LEE CHAT and Another v. CHINA ROLL INDUSTRIES LTD.

1997, No.MP1334

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS

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J U D G M E N T

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1. I have before me a Vendor and Purchaser summons taken out by the Plaintiffs who were the Purchasers claiming a declaration that requisitions on title have not been satisfactorily answered by the Defendant Vendor. The Purchasers also seek a declaration that the Vendor has not shown a good title to the Property and must repay the deposit and other relief.

2. On 11 April 1997, the Purchasers and the Vendor entered into the Formal Sale and Purchaser Agreement ("the Agreement") concerning the Property which is Flat A, 5th Floor, Beauty Mansion, Nos.69, 69A, 71 and 71A Kimberley Road, Kowloon. Under the Agreement, the completion date was 22 April 1997.

3. Due to a series of errors, this Vendor and Purchaser Summons came to be placed in the running list. Counsel who appeared before me were instructed on very short notice and had not previously advised the parties. It is therefore most unfortunate that neither firm of solicitors made any effort to put matters right during the intervening months between the hearing before the Master in August and the hearing today. For such a summons to be placed in the running list was plainly not in the interest of the parties.

Chronology

4. The relevant title deeds were provided by the Vendor's solicitors in two instalments. The first occurred on 12 April and the second on 17 April. The first requisition arises out of a deed delivered on 12 April and the second requisition arises out of an instrument delivered in the later instalment.

5. Completion did not take place on 22 April and on the following day, at about 2:30 p.m., the Vendor's solicitors faxed a letter to the Purchasers' solicitors alleging breach on the part of the Purchasers and seeking to forfeit the deposit pursuant to Clause 13(a) of the Agreement.

The requisitions

6. The Purchasers raised two requisitions : the first arose out of an assignment dated 5 March 1987 ("the Assignment") between Bestir Enterprises Limited ("Bestir") and Cheung Ying Chung ("Mr Cheung"), a predecessor-in-title of the Vendor; the second arose out of a statutory declaration made by Koo Yun Ming ("Mr Koo") on 10 December 1983.

The first requisition

7. This arises out of the Assignment whereby Bestir assigned the Property to Mr Cheung. The Assignment was sealed with the common seal of Bestir and signed by Mr Cheung as director. The Purchasers' solicitors wrote on 16 April 1997 as follows :

"The [Assignment] was executed by [Mr Cheung], the director of [Bestir], the then vendor in order to assign the [Property] to [Mr Cheung], the then purchaser. Therefore, conflict of interest arises. Kindly clarify. We would be obliged if you would kindly provide us with the articles of [Bestir] for our perusal as soon as possible."

The Defendant's response is dated 17 April :

"We fail to see any conflict of interest here. Please note that it is not a case where a Director sells to the Company his own property at an over-market value property. We take the view that the purchaser is well protected under the rule laid down in the Turquand's case."

On 22 April, the date scheduled for completion, the Purchasers' solicitors replied :

"We do not share your view mentioned in your said letter. Furthermore, up to the present, we have not yet received the requested articles in order to prove the due execution thereof. Kindly let us have the same without any further delay."

It prompted the following response later that same day :

"... we reiterate that the [Assignment] is presumed to have been duly executed unless the contrary is proved and the purchaser is well protected by the rule laid down in the Turquand's case. As such production of the requested articles is not necessary."

8. After the series of correspondence, as noted above, on 23 April at about 2:30 p.m., the Vendor purported to forfeit the deposit. Although the Purchasers also wrote on 23 April, their letter to the Vendor was sent after the letter from the Vendor's solicitors alleging repudiation by the Purchasers was received :

"There is clearly a conflict of interest. Secondly, even if the doubt of conflict of interest can be removed which is yet to be done, the said Assignment was only signed by one director, due execution cannot be presumed. We refer you to the Counsel's opinion dated 27th June 1996 mentioned in Law Society Circular No.172/90. Please note that we have never required you to provide us with the Minutes regarding the internal matter of the Company."

The Purchasers then sought to rescind the Agreement.

9. At the hearing, counsel for the Purchasers abandoned any argument based on conflict of interest.

10. The Vendor contends that the requisition regarding due execution was not raised until the Purchasers' solicitors letter of 22 April which was more than seven working days after the Assignment had been provided. In other words, the Vendor's contention is that the requisition raised on 16 April was limited to one issue and one issue only, namely, the conflict of interest point. Reference was made to Chan Chik-sum v. Great Pearl Industries Ltd. [1997] 1 HKC 27 where Bokhary J.A. (at 33C-D) held :

"Requisitions on title must be formulated with reasonable precision if they are to be effective."

11. Whilst it is true that there was no specific reference to "due execution" in the 16 April letter, here we are dealing with exchanges of correspondence between lawyers rather than laymen. In my judgment, it would be immediately obvious to any lawyer reading the letter of 16 April that it raised two concerns : conflict of interest and due execution, for why else would the Purchasers' solicitors have requested for a copy of the Articles of Association? That would not have assisted them to resolve the conflict of interest question. The letter of 22 April simply developed the point further.

12. The Vendor relies on the presumption of due execution which arises under section 23 of the Conveyancing and Property Ordinance ("CPO") and, in the alternative, on Turquand's rule.

13. The common seal of the company was affixed to the Assignment by Bestir. It was expressed to be "SIGNED by Cheung Ying-Chung, its Director".

14. My first observation is that the deeming provision in section 20(1) of the CPO does not apply : it only arises if the deed :

"purports to bear the seal of the corporation affixed in the presence of and attested by a secretary or other permanent officer of the corporation and a member of the corporation's board of directors or other governing body or by two members of that board or body."

The deeming provision does not arise because there is but one attesting signature. Turning now to section 23, that provides that :

"An instrument appearing to be duly executed shall be presumed, until the contrary is proved, to have been duly executed."

Does a presumption of due execution arise?

15. Hillier Development Ltd. v. Tread East Ltd. [1993] 1 HKC 285 is a case where inter alia the due execution of an assignment by a vendor company was challenged. In that case, the assignment was also only signed by a single director. The execution clause reads :

"Sealed with the common seal of the vendor and signed by Chan Bing-fai, one of its directors as directed and authorised by the Board of Directors to sign ..." (emphasis added)

The relevant provision in its articles of association was, for practical purposes, on all fours with the articles of association in the present case viz.

"All deeds or instruments requiring the seal of the company shall be signed by two directors or in such manner as the directors shall from time to time by resolution determine."

But in Hillier, the solicitors for the purchasers already had the articles of the company in their possession. So, in their requisition, they asked for a certified true copy of the board resolution of the company showing the requisite authority. In response, the vendor relied on Law Society Circular No.105/90 in support of its view that the assignment was deemed to have been properly executed and that their client was not required to produce any evidence of authorisation by the board. Godfrey J (as he then was), after noting (at p.9 of the Judgment in 1991, No.A907) that it was within the power of the company to authorise a director to sign, went on to hold that there was nothing in the initial requisition regarding the due execution of the assignment, that section 23 of the CPO provided for due execution to be inferred and further, that the purchaser was not entitled to call for a sight of the resolution of the directors. He said :

"A purchaser was not entitled to enquire into the matters of internal management of a limited company; it is enough for him to satisfy himself that the power to do what has been done did exist."

On the due execution point, he was upheld by the Court of Appeal.

16. The present case is of course factually different from Hillier because here the Purchasers' solicitors did not have a copy of the articles of association in their possession at the time of the requisition. In fact, they specifically asked to be provided with such a copy. This request was refused and no copy of the articles was ever provided. So the question arising on the facts is whether the Vendor was under any obligation to supply a copy as requested.

17. In my judgment, the Purchasers 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 authorise one director only to sign the agreement. The articles in the form prevailing at the date of the Assignment is thus part of the Vendor's title. Without them, there is no question of section 23 being triggered. By refusing to supply a copy of the articles of association, the Vendor failed to discharge its obligation and so disabled itself from being in a position to rely on any presumption that might otherwise have arguably arisen under section 23. Had the articles been provided, the further question would have arisen, namely, whether the presumption of a due execution referred to in section 23 applies in the absence of words showing due authorisation as in the execution clause in Hillier or whether the words "as director" were sufficient to trigger the presumption. In the events that have happened, it is unnecessary to express any view on this further question.

18. As to the alternative submission that the reference to Turquand's rule adequately answered the requisition, carried to its logical conclusion, it will never be possible to challenge the due execution of an instrument by a company. That cannot be right. Turquand's rule is not a sufficient answer.

The second requisition

19. This arises out of a statutory declaration made by Mr Koo on 10 December 1983. Mr Koo entered into an agreement to purchase the Property on 10 July 1968. This was subsequently assigned to him under Memorial No.650109. It is not apparent from the land search what the date of this assignment was but it is likely to have taken place during 1968 or 1969. Clause 5 of the Agreement provided that the Vendor is to give good title in accordance with section 13 of the CPO.

20. The statutory declaration was to the effect that in or about 1969, Mr Koo received from his solicitors all the title deeds and documents relating to the Property. Shortly thereafter, he kept them inside a metal cabinet in the bathroom of his residence. In May 1983 when he looked for the deeds and documents, he found that they had been damaged in that the contents were hardly legible. The title deeds and documents formed the bundle marked "A" referred to in the Declaration.

21. By a letter dated 22 April 1997 (being the scheduled completion date), the Purchasers' solicitors wrote to ask for Bundle "A". They also questioned the credibility of Mr Koo's declaration that all the title deeds and documents were in his possession between 1969 and 1983 when the Property was mortgaged to a bank in 1972 and reassigned in 1975 and sought clarification.

22. The first question that arises is whether this requisition was properly raised. The Vendor's obligation under section 13(a)(ii) of the CPO was to provide title deeds extending not less than 15 years before the date of the Agreement (which was 11 April 1997) commencing with an assignment, a mortgage by assignment or a legal charge, each dealing with the whole estate and interest in the Property. The assignment to Mr Koo which was in completion of the agreement dated 10 July 1968 is unarguably the intermediate root of title for the present transaction. Indeed on 17 April 1997 the assignment formed part of the second instalment of title deeds forwarded to the Purchasers' solicitors. In their covering letter, the Vendor's solicitors stated that the agreement for sale and purchase dated 10 July 1968 in favour of Mr Koo was a "pre-root document" and would not be furnished. The Purchasers' solicitors did not demur and appear to have accepted that this was so.

23. In these circumstances, I agree with the Defendant's submission that Bundle A could only have comprised pre-root instruments. That being so, the Purchasers were not entitled to have sight of the bundle and accordingly, the second requisition was not proper. A vendor is under no obligation to answer unnecessary or improper requisitions.

The subsidiary issue

24. In their letter to the Vendor's solicitors dated 22 April 1997, the Vendor's solicitors wrote as follows :

" We reiterate that our clients have 7 working days to peruse the title deeds and documents.

We reserve our client's right to raise any further requisitions."

25. The Purchasers' case is that Clause 7 of the Agreement gave them seven working days from the receipt of the title deeds to raise requisitions or objections. They rely on Yeung Sau Chuen Sammy v. Chung Chun Ting and Another, 1992, MP 4080. The agreement in that case also contained a provision similar to Clause 7. The date fixed for completion was 31 December 1992. Certified copies of some of the title deeds were not delivered to the purchaser's solicitors until 29 December 1992. Godfrey J held (at p.3) :

" The obligation of the vendors to supply originals or certified copies of these documents of title fell to be discharged only on the date fixed for completion which was 31st December 1992. However, since the debentures and reassignments were documents of title, it was necessary for copies of them to be provided to the purchaser's solicitors sufficiently long in advance of the date fixed for completion to give the purchaser's solicitors a proper opportunity of considering those documents of title and raising any requisitions upon them.

.... When not all the title deeds are delivered, and there are others which are delivered later, it follows that in relation to those title deeds of which copies are delivered late, the purchaser's solicitors must have seven working days after their receipt to consider those documents.

In the present case, no copies of the debentures and reassignments were delivered until what purported to be certified copies of them were sent to the purchaser's solicitors on 29th December 1992. In my judgment, the purchaser's solicitors were entitled to seven days to consider these. They were not given that time; because, on 31st December 1992, the vendors, treating the failure of the purchaser to complete on that date as repudiatory in character, treated the contract as at an end by reason and purported to forfeit the purchaser's deposit."

26. I do not think that the Yeung Sau Chuen case laid down any immutable rule that in every such case, forfeiture may not occur during the seven days following delivery of the title deeds. Situations may arise where requisitions are in fact raised and satisfactorily answered during that seven-day period and the right to raise further requisitions may, in appropriate circumstances, be spent. Whether it is so would depend on the actual circumstances and generalisations are unlikely to be of assistance. If there had not been an express reservation in the present case, and the only requisition raised is the second requisition which I have held was not properly raised, the Defendant might well be right that, in those circumstances, the Purchasers had exhausted their right to raise requisitions. But where the Purchasers having raised a requisition then expressly reserve their right to raise further requisitions during those seven working days, I can see no reason why such a reservation of rights may not be made or should not be given effect. Given the terms of the letter of 22 April, the reservation of rights admits of no doubt. It would not be right, in the circumstances, to deprive the Purchasers of what they had contractually bargained for.

27. It follows that it was premature for the Vendor to have purported to forfeit the Purchasers' deposit on 23 April. Accordingly, I find that the Vendor had wrongfully repudiated the contract on 23 April.

Order

28. For the reasons above, I will make a declaration in terms of paragraph 2 of the Originating Summons. I further order that the Vendor do forthwith repay the deposit with interest; pay the Purchasers the costs and expenses of investigating the title (which is to be assessed by the Master if not agreed) and any stamp duty paid.

29. Costs must follow the event and I will make an Order nisi that the costs be to the Plaintiffs.

(Doreen Le Pichon)

Judge of the Court of First Instance
High Court