GRAND TRADE DEVELOPMENT LTD. v. BONANCE INTERNATIONAL LTD.

HCMP 2342/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2342 OF 2000

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J U D G M E N T

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Introduction

1. This is yet another action relating to requisitions on title arising from the manner of execution of title documents by limited companies. The background facts are undisputed and are as follows.

The Background Facts

2. By a sale and purchase agreement dated 13 April 2000 between the Plaintiff purchaser and the Defendant vendor, the parties agreed to convey a flat in Bowen Place, Bowen Road, Hong Kong. There were the usual terms regarding:-

1. the vendor's duty to show and give good title in accordance with s. 13 of the Conveyancing and Property Ordinance, Cap. 219 (Clause 15.01 thereof);

2. delivering requisitions and objections to title within 7 working days after the date of receipt of title documents (Clause 16.01).

3. Requisitions on title were raised subsequent to the date of the sale and purchase agreement. Those relevant to this action relate to the execution of 2 assignments respectively by 2 companies (set out below).

4. The vendor of the assignment dated 29 April 1995 was a Manibest Investments Limited ("Manibest"). Manibest executed the assignment by:-

(a) sealing it with the common seal of Manibest;

(b) signing it by one "Adrian John King representing FK Directors Limited, [Manibest's] director".

5. The provision in the articles of association of Manibest relating to execution is Clause 23 which provides:-

"(a) The Seal of the Company shall be kept by the Board of Directors and shall not be used except with their authority.

(b) Every document required to be sealed with the Seal of the Company shall be deemed to be properly executed if sealed with the Seal of the Company and signed by the Chairman of the Board, or such person or persons as the Board may from time to time authorize for such purpose".

6. The situation regarding the assignment dated 20 December 1996 is similar. The vendor thereof was a Winkit Properties Limited ("Winkit"). Winkit executed the assignment by:-

(a) sealing it with the common seal of Manibest;

(b) signing it by "its director, Chan Siu Kit".

7. Winkit's articles of association relating to execution of documents are the same as those for Manibest and provide that:-

"20 The Seal of the Company shall be kept by the Board of Directors and shall not be used except with their authority.

21 Every document required to be sealed with the Seal of the Company shall be deemed to be properly executed if sealed with the Seal of the Company and signed by the Chairman of the Board, or such person or persons as the Board may from time to time authorize for such purpose".

Was there any Defect in Title?

8. Before turning to the actual requisitions and the answers given thereto (under the heading "The Requisitions and the Answers" below), I shall deal first with the arguments raised by the parties' counsel at the hearing regarding the Defendant's title.

9. Mr Lam for the Plaintiff contends that the Defendant's title is defective relying on the following cases:-

1. Wong Yuet Wah Mandy v. Lam Tsam Yee and Another [1999] 3 HKC 268;

2. Li Ying Ching v. Air-Sprung (Hong Kong) Limited [1996] 4 HKC 418;

3. Lee Chat v. China Roll Industries Limited [1998] 1 HKC 269;

4. Ho So Yung v. Lei Chon Un [1998] 2 HKC 697.

10. He submits that by reason of the decisions in Wong Yuet Wah Mandy and Li Ying Ching, it is now settled law that s. 23 of Cap. 219 (presumption as to due execution) only applies when there is evidence on the face of the title document that the person who executed it has been duly authorized to do so. In the absence of such evidence, there is a "blot" in the vendor's title.

11. Save as regards Li Ying Ching and Ho So Yung, Mr Lee for the Defendant argues that the decisions relied on by the Plaintiff are distinguishable. This will be discussed below.

(1) Execution of Documents by Companies at Common Law

12. Mr Lee submits that in order to properly determine the validity of the assignments executed by Manibest and Winkit, it is necessary to examine how a limited company can validly execute a document at common law. In this connection, he refers to Woo Turban and Another v. Taiwan Fuji Trading (HK) Limited [1995] 2 HKC 481:-

"On this question of execution of company documents, extracts from Gore-Brown on Companies are cited:

Para 5.6 ... Where a document has to be sealed, most articles provided that this may be done by a director and the secretary or by two directors. The cases establish that where a document is executed with the signature or signatures that the articles require, its formal validity cannot be contested by the company, but where this is not the case, the document is not binding on the company ...

Para 5.8 ... The mere affixing of the seal of a corporation is sufficient without witness, and unless the articles provided that the directors shall attest, it is not necessary, though it is customary, for them to do so. Where the articles have such provision, the signature of the directors is not an attestation in the ordinary sense, but is part of the execution of the deed, and it would seem to follow that without such signatures, the execution is not complete ... " (emphasis supplied) (pp. 484-5, per Leong, J (as he then was)).

Although the learned Judge did not expressly approve the above passages, it appears from the tenure of his judgment that he approached the matter on the basis that they were legally correct. After having considered the above passages and those set out below regarding this point, I agree with Mr Lee's submission that, in the absence of requirement to the contrary by the articles of association, the mere affixing of a company's seal is sufficient without witness to make the document binding on the company.

13. The point was also discussed in Barnsley's Conveyancing Law and Practice (1996) 4th Ed., p. 453:-

"(f) Execution by corporations

[After referring to s. 1 of the Law of Property (Miscellaneous Provisions) Act 1989 which only applies to individuals] ... The execution of a deed by a corporation aggregate requires the affixing of its seal. This is no mere empty formality, since a corporation, for obvious reasons, cannot sign documents ... ".

14. In Shears v. Jacob (1865-66) LR 1CP 513, the manner of execution by a company was discussed. It must, however, be noted that this was done in the context of whether the directors and secretary of the company have signed as attesting witnesses, thus rendering the document void as a bill of sale under the Bills of Sale Act. The Court of Common Pleas said:-

"But I think that there is no pretence for saying that [the directors] attested the making of this instrument. They have merely put their names to it for the purpose of authenticating the seal; and the countersigning by the secretary was in like manner a mere compliance with the ordinary form of affixing the seal of a joint-stock company to every document issued by them" (emphasis supplied) (p. 517, per Erle, CJ).

The other members of the court (Byles, Keating and Montague Smith, JJ) considered essentially that the directors signed as directors only, but not as attesting witnesses within the meaning of the Bills of Sale Act. There was, however, no discussion about the exact nature of the signatures.

15. Finally, the learned authors of Williams on Vendor and Purchaser (1936) 4th Ed. said:

"... In general, while a company is a going concern ... the regularity of a sale can be assured ... except ... to see that the conveyance to the purchaser is duly executed by the use of the seal of the company in accordance with the clause as to the use of the seal in the articles of association ... " (emphasis supplied) (p. 505).

(2) Relevant Hong Kong Decisions

16. Having dealt with the common law position regarding how a company can execute a document, Mr Lee seeks to distinguish the decisions relied on by the Plaintiff in the following manner.

17. The relevant article in Wong Yuet Wah Mandy stated:-

"All deeds ... requiring the seal of the Company shall be signed ... in such manner as the Directors shall from time to time by resolution determine".

The distinguishing features are: (1) there was a specific requirement for signature and (2) the manner of signing also needs to be determined by the directors by resolution.

18. Lee Chat was concerned with the vendor's failure to supply the articles of association of the company in question, the court said:-

" ... here the purchaser's solicitors did not have a copy of the articles of association ... In fact, they specifically asked to be provided with a copy ...

In my judgment, the purchaser were entitled to ask to see a copy of the articles in order to verify whether it was within the powers of the company to authorize one director only to sign the agreement ... Without them, there is no question of s 23 being triggered ... " (at pp. 274-5, per Le Pichon, J).

19. Mr Lee further argues that the Defendant's case is supported by Lo Wing Wah and Another v. Chung Kam Wah [2000] 1 HKLRD 227:-

"Some articles no doubt do expressly provide that the common seal shall not be affixed to any instrument except in the presence of say, two directors ... In those cases, even the act of affixing the seal would itself not be valid unless it was done in the presence of the required number of company officers.

In the present case, however, art. 19 provides for the use of the seal with the authority of the directors, but that is all. Article 20 is a deeming provision which deems a deed to be properly executed if sealed with the seal of the company and signed by the Chairman singly, or by two directors jointly.

So I take the view that the sealing of the deed in this case is not, in any case, invalidated, even if the signature part of art. 20 is not complied with. The legal estate of the property passed by the sealing (see Peking Fur Store Ltd v Bank of Communications [1993] 1 HKC 625)" (emphasis supplied) (p. 229, per Yuen, J).

I pause to observe that article 20 in Lo Wing Wah is, for present purpose, the same as the relevant articles of Manibest and Winkit.

20. However, the latter part of the decision in Lo Wing Wah can be understood as supporting the Plaintiff's case:-

"I find that the signature of the assignment by Wong singly was not in compliance with art. 20 ...

There was no evidence provided by the plaintiffs to the effect ... that Wong ... was the Chairman ... And since Wong was not described as Chairman on the assignment, s. 23 of ... Cap. 219 does not help ...

However, that is not the end of the line for the plaintiffs. They have answered the requisition by providing evidence to the effect that the Company ... has been voluntarily wound-up in 1993, six years after the assignment ... and five years prior to this agreement.

... the Company had no assets other than those listed in the statement of assets ... and the property in issue was not included ... in the list ...

... I would hold that ... it is clear the Company had no intention to assert any claim to the property and there is no risk ... to have the assignment declared invalid ... " (p. 230).

21. Naturally, Mr Lam for the Plaintiff argues that the latter part of Lo Wing Wah was correctly decided whereas Mr Lee for the Defendant argues that the former part of Lo Wing Wah was. The learned Judge has not stated whether the part of the judgment regarding the single signature of Wong was an alternative way of approaching the matter in issue. If so, then Lo Wing Wah would be a decision which supports Mr Lee's argument. If, however, the learned Judge was of the view that due execution by the company could only be effected by affixing the company seal coupled with the signature of Wong, then Lo Wing Wah will support Mr Lam's argument.

22. A slightly different approach was adopted in Peking Fur Store Ltd v. Bank of Communications [1993] 1 HKC 626, 627. Having found that the signature of only one director did not comply with the articles of association, the court said:-

"... The vendor has produced ... a copy of a resolution of the board ... which not only authorized the transaction ... but expressly authorized the signature ... by one director only ... The company's seal was affixed to the assignment and the legal estate passed accordingly, despite the formal defect in execution. The general rule is that a corporation is bound by an instrument under its seal, unless it can be shown that its execution was obtained by fraud, or there is some illegality in the transaction: Agar v. Athenaeum Life Assurance Society (1858) 3 CB(NS) 725, 726; 140 ER 927 per Willes J" (emphasis supplied).

The decision in Agar was summarised in the headnote of the report which reads:-

"A departure from the formalities required by the deed of settlement of a joint stock company does not affect the validity of a contract under its common seal.

It is no defence, therefore, to an action against a joint stock company upon a debenture sealed with their common seal, that the borrowing of the money thereby secured was not sanctioned by a resolution of an extraordinary general meeting of the shareholders, pursuant to the provisions of their deed of settlement ... ".

The argument relating to the need for sanction arose from the signature of the debenture by only 2 directors but a provision in the said deed provided for signature by 3 directors. Cockburn, CJ, Williams and Crowder, JJ decided the argument on the basis that the provision in the deed did not cover the debenture. The "general rule" referred to in Peking Fur Store Ltd was found in the judgment of Willes, J in the Agar case.

(3) Decisions in Lo Wing Wah, Li Ying Ching and Ho So Yung

23. Whatever may be the true effect of the decision in Lo Wing Wah, the Plaintiff's argument is clearly supported by Li Ying Ching and Ho So Yung. The articles of association in those cases are again, for present purpose, the same as those for Manibest and Winkit. The learned Judges in those cases decided that the execution of title documents was invalid when they were signed by one director only.

24. At one stage Mr Lee seeks to distinguish the said 2 cases but, realizing that there cannot be any proper way to achieve that purpose, he asked me to decline to follow them. Mr Lam naturally asks me not to do so.

25. As stated above, I accept Mr Lee's argument that a document can be duly executed by merely affixing the seal of the company. This argument was apparently not raised by counsel in Lo Wing Wah (insofar as that case should have decided that both sealing and signing are both required), Li Ying Ching or Ho So Yung and was not referred to in those decisions.

26. Further, the relevant articles of association in Manibest and Winkit are "deeming" provisions as to proper execution which were intended for the benefit of the company as well as those dealing with it. Hence, when a document of these companies is sealed and signed by the requisite officer(s), the document is deemed to have been properly executed. There is however no reason to conclude that the articles provide for a "reverse deeming", that is, the document is deemed not to be properly executed when it has not been signed in the manner provided for.

27. I have already dealt with the issue of how a document can be validly executed by a company at common law. For the above reasons, I conclude that I should decline to follow the above decisions.

(4) Conclusion

28. By reason of the matters aforesaid, I conclude that:-

(a) a document of a company is duly executed if it is affixed with the company seal, unless other matters are required by the articles of association;

(b) I should decline to follow the decisions in Lo Wing Wah (insofar as it requires a document to be both sealed and signed), Li Ying Ching and Ho So Yung;

(c) Wong Yuet Wah Mandy is distinguishable on the facts.

29. Although the Defendant cannot rely on the "deeming" provisions in the articles of association of Manibest or Winkit, by reason that the 2 assignments in question appear to have been duly executed, I find that the Defendant can rely on the presumption as to due execution under s. 23 of Cap. 219. There is therefore no defect in the Defendant's title.

The Requisitions and the Answers

30. The parties also dispute whether the Defendant's solicitors have properly answered the Plaintiff's requisitions. The relevant correspondence commenced with a letter dated 3 May 2000 from the Plaintiff:-

"The [Manibest] Assignment was executed by only one director ... not in accordance with the sealing provisions. Please prove due execution of the Assignment".

A similar requisition was raised in relation to the Winkit assignment.

31. These requisitions were actually not quite correctly worded because, as can be seen from the articles of association, the "sealing provisions" only stated that the company seals "shall not be used except with [the Board of Directors'] authority". The Defendant's solicitors nevertheless did not seem to have any difficulty in understanding the requisitions and responded as follows:-

"Please refer to Law Society's Circular 105/90 (copy enclosed), in which it was clearly sated that in situation 2(c) as therein mentioned, we are not required to produce any authorization as section 23 of [Cap. 219] could properly be invoked. We consider the situation is still valid ... No further proof of due execution of the subject Assignment is necessary".

32. The same answer was given as regards the other requisition. Para 2(c) of the Law Society Circular stated:-

"A conveyancing document may be executed by a corporation ... in the following manner ...

otherwise than in accordance with section 20(I), e.g. by person or persons authorized by the board of directors for the purpose pursuant to the Articles of Association ...

The Council has obtained a London Q.C.'s opinion on this matter and the opinion is that in all the circumstances set out ... above, a vendor is NOT required, in view of ... section 23 [of Cap. 219], to produce evidence of authorization by the board of directors in order to prove title".

33. The Plaintiff was dissatisfied with the answer and said in the letter dated 4 May 2000:-

"We cannot accept your answer. Replying on Wong Yuet Wah Mandy v. Lam Tsam Yee & Another [1999] 3 HKC, we are entitled to the board resolution of the Vendor in order to satisfy ourselves as to the due mode of execution ... ".

34. The Defendant responded by a letter dated 4 May 2000:-

"We would like to distinguish the case of Mandy Wong ... In the said case, Board Resolutions needs [sic] to be produced where the sealing provision of the Articles of Association reads [the Clause referred to in Wong Yuet Wah Mandy was then set out (see above)] ... In the present situation, we would refer to the sealing provision of the Company concerned, where it reads that [the relevant article (see above) was then set out]. We then opine that the execution by one Director ... in the capacity of the Vendor ... falls within the meaning of 'duly executed', without the necessity of producing a board resolutions [sic]. Please also refer to the Law Society's Circular 105/90 ... ".

35. Further correspondence regarding this point continued and in a letter dated 5 May 2000, the Defendant said:-

"... we would like to stress that there is no requirement as stated in the company's sealing provision that the production of board resolution is necessary to prove authorization of such person by the Board ... But in Mandy Wong case, the sealing provision reads that, "....or in such manners as the Directors shall from time to time by resolution determine" which means that if a document is executed by one person under seal, ... a resolution authorizing the execution must be produced in order to prove the execution".

36. It is unnecessary to set out the details of the subsequent correspondence which in effect repeated the said lines of argument. By 5:30 p.m. on 5 May 2000 (after the extended time for completion has lapsed), the Defendant wrote and informed the Plaintiff that in view of the Plaintiff's failure to complete, the Defendant treated it as a repudiation and termination of the agreement. The deposit was also forfeited.

37. Mr Lee fairly accepts that the correspondence between the parties' solicitors could have been better worded. However, he submits that the battle line was sufficiently clearly drawn: the Plaintiff insisted that the Defendant should produce evidence relating to due execution of the assignments whereas the Defendant denies such an obligation to do so.

38. Mr Lee contends that even though the reason(s) given by the Defendant for not producing the evidence asked for might not have been the proper ones, this should not affect the outcome of this action. This is because, first, neither party was in doubt as to what the other side's stance was. Further, he relies on the following observation in Active Keen Industries Ltd v. Fok Chi-keong [1994] 1 HKLR 396, 405:-

"Obviously, if a purchaser raises a substantial objection as to the vendor's title and there are facts within the vendor's knowledge which, if revealed, might meet the objection, and the vendor chooses to withhold that ... the vendor clearly cannot, on the day fixed for completion, turn round and say ... Now I will both show you a good title and make you good title ... The purchaser must be given reasonable time to consider the title of the vendor and his own position ...

... A requisition as to title is not an occasion for the parties' solicitors to bandy propositions of law: each party must decide for himself, ultimately, what the legal position is, based upon the facts known to himself: although, obviously, if one party can persuade the other to his won point of view on the law, so much the better" (emphasis supplied) (per Litton, JA (as he then was)).

39. Mr Lee said in this action the relevant facts were fully known to both parties' solicitors. The requisitions and answers were related to pure points of law. Provided the battle line was clearly drawn, Mr Lee submits it is irrelevant whether the arguments put forward in the Defendant's letters were based on the correct legal principles. In view of the observations in Active Keen Industries Ltd, I agree with his submission.

40. The position with regard to requisitions and answers which involve points of mixed fact and law may or may not be different from the observations in Active Keen Industries Ltd. Since this does not arise in the present action, it is appropriate to leave the point to be determined in future should it become necessary to do so.

Other Matters

41. Having come to the above conclusions, it is unnecessary to deal with the other points raised by the Defendant. I shall therefore only mention them for completeness.

42. Mr Lee argues that the requisitions were not valid because they were:-

1. insufficiently specific as to how the execution of the assignments was allegedly not in compliance with the articles of association;

2. not formulated with reasonably sufficient precision in that they did not explain how the allegedly improper execution of the assignments would affect the Defendant's title.

43. Mr Lee also raises the point that by virtue of Clause 15.02 of the sale and purchase agreement, the Defendant did not contract to convey any legal estate in the suit property to the Plaintiff.

44. Further, Mr Lee argues that the Defendant has satisfactorily answered the requisitions by referring to the "internal management" rule (or the Turquand's Rule), relying on Tread East Ltd v. Hillier Development Ltd, HCA 907 of 1991; Hillier Development Ltd v. Tread East Ltd [1993] 1 HKC 285.

45. Lastly, Mr Lee submits that even if the Defendant could not rely on s. 23 of Cap. 219, it could rely on the following long established common law principles:-

(a) omnia praesumuntur legitime facta donec probetur in contrarium (all things are presumed to have been legitimately done, until the contrary is proved);

(b) omnia praesumuntur rite et solemniter esse acta (all things are presumed to have been done rightly and regularly):

17 Halsbury's Laws of England 4th Ed., 118; Morris v. Kanssen and Others [1946] AC 459, 475.

Conclusion

46. By reason of the aforesaid matters, I find in the Defendant's favour. The Plaintiff's claim is therefore dismissed.

Relief

47. Since I have dismissed the Plaintiff's claim, it is also unnecessary to consider the relief asked for in this action. Without disrespect to counsel, I shall not set out the arguments raised by counsel regarding this aspect of the action.

Costs

48. There will be a costs order nisi pursuant to RHC Ord. 42 r. 5B(6) that the cost of this action be to the Defendant to be taxed if not agreed.