SARAS GOPI v. BINA DEEGAN

HCA 3075/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 3075 OF 2015

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RULING

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Introduction

1.  When giving judgment on Mrs Deegan’s application for security for costs, I said that interlocutory applications in family disputes tend to be contested with the tenacity normally reserved for the trial of the action.  That has turned out to be true about the issue on which the court has now been asked to rule.  That is whether the form of the charge over Mrs Gopi’s property in London which Mrs Gopi has offered will enable Mrs Deegan to enforce the charge if Mrs Gopi fails to comply with any order for costs which may be made against her.  The parties did not object to me determining the issue on the basis of their written submissions, and this is my ruling on that issue.

Three preliminary points

2.  Three preliminary points should be made.  The first is that charging the plaintiff’s property to the defendant is not the usual way of providing security for a defendant’s costs.  There are two reasons for that.  First, providing security for costs in that way is liable to cause problems.  There may be uncertainty over the true value of the property.  It may take some time for the security to be realised.  And if the property has to be sold in order to realise the security, there may be arguments over whether it was sold at a fair price.  Secondly, in most cases, it will be unnecessary. If a plaintiff wants to raise the money by charging his or her property rather than paying money into court, the most obvious way to do that is to obtain a bank guarantee for the appropriate sum and for the guarantee to be secured by a charge over the property in favour of the bank: see the observations of Longmore LJ in AP (UK) Ltd v West Midlands Fire and Civil Defence Authority [2001] EWCA (Civ) 1917 at [13] and [33].  However, this was a case in which Mrs Gopi’s counsel asked the court for the security to be provided by a charge over her property in London, and although Mrs Deegan’s solicitor made the point that it was not the usual way in which security for costs was provided, he did not object to the security being provided in that way in this case.

3.  Having said that, no form of security is more easily enforceable than money paid into court.  All that is needed is an order for its payment out of court.  But contrary to what Mrs Deegan’s solicitors contend, that does not mean that a charge over Mrs Gopi’s property should put Mrs Deegan in no worse position than she would have been in had security been provided by a payment into court.  Nor does it mean that enforcing any charge over Mrs Gopi’s property should be just as easy.  It will never be, and to say that it should be is inconsistent with their agreement for the security to be provided by such a charge.  It may well be, to quote from Stephenson Harwood’s letter of advice (as to which see para 6 below), that Mrs Deegan would be “materially better protected” by money paid into court than a charge over Mrs Gopi’s property, but since her solicitor agreed (albeit reluctantly) to the security taking the form of a charge, Mrs Deegan cannot now go back on that.  Having said that, the charge still has to be capable of being enforced without too much difficulty or the need for further litigation. 

4.  The second preliminary point is this.  Both sides were confident that the terms of the charge could be agreed.  That was why the parties proposed that the order I should make would not set out the terms of the charge, save to provide that its terms were to be agreed within 14 days.  I was content to go along with that, though (a) Mrs Gopi still had the option of providing the security by making a payment into court, and (b) I gave the parties liberty to apply in case they were unable to agree the terms of the charge.  In the event, the parties were unable to agree the terms of the charge, and it was pursuant to this liberty to apply that Mrs Gopi has brought the issue back to court.

5.  An unscrupulous litigant in Mrs Deegan’s position could scupper Mrs Gopi’s ability to provide security by a charge over her property by simply refusing to agree whatever terms Mrs Gopi’s solicitors proposed.  Accordingly, and in order to give effect to the agreement of the parties that security could be provided by a charge over Mrs Gopi’s property, the order I made has to be treated as subject to a condition that Mrs Deegan’s consent to such terms as Mrs Gopi’s solicitors proposed should not be unreasonably withheld.  In these circumstances, the outcome of this application will turn on the reasonableness of the terms proposed by Mr Gopi’s solicitors.

6.  The third preliminary point relates to the advice which the parties have received from solicitors in the UK.  Withers have given advice to Mrs Gopi, and Stephenson Harwood have given advice to Mrs Deegan. There is no direct evidence whether they are the parties’ solicitors in the UK, or whether they were simply instructed by the parties’ solicitors in Hong Kong to provide independent advice.  To be on the safe side, I have treated the advice they have given, not as expert evidence, but as submissions adopted by whichever party the advice was given to.

The proposed charge

7.  The charge which Mrs Gopi’s solicitors have offered is in the form of a form prescribed by the Land Registry of England and Wales for a legal charge of a registered estate.  The form is Form CH1.  By it Mrs Gopi covenanted to pay to Mrs Deegan those of Mrs Deegan’s costs (a) which were incurred up to when the action was set down for trial and (b) which were ordered to be paid by Mrs Gopi to Mrs Deegan by the Court of First Instance, up to a maximum of $2,000,000.00.  The performance of that obligation was secured by a charge on Mrs Gopi’s flat in Maida Vale, London.  If no such payment was made within six months of the date of any relevant order for costs, Mrs Deegan could immediately exercise her power of sale under the charge.

A deed of charge?

8.  Mrs Deegan’s solicitors contend that the court’s order contemplated that the charge would be created by means of a deed of charge.  A number of reasons have been advanced in support of that contention, but they boil down to three things:

(i) In Hong Kong, a charge is created by a deed of charge.  There is no equivalent of Form CH1.

(ii) Form CH1 is appropriate for use by persons or institutions who lend money to the chargor, as it describes the chargor as the borrower and the chargee as the lender.  It is therefore inappropriate for it to be used in a case in which a charge is created to secure another form of debt.  What the order had therefore contemplated was a bespoke deed of charge, tailored to secure the type of prospective debt which Mrs Gopi might incur.

(iii) At the time of the court’s original order for security for costs, the parties’ solicitors in Hong Kong were unaware of the practice in England and Wales of using Form CH1 to create a charge over property.  Its use could therefore not have been contemplated in the present case.

9.  All this misses the point.  The court did not have in mind, one way or the other, the means by which the charge should be created — and I should know since it was I who made the order.  I just left it to the parties to agree the terms of the charge, and that included the means by which the charge should be created.  It may be that Form CH1 is commonly used for commercial lending — and even then only in the UK. And it may be that Mrs Deegan’s solicitors had in mind a bespoke deed of charge.  But none of that that means that Mrs Gopi’s counsel or solicitors had turned their minds, when the nature of the security was being discussed in court, to the form which a charge should take.  In any event, Form CH1 operates as if it is a deed of charge.  The box in the form which deals with the execution of the document refers to the form being signed by both the chargor and the chargee “as a deed”.

Third party rights

10.  At the original hearing, the court was told that Mrs Gopi’s flat was unencumbered.  Mrs Deegan’s solicitors say that this was one of the reasons why they were content for security for her costs to be provided by a charge over the flat.  At one stage, it looked as if what the court had been told had been incorrect: the CH1 initially prepared on Mrs Gopi’s behalf referred to a “second legal mortgage”.  But it was later said that this had been an error, and Mrs Deegan’s solicitors do not dispute that.  However, although the flat is unencumbered, Mrs Deegan’s solicitors have expressed concern about someone other than Mrs Gopi who spends time at the flat.  Indeed, it is claimed that someone known as Amar lives in the flat with Mrs Gopi, and has done so for five years.  Mrs Deegan knows that this is so, she says, because of the “numerous occasions” when she herself stayed in the flat in recent years.  Amar has been described by Mrs Deegan variously as a companion or a housekeeper.  Mrs Gopi disputes that.  Her solicitors have said that only Mrs Gopi lives in the flat, and that a “nurse carer” (presumably Amar) only stays overnight occasionally.  That is not quite what Withers originally said, which was that Amar is employed as a nurse and stays at the flat five nights a week, though Withers subsequently said that Amar only visits the flat during the day, and that “if she stays overnight it is only on an occasional basis”.

11.  Stephenson Harwood point out that neither a copy of Amar’s contract of employment nor a copy of the statement setting out the terms of her employment have been produced (despite the existence of the latter being a requirement under English employment law), nor have there been produced copies of Amar’s itemised pay statements or evidence that Mrs Gopi has paid employers’ national insurance contributions to the Revenue.  Indeed, Stephenson Harwood have not found anyone with Amar’s full name on the register held by the Nursing and Midwifery Council.  Having said all that, Amar’s status is not something I can resolve on an application of this kind, even though it is relevant to the nature of any rights which Amar might have acquired in the flat.

12.  If Amar is merely Mrs Gopi’s employee, she will have no more than a licence to occupy the flat for the purpose of carrying out her duties, and this licence can be terminated relatively easily.  On the other hand, if Amar really is Mrs Gopi’s companion living with her in the flat, it may be open to her to claim that she has some interest in the flat.  The example given by Stephenson Harwood is that on Mrs Gopi’s death, Amar might claim that Mrs Gopi had promised her the flat in return for looking after her in her old age.  Such a promise would give Amar an interest in the flat: see Gillett v Holt [2001] Ch 210 and Thorner v Major [2009] 1 WLR 776.  The effect of section 29(2)(a)(ii) of, and para 2 of Schedule 3 to, the Land Registration Act 2002 is that such an interest would rank in priority to the charge, with the result that the charge would be ineffective in providing security for Mrs Deegan’s costs.

13.  None of this might happen, of course, but the possibility that it could is something which gives rise to a legitimate concern on Mrs Deegan’s part about the suitability of the charge as security for her costs.  Having said that, though, that concern can be met, as Stephenson Harwood acknowledge, by Amar postponing any interest she may have in the flat to that of the charge.  Mrs Gopi is prepared to request Amar to do that. Although Withers say that this is unnecessary in view of the true nature of Amar’s status, Mrs Gopi is willing, “as a gesture of good will”, to ask Amar to do that once Amar has taken legal advice on the matter.  It is noteworthy that it is not asserted on Mrs Gopi’s behalf that Amar has agreed to postpone any interest of hers in the flat to that of the charge, but the execution of a deed of postponement by Amar following independent legal advice would dispose of any concerns about the utility of the charge as an acceptable form of security.  The order I propose to make will be subject to a condition dealing with that.

14.  There is one other relevant consideration here. It is said that Mrs Gopi is in the habit of using “family arrangements” to defeat creditors’ rights.  In the circumstances, Mrs Deegan’s solicitors want Mrs Gopi to warrant on oath that no such family arrangements exist which might jeopardise the enforceability of the charge.  That request has been made three times: in Mrs Deegan’s solicitors’ letter of 23 February 2017, in Stephenson Harwood’s letter of advice and in the written submissions filed on behalf of Mrs Deegan.  The reasonableness of that request has not been addressed by Withers or by Mrs Gopi’s solicitors.  If there are no such family arrangements in place, Mrs Deegan loses nothing by giving an appropriate warranty to that effect.  If there are such family arrangements in place, it is questionable whether the charge represents sufficient security at all.  Again, the order I propose to make will be subject to a condition dealing with that.

Other concerns

15.  A number of other concerns have been expressed about the charge.  I deal with them in turn.

16.  Date of repayment.  The charge cannot be enforced until six months have elapsed since any relevant order for costs was made.  It is contended that this is too long. I do not agree.  There may have been some merit in that suggestion if Mrs Deegan had to make an application to the court for the enforcement of the charge.  But clause 9.5.1 of the charge provides that Mrs Deegan’s power of sale arises as soon as the six months has elapsed without referring to any need on her part to make an application to the court.  I therefore assume that no such application needs to be made for the charge to be enforced.  On that footing, a period of six months for Mrs Gopi to pay the costs is not unreasonable, bearing in mind that in the absence of agreement those costs will have to be taxed in the meantime.

17.  The costs of enforcement.  The charge does not address the cost of its enforcement.  That is because its enforcement is governed by section 105 of the Law of Property Act 1925, which provides that the costs of such enforcement are to be assessed on the standard basis.  Withers assert that the assessment of such costs on the standard basis is “the general rule when a charging order is enforced”, whereas Stephenson Harwood say that “[a]ny properly advised chargee requires a clause in the charge enabling it to get its enforcement costs paid on an indemnity basis”.  That makes sense to me, especially in a case such as this where Mrs Deegan’s solicitor’s agreement to the security being provided by a charge on Mrs Gopi’s flat was something of an indulgence.  The order I propose to make will be subject to a condition dealing with that.

18.  The costs covered by the charge.  Clause 9.1.4 of the charge defines any relevant order for costs as “an order for the payment of the costs incurred by [Mrs Deegan] … upon completion of the trial of [the] action and after taxation of such costs unless the amount of such costs are otherwise agreed by [Mrs Gopi]”.  Stephenson Harwood’s concern relates to the words “upon completion of the trial”.  They say that their effect is that the costs of an appeal, or costs following a notice of discontinuance, or in connection with applications for orders for an interim payment or for a payment on account of costs, would not be secured. The concern about the costs of an appeal is misconceived.  The only costs for which security was ordered were those costs incurred by Mrs Deegan up to the date on which the action is set down for trial.  The same is true of the costs incurred in connection with applications for orders for an interim payment or for a payment on account of costs.  If the costs of such applications are incurred before the action is set down for trial, those costs are secure (provided that the limit of £2,000,000.00 for all Mrs Deegan’s costs up to the date of setting down is not exceeded), but not if they are incurred after that.  So far as the costs (presumably of the action) in the event of Mrs Gopi discontinuing her action are concerned, I am uncertain what Stephenson Harwood’s concern actually is.  Withers think that the concern is that the costs will not have arisen following the conclusion of the trial, and that the words “upon completion of the trial” therefore exclude those costs.  If that is Stephenson Harwood’s concern, it is easily remedied by the words “upon completion of the trial of [the] action” being replaced by “following the conclusion of the action”. Unsurprisingly, Mrs Gopi is agreeable to that, and the order I propose to make gives effect to that.

19.  Restrictions on disposal.  Form CH1 contains a box (which can be included in the charge or not) in which the “borrower” can state that it applies to enter the standard form of restriction on the disposal of the property (or the creation of a further charge over the property) in the proprietorship register.  The standard form is Form RX1.  No such statement was made by Mrs Gopi in the proposed charge.  Stephenson Harwood make the point that in these circumstances Mrs Gopi could dispose of the flat, or create a further charge over the flat, without Mrs Deegan’s consent.  Indeed, Stephenson Harwood point out that the charge does not even contain an undertaking by Mrs Gopi that she will not do either of these things.  All that is true, but it is beside the point.  Once the charge has been registered with the Land Registry, Mrs Gopi will not be able to dispose of the flat free of Mrs Deegan’s charge, or create a further charge over the flat which would have priority over Mrs Deegan’s charge. So neither the completion of Form RX1 nor an undertaking not to dispose of the flat is necessary.  Mrs Deegan’s charge over the flat retains its utility as security for her costs.

20.  Priority searches.  The charge over Mrs Gopi’s flat will be valueless if it is disposed of or further charged prior to the charge’s registration.  Stephenson Harwood make the point that Mrs Gopi has not offered a priority search to deal with this eventuality.  That is so, but if Mrs Deegan’s concern about this is a real one (rather than one raised only for the purpose of persuading the court that a charge over the flat does not provide Mrs Deegan with sufficient security for her costs), there is nothing to prevent her solicitors from conducting such a search themselves.

21.  Inspection of the flat.  Stephenson Harwood say that it is common for a property to be inspected before a charge over it is granted to ensure that no-one else is in occupation of the property (who might have rights in respect of it) and that the property is in a satisfactory condition.  No such inspection has been offered.  The answer to that is that no such inspection has ever been sought by Mrs Deegan’s solicitors, there is no suggestion that anyone other than Amar is living in the flat (despite the access which Mrs Deegan claims to have to the flat) and there is no suggestion that the condition of the flat is anything other than satisfactory.

22.  Forfeiture. Should a lessee be in breach of its repairing covenant, it is possible that the landlord will seek to forfeit the lease.  Stephenson Harwood voice that concern here.  That presupposes that Mrs Gopi is a lessee of the flat rather than its owner.  I assume that to be the case, though it has never been spelled out. However, Withers say that it is the landlord who is responsible for any structural repairs to the flat, and that Mrs Gopi is liable only for its maintenance and decoration.  Withers deny that Mrs Gopi is in breach of any repairing covenant in the lease, and it must be remembered that forfeiture is usually the remedy of last resort for a landlord, bearing in mind the many steps which a landlord must take before the lease can be forfeited.  It must also be remembered that the lessee can apply for relief against forfeiture — which will invariably be granted if the breach of covenant has been remedied in the meantime.  In the circumstances, the risk of forfeiture is too remote for it to affect the adequacy of the charge as security for Mrs Deegan’s costs.

Conclusion

23.  For these reasons, I have concluded that the terms of the charge proposed by Mrs Gopi (with the words “upon completion of the trial of [the] action” in clause 9.1.4 being replaced by “following the conclusion of the action”) will enable Mrs Deegan to enforce the charge without too much difficulty or the need for further litigation if Mrs Gopi fails to comply with any orders for costs until the action has been set down for trial, up to a maximum of $2,000,000.00, on condition that, within 28 days of this ruling,

(i) Amar executes a deed of postponement whose effect is to postpone any interest which she may have in the flat to that of the charge,

(ii) Mrs Gopi files an affidavit in which she deposes that there are no family arrangements of which she is aware which might jeopardise the enforceability of the charge, and

(iii) Mrs Gopi undertakes to the court through her solicitors that she will pay Mrs Deegan’s costs of enforcing the charge on the indemnity basis.

24.  At present I see no reason why Mrs Deegan should not be required to pay the bulk of Mrs Gopi’s costs relating to the issues which this ruling has addressed.  It is true that the language of clause 9.1.4 has to be altered in one minor respect, but I did not regard that as necessary.  It is also true that I have only approved the charge proposed by Mrs Gopi subject to certain conditions, but I have rejected most of the objections raised on behalf of Mrs Deegan.  In particular, I have rejected the core point made on her behalf that Form CH1 was inappropriate, and that what was required was a deed of charge.  My current thinking is that the fairest order to make is that Mrs Deegan must pay to Mrs Gopi 60% of her costs incurred in respect of the issues which this ruling has addressed, limited to those costs incurred from 14 days after the draft charge was first sent to Mrs Deegan’s solicitors for their approval, those costs to be taxed if not agreed, but not to be paid until the conclusion of the action.  I make an order nisi to that effect.

25.  I conclude with two observations.  First, I was left with the distinct impression that Mrs Deegan’s solicitors regretted agreeing to the security being provided by a charge over Mrs Gopi’s flat, and they therefore took every point which was available to them, however unmeritorious the point might be, to persuade the court to resile from what the parties had agreed, and to revert to the usual order that security for costs be provided by a payment into court.  The difficulty with that is that the court was obliged to give effect to what the parties had agreed, provided that it provided Mrs Deegan with sufficient security for her costs.  Secondly, the resolution of the issue to which this application relates has resulted in the expenditure of very considerable legal costs, which many people would think were wholly disproportionate to the minor issue at stake.  The parties would, I think, be well advised to think long and hard before engaging in costly skirmishes which will only result in further depleting family assets.