the question of what is meant by “all” costs and expenses in the context of the second question to be determined as a preliminary issue) in the following three situations:-

(1) those “incurred under … this Share Charge”;

(2) those “incurred … in connection with any other matter arising under or in consequence of this Share Charge”; and

(3) those “incurred … in connection with the Shares”.

26.  He went on to submit that the intent of the wording used to cover the second situation is clearly to exclude the exception to the general rule identified in Parker-Tweedale v Dunbar Bank, and to extend recoverability to all costs and charges which might be incurred by the Bank in consequence of the share charge – i.e., in consequence of having taken a charge over the Nam Tai shares from TAI.  He accepted that this would mean that a wide range of matters, possibly even extending beyond the situation identified in the exception to the general rule, would potentially be covered, but argued that there was nothing exceptionable about this, as it was impossible to predict how and in what circumstances a lender in the position of the Bank might come to incur costs and expenses as a result of having become a chargee.  As a matter of commercial common sense, said Mr Jat, it was understandable that the Bank should wish to provide itself with the maximum degree of protection possible.

27.  Mr Thomas, however, contended that the wording used was somewhat enigmatic, and could (at its widest) mean that any costs and expenses incurred by the Bank because it had taken a charge over the Nam Tai shares would be recoupable out of the sale proceeds.  He submitted that the more appropriate reading would be to construe the clause contra proferentem against the Bank, and limit its operation to a case in which the share charge was the “dominant or operative cause” (as opposed to being merely a causa sine qua non) of the costs and expenses incurred.  He also submitted that, in any event, the meaning to be given to this clause could not conflict with the exception to the general rule – at least, not without the use of much clearer or unequivocal language.

28.  In my view, the language of clause 2.1(j) does clearly point to an intention to exclude the operation of the exception to the general rule as stated in Parker-Tweedale v Dunbar Bank, and to extend it to all situations in which the Bank’s expenditure of costs and charges is a consequence of the share charge.  Indeed, costs and charges incurred by the Bank as the result of a challenge by a third party to the validity of the charge or the exercise by the Bank of its powers under it (with or without the involvement, concurrence or assistance of TAI as chargor), would seem to be an obvious case of costs and charges being incurred “in consequence of” the share charge.  From the Bank’s point of view, the only reason for its having to incur such charges and expenses will be because it is the chargee.  Were it not for the Bank being a chargee, it would not have been involved in such proceedings at all.

29.  That the rights of the Bank to recoupment of its costs and expenses under the general law may be extended by the terms of the contract between it and TAI is recognised, not just by Nourse LJ in Parker-Tweedale v Dunbar Bank itself, but also in the subsequent case of Gomba Holdings (UK) Ltd v Minories Finance Ltd (No. 2) [1993] Ch 171, where, in respect of a clause in a mortgage which stated that “all costs charges and expenses howsoever incurred by the bank … under or in relation to this mortgage … on a full indemnity basis” were to be recoverable, Scott LJ observed that “the words “howsoever incurred” presumably avoid the exclusion of the third category of costs, charges and expenses referred to by Nourse LJ in Parker-Tweedale v Dunbar Bank …”.

30.  It seems to me that the phrase used here – “in consequence of the share charge” – is no narrower, and is, if anything, wider in its meaning, in that it would extend to costs and charges incurred in consequence of, or as a result of, the Bank having entered into the share charge, even if they might not be strictly “under or in relation to” it.

31.  I do not think that Mr Thomas’ submission that the clause should be construed contra proferentem assists TAI.  For the reasons which I have explained above, it does not seem to me that the clause is ambiguous or uncertain in its meaning, such that the narrower of two competing interpretations should be adopted against the party responsible for its wording.

32.  Nor do I think that it is appropriate, in this context, to seek to identify “operative” or “dominant” causes for the incurring of particular costs and charges.  The search for an operative or dominant cause most commonly arises in the context of causation, where the objective is to ascribe to one (or more) of a variety of factors which cause or contribute to a particular situation arising, operative legal significance.  While this is generally necessary where one is seeking to determine whether a party should be responsible for injury, loss or damage caused to another, it is not, I think, particularly apposite in the present context, where one party to a contract, in this case the Bank, is seeking to define the extent of its rights to recoupment out of property charged to it.  Where, for example, the Bank has incurred costs and expenses as a result of having to bring or defend proceedings against a third party, questions of causation do not really arise.  Whether the situation is one which falls within the general rule in Parker-Tweedale v Dunbar Bank or within the exception to it, is not a matter of causation – in both situations, the mortgagee’s involvement is a result, or consequence of his being a mortgagee of the property concerned.  In both cases, the need for him to act arises as a result of the actions of a third party, a stranger to the mortgage.  The distinction between the general rule and the exception is a result of the law taking the view that it is (absent some other agreement being made) a fair allocation of risk to require the mortgagor to bear such costs where his interests are directly affected by a challenge to the title to the charged property, and not otherwise.

33.  Similarly, I do not see that there is any basis for requiring the width of clause 2.1(j) to be read down as a matter of construction, in order to bring it into line with the exception to the general rule.  Whether or not the parties have agreed to depart from the position established by the general rule and its exception is to be determined by consideration of the terms of their agreement.  In this case, I am satisfied, for the reasons already explained, that the wording of the share charge does dictate the conclusion that the default legal position has been altered in the Bank’s favour, in the way which I have described.  This is not to give the Bank carte blanche to incur any costs it thinks fit, and to do so at the expense of TAI – it will remain open to TAI to challenge such costs as being unreasonably incurred, both at the level of their being incurred at all, and at the level of their amount.  The first of these matters falls to be considered in the context of this application, whereas the second will be addressed at a later stage of these proceedings.

34.  Having dealt with the proper construction of clause 2.1(j), I go on to consider whether or not the Bank is entitled to retain out of the sale proceeds sums in respect of its costs in each of the proceedings set out in Table C to the 1 November 2007 letter.  For these purposes, I have had regard to the evidence contained in the affirmations filed for the purposes of these proceedings, and also to material in affirmations filed in relation to HCCW 974 of 2000.

35.  Item 1 of Table C relates, as I have noted, to two distinct sets of proceedings in the BVI, Action No. 196 of 1993 and Action No. 69 of 1997.

36.  Action No. 196 of 1993 was an action brought by FORFAS against TAI, leading to a judgment against it which was subsequently acquired Nam Tai by way of assignment, and used by Nam Tai to wind up TAI. Having succeeded in obtaining judgment, FORFAS obtained a charging order over TAI’s shareholding in Nam Tai, which had by this time been charged to the Bank pursuant to the share charges.  On the strength of this charging order, FORFAS went on to lodge a stop notice in respect of the shares.  In the course of attempting to sell the charged shares, the Bank requested Nam Tai to remove certain restrictive legends appearing on the share certificates, and was told by Nam Tai that it could not (or would not) do so because of the stop notice. Nam Tai indicated to the Bank that the Bank should apply to have the charging order discharged.  The Bank did this by intervening in Action No. 196 of 1993 by an application made on 18 December 1996.  On 3 October 1996, the BVI Court declined to discharge the charging order, apparently because it was of the view that the real question which arose as between the Bank and FORFAS was one of priorities.  In the light of this, the Bank thereafter took out a further summons seeking to establish the priority of its rights to the charged shares over those of FORFAS, and for an order making it clear that the Bank was entitled to dispose of the charged shares.  This resulted in further orders of the BVI court in September 1997 which discharged FORFAS’ charging order in order to enable the Nam Tai shares to be sold to satisfy TAI’s debts to the Bank, and (by a separate order) setting parameters for the sale of such shares by fixing a minimum price at which they were to be sold.

37.  It seems to me that having regard to those facts, there can be little question but that the costs incurred by the Bank in those proceedings are recoverable by the Bank out of the sale proceeds.  Such costs were incurred in order to enable the Bank to sell the charged shares. They therefore fall within both Clauses 11.6 as being part of “all costs and expenses whatsoever arising out of the exercise of the power of sale under … clause 11”.  The use of the word “whatsoever” indicates that the range of costs and expenses covered by the clause are to be given a wide coverage, and there is no reason why they should not cover these costs.  Similarly, such costs would equally appear to be “costs, charges and expenses (including legal fees) incurred by [the Bank] in connection with … enforcement of this Share Charge” and thus fall within clause 31.1, as the sale by the Bank of the charged shares is but one way in which the charge could be enforced.  Finally, I also consider that such costs are covered by clause 2.1(j), whether as “a matter arising under or in consequence of” the share charges, or “in connection with the Shares”.

38.  Mr Thomas’ initial complaint in respect of this item was that it was not very clear why the Bank had become involved in Action No. 196 of 1993.  This may have been because the evidence filed for the purpose of this application did not explain as clearly as it might have done the circumstances leading to the Bank’s intervention in that action.  However, the further material supplied shortly before this hearing (in the form of the affirmations filed in HCCW 974 of 2000) provided a fuller picture, which I have summarised above.  Mr Thomas also suggested that the question of priorities as between FORFAS and the Bank was not really one which admitted of much controversy or difficulty, as it must have been obvious that the Bank’s share charge, being prior in time to FORFAS’ charging order (having been obtained on the same day as FORFAS commenced Action No. 196 of 1993), must take precedence.  That may well be so, but it seems to me that, having been told by Nam Tai that it could not deal with the shares so long as the charging order and stop notice remained in place, it cannot be said to have been unreasonable for the Bank to take the steps which it did to enable those impediments to be removed.  I am therefore of the view that subject to questions of quantification of the appropriate amount of costs recoverable, these costs are recoverable by the Bank as against TAI, and that the Bank is therefore entitled to deduct them from the sale proceeds.

39.  Turning to BVI Action No. 69 of 1997, these were the winding up proceedings of TAI in the BVI.  Mr Jat explained, in the course of his submissions, that there were in fact two aspects to the costs incurred by the Bank in relation to these proceedings.  First, there were certain costs involved in the Bank’s participation in the winding up proceedings, principally by providing information to the liquidator of TAI in respect of the Bank’s debt and security, and in respect of the Bank’s position in the liquidation. Second, there were the costs involved in the litigation concerning Nam Tai’s scheme to destroy the Bank’s security, and deprive TAI of its Nam Tai shares, to which Nam Tai, TAI, its former liquidator Mr Hague and the Bank were all parties.

40.  So far as the first aspect is concerned, it seems to me that the Bank’s involvement in the TAI liquidation in order to provide information as to the amount of TAI’s debts to it, and as to its own position in relation to the liquidation, clearly arise as a consequence of the Bank having taken the share charges, and are thus recoverable pursuant to clause 2.1(j) in the sense in which I have construed it

41.  As for the second aspect, as I have noted, Mr Thomas accepts that the costs incurred by the Bank in disputing the validity of the purported redemptions by Nam Tai of the charged shares are costs that fall within the second part of the rule in Parker-Tweedale v Dunbar Bank so as to be in principle recoverable by the Bank as chargee.  However, Mr Thomas challenged the recoverability of such costs by contending that it was unreasonable for the Bank to have incurred them at all, since, he said, TAI itself, through its liquidator (later former liquidator) Mr Hague, was vigorously challenging the redemption, throughout the litigation in the BVI – all the way up to and including the appeal to the Privy Council.

42.  However, Mr Jat submitted that as the Bank was served (as an interested party) with the application papers in respect of TAI’s liquidator’s challenge to Nam Tai’s purported redemption of the charged shares, it was entitled to participate in the proceedings in order to protect its interests (and could not be criticised as having acted unreasonably in doing so).  Mr Jat point out that in the BVI, both at first instance and on appeal, questions of priority arose for consideration, and that for this reason, it was open to, and reasonable for, the Bank to take part in the proceedings.  When the proceedings reached the Privy Council, there was, said Mr Jat, even greater reason for the Bank to participate.  This was because by this stage, the issues involved not just the efficacy of the purported redemption by Nam Tai, which the BVI Court of Appeal had upheld, but also a question as to how restitution should be made in respect of the charged shares purportedly redeemed.  The position taken by the various parties appearing on the appeal is set out in the judgment of the Privy Council (see paragraphs 9 and 13 to 16).  Mr Hague, TAI’s former liquidator, while appealing against the decision as to the validity of the redemption, was not concerned with the question of to whom any replacement shares should be issued.  TAI’s liquidator, Mr Harrigan, appeared on the appeal, but indicated that his position was neutral.  Nam Tai submitted that if new shares were to be issued, they should be issued in TAI’s name, so that TAI’s liquidator could deal with the sale of the shares and pay the Bank what it was due out of the sale proceeds.  The Bank, having obtained leave from the Privy Council to appear on the appeal, contended (successfully) for orders requiring the replacement shares to be issued to it, in its own name – this being something it was entitled to insist on to perfect its security following TAI’s default, to enable it to exercise its power of sale.

43.  I do not think that it can be suggested that it was unreasonable for the Bank to have participated in these proceedings.  At the earlier stages, it was justified in doing so having regard to the questions of priority that arose.  At the Privy Council stage, it seems to me that there was every reason for the Bank to participate to protect its interests.  Nam Tai was contending for a result which would leave the shares and their disposal in the hands of TAI’s liquidator.  From the Bank’s point of view, this would be a deeply unsatisfactory outcome since, as Lord Hoffman pointed out, it would deprive the Bank of its power of sale as mortgagee.  It would leave the sale in the hands of TAI’s liquidator, who by this stage was being funded by Nam Tai, TAI’s most substantial unsecured creditor, against a background of disputes as to the amount of TAI’s indebtedness to the Bank, and litigation between Nam Tai and the Bank.  It was clearly in the Bank’s interest to ensure that, if Mr Hague’s appeal were successful, the shares to be reissued were reissued to it, and not to TAI.  Mr Hague, being concerned only with the validity of the redemption, and being no longer the liquidator of TAI, did not concern himself with this aspect of the matter.  Mr Harrigan, TAI’s current liquidator, had taken a neutral stance.  There was therefore no party before the Privy Council interested in putting forward the Bank’s point of view, and it was accordingly entirely reasonable for it to seek to participate in order to do so.  Further, for what it is worth, the fact that the Bank was given leave to appear, and was awarded its costs, also suggests that its participation was neither unnecessary nor unreasonable.

44.  I am therefore satisfied that the Bank is entitled to recoup these costs out of the sale proceeds also.

45.  Turning to item 2 in Table C, the California proceedings, these involved a claim by Nam Tai that the Bank had been involved in a conspiracy with Price Waterhouse (Mr Hague’s firm) and Paine Webber (stockbrokers involved in the sale of the charged shares) in connection with the sale of the charged shares.  This action was short-lived, and was fairly quickly dismissed.  However, the Bank incurred costs in relation to it.  Mr Thomas’ position was that an action of this nature fell outside the ambit of both the rule and the exception in Parker-Tweedale and was an a fortiori case where the Bank could not recover its costs.  However, having regard to the views which I have expressed as to the proper construction of clause 2.1(j), it seems to me that these costs, too, are recoverable by the Bank, as they arose out of the Bank’s enforcement of its power of sale under the share charges, and therefore arose in consequence of the share charges, within the meaning of clause 2.1(j), or were from a matter that arose in consequence of the share charge.

46.  So far as item 3 of Table C is concerned, this relates to proceedings in New York and Hong Kong (in Hong Kong, HCMP 166 of 2005), in which Nam Tai sought discovery and evidence from the Bank in connection with proceedings brought in New York by Nam Tai against Paine Webber, for alleged conspiracy with the Bank in respect of the sale of the charged shares.  These proceedings too were short-lived, with the New York court setting aside a subpoena duces tecum and ad testificandum against the Bank, and dismissing Nam Tai’s claim on forum grounds.  Consequent upon the dismissal of its claims in New York, Nam Tai abandoned HCMP 166 of 2005, in which it sought to enforce a letter of request that had been issued by the New York court to enable evidence to be obtained in Hong Kong from the Bank.  Again, it seems to me that the Bank’s involvement in these proceedings can only have been as a consequence of the share charge, as the proceedings concerned the process of sale of the charged shares.  Like the Californian proceedings in item 2 of Table C, it seems to me that costs incurred by the Bank in relation to these proceedings are equally covered by clause 2.1(j), and are therefore recoverable out of the sale proceeds.

47.  Item 4 of Table C, the proceedings in HCCW 974 of 2000 in which TAI unsuccessfully sought to inspect the records in TAL’s liquidation in Hong Kong (and the costs of the appeal from my decision – CACV 234 of 2007), are not a matter that is suggested to arise under or in consequence of the share charges.  However, Mr Jat submits that the costs incurred by the Bank in these proceedings, too, are to be recouped out of the sale proceeds, as a result of clauses 11.6 and 16.1 of the share charges.  Mr Jat’s argument is that by seeking to inspect the liquidation records of TAL, TAI was necessarily asserting that it was a creditor of TAL, and seeking to assert rights as a creditor in TAL’s liquidation, doing so at a time when it was not entitled to do so since the Bank had not yet been fully repaid.  Mr Thomas suggested that my decision in that case had not in fact found that there was any breach by TAI of clause 16.1 of the share charge.  However, I consider that that is the necessary consequence of the views that I expressed at paragraphs 50 to 54 of my judgment in that case.  There, I took the view that in order have locus to make an application for inspection, TAI had of necessity to assert that it was a creditor of TAL, and in doing so would be in breach of clause 16.1 of the share charges.  As TAI had made the application, it was, in breach of clause 16.1, asserting a status as a creditor of TAL, and in doing so necessarily competed with the Bank.  TAI having, in breach of the clause, asserted its status as a creditor of TAL by making the application for inspection, the Bank’s intervention in HCCW 974 of 2000 was, I think, a matter that arose out of that breach.  In the circumstances, I am satisfied that these costs too, are recoverable out of the sale proceeds.

48.  Finally, so far as item 5 of Table C is concerned, this relates to the costs of HCA 1619 of 2007, in which, faced with Mr Harrigan having purported to assign any rights of action he might have against the Bank as liquidator of TAI, including his rights pursuant to the charges, and subsequent attempts by Nam Tai to interfere in the Bank’s exercise of its power of sale, the Bank took proceedings to restrain threatened action by Nam Tai in New York, and to have the assignment declared void as against the Bank.  I held, in my judgment in those proceedings, that the purported assignment was void, being in breach of clause 24.1 of the share charges.  Accordingly, the Bank’s costs of these proceedings too, are recoverable pursuant to clause 11.6, as they arose out of the breach of clause 24.1.

49.  Thus, I am satisfied that the Bank is entitled under the terms of the share charges to deduct its costs incurred in the proceedings described under each of the items 1 to 5 in Table C of the 1 November 2007 letter, subject to questions of quantification of those costs.

50.  The issue of quantification gives rise to the second preliminary question, as it will be necessary to consider the basis on which the costs incurred by the Bank are to be assessed.  This leads to two questions of principle, which are covered by this question, and one of fact, which is not.  The questions of principle are: first, whether under the terms of the share charges, the assessment of the appropriate amount of costs to be recovered by the Bank is to take place (as TAI suggests) by reference to the party and party basis of assessment of costs, or (as the Bank submits) by reference to the indemnity basis of taxation; and second, if the indemnity basis, whether the Bank has lost its right to insist on using that basis in the light of costs orders actually made in various of the proceedings to which it was a party.  The question of fact, to be determined at a later stage, is what, on whichever basis of taxation is to be adopted, the quantum of such costs should be – in particular, whether any deduction should be made in respect of the sums put forward by the Bank as representing the costs incurred by it.

51.  In the share charges, both clauses 2.1(j) and 31.1 refer to TAI paying “all costs, charges and expenses” incurred by the Bank that fall within those clauses, while clause 11.6 requires TAI to indemnify the Bank against “all …costs and expenses whatsoever” arising out of the matters referred to in that clause.

52.  Mr Thomas, for TAI, referred me to the decision of Vaisey J in Re Adelphi Hotel (Brighton) Ltd [1953] 1 WLR 955, in which the expression “all costs charges and expenses” was held to entitle a mortgagee only to payment of his costs recoverable under the mortgage on a party and party basis, and suggested that I should follow this decision. However, as appears from Fisher and Lightwood’s Law of Mortgage (11^th ed) at para 55-10, the construction of this phrase adopted by Vaisey J has not generally been followed in other English decisions – see note 2 under this paragraph, where it is pointed out that in several later English decisions, the expression was construed as giving rise to an entitlement to costs on the indemnity basis.  In Drummond v S & U Stores Ltd [1981] 1 EGLR, a landlord and tenant case, Glidewell J declined to follow Adelphi Hotel, and held that the expression called for any taxation to be on an indemnity basis.  In Bank of Baroda v Panessar [1987] Ch 335, Walton J, who does not appear to have been referred to either Adelphi Hotel or Drummond, showed little hesitation in regarding the expression as importing the indemnity basis of taxation.  Further, in Fairview Investments Ltd v Sharma (unreported, 14 October 1999, CA), also a landlord and tenant case, Chadwick LJ considered that a clause requiring the lessee to pay “all” expenses, while not entitling the lessor to recover costs and expenses unreasonably incurred or unreasonable in amount, did call for an assessment of costs on the indemnity basis in order to “enable the lessor to recover the costs which can properly be recovered”.  It may also be noted that in Gomba Holdings (to which I have referred above), Vinelott J at first instance also doubted the correctness of the decision in Adelphi Hotel, although the Court of Appeal expressed no view on the matter, perhaps because the position there was put beyond doubt by the express provision that all costs were to be recoverable on a “full indemnity basis”.

53.  In my view, the clear weight of authority in England points towards the interpretation of the phrase “all costs …” as importing a taxation on an indemnity basis when actual assessment of the costs recoverable is in issue. For my part, I think that this is the appropriate construction to be placed on the phrase, since as a matter of ordinary language, “all costs” means simply that – that all costs incurred are to be recoverable.  While costs that are unreasonably incurred or unreasonable in amount will not be recoverable despite these words, as pointed out by Chadwick LJ in Fairview Investments, this exclusion would seem to rest more on the basis of public policy than language.

54.  I therefore consider that under the terms of the share charges here, the Bank is entitled to recover all of its costs incurred in the proceedings mentioned in Table C of the 1 November 2007 letter, and that such costs are, should it be necessary for them to be assessed, to be assessed by reference to the indemnity basis of taxation.

55.  Has the Bank lost its right to have its costs assessed by reference to the indemnity basis of taxation because it has, in some of the proceedings concerned, received costs orders in its favour on the party and party basis?  This question was considered by the English Court of Appeal in the Gomba  Holdings case.  There, Nourse LJ said (at p.194 C-E):-

“(iv) A decision by a court to refuse costs, in whole or in part, to a mortgage litigant, may be a decision in the exercise of the section 51 discretion [i.e. the ordinary exercise of the court’s discretion to make an appropriate costs order in respect of proceedings before it] or a decision to fix the terms on which redemption will be allowed or a decision as to the extent of a mortgagee’s contractual right to add his costs to the security or a combination of two or more of these things. The pleadings in the case and the submissions made to the judge may indicate which or the decisions to which we have referred has been made.

“(v)  A mortgagee is not, in our judgment, to be deprived of a contractual or equitable right to add costs to the security merely by reason of an order for payment of costs made without reference to the mortgagee’s contractual or equitable rights and without any adjudication as to whether or not the mortgagee should be deprived of those costs.”

56.  This is, in my view, clearly the correct approach to this question.  Applying this approach to the various proceedings with which we are concerned:-

(1)   So far as the BVI proceedings are concerned, both in relation to Action No. 196 of 1993 and Action No. 69 of 1997, there is nothing to suggest that the Bank’s entitlement to add its costs to the sums secured by the share charge was the subject of consideration by any of the courts dealing with the matters at any stage.  Accordingly, it would not be right to deprive the Bank of the right to recover such costs as it would be entitled to on an indemnity basis taxation, subject to its giving credit (which it appears to have done) for any sums paid to it in respect of such costs by Nam Tai on a party and party basis.

(2)   So far as the Californian and New York proceedings are concerned, the question does not arise, as no costs orders were made in favour of the Bank in those proceedings.

(3)   As for the three sets of Hong Kong proceedings, there is nothing to suggest that the question was considered in HCMP 166 of 2005 (which was, in any event, a proceeding between Nam Tai and the Bank, in which the Bank’s rights as mortgagee would not appear to have arisen for consideration).  As for HCCW 974 of 2000 and HCA 1619 of 2007, while these were proceedings between the Bank and TAI, the question of the Bank’s rights to a higher basis of taxation was not considered – in each case, I made costs order nisi, no submission having been made as to the effect of the share charges on questions of costs.  As for CACV 234 of 2007, there is no reason to think that the position was any different.  In the circumstances, I do not think that the Bank has lost its right to insist, in the context of the accounting process now being undertaken, on recovering its costs on an indemnity basis, in accordance with its contractual rights.

57.  This leaves the third preliminary question – whether the Bank is entitled to withhold an amount in respect of further costs that it may incur.  As to this, Mr Thomas accepted that the Bank was entitled to withhold a reasonable amount to cover its anticipated costs of these proceedings, by which the accounting process in respect of the proceeds of sale under the share charge would be carried out, as such costs would clearly fall within the terms of the share charge as costs which the Bank could add to its security.  Mr Thomas said, however, that that was as far as the right to retain sums could go.  Mr Jat submitted that having regard to the litigious history of the relationship between the Bank, TAI and Nam Tai, it was not unreasonable for the Bank to seek to withhold sums against the risk that future costs may be incurred.

58.  In my view, the Bank is entitled to withhold, or seek to retain, monies in respect of reasonably anticipated future costs. However, at this stage, some time now having elapsed since the last set of litigation in HCA 1619 of 2007, the shares having been sold (and insofar as they did not need to be sold, returned to TAI), there would seem to be no real basis for seeking to withhold any funds beyond a reasonable amount in respect of the anticipated future costs of these proceedings to finalise the accounting process.  Thus, while I would answer the third question in the affirmative, I do make it clear that the extent of the Bank’s right to set aside sums for its future costs and expenses is, on the basis of the evidence that I have before me, limited to this extent.

59.  Thus, I would answer the preliminary questions as follows:-

(1)   The Bank is entitled to recover from the proceeds of sale its costs and expenses incurred in all of the legal proceedings set out in Table C of the 1 November 2007 letter.

(2)  Such costs and expenses are to be deducted on a full indemnity basis.

(3)  The Bank is entitled to set aside from the proceeds of sale a provision for its future costs and expenses, subject to the observations I have made in paragraph 58.

60.  So far as the costs of this application are concerned, the Bank having been wholly successful in its contentions, I shall make an order nisi that TAI is to pay the Bank its costs of this application.  Having regard to the terms of the share charges, since the application is made in relation to the accounting process thereunder, and the Bank’s costs in relation to it clearly constitute costs that are recoverable under its terms, I shall also make an order nisi that such costs are to be taxed on the indemnity basis, if not agreed.