WOO TURHAN and Another v. TAIWAN FUJI TRADING (HK) LTD.

IN THE SUPREME COURT OF HONG KONG

MISCELLANEOUS PROCEEDINGS NO. 168 OF 1995

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J U D G M E N T

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1. On 10.6.94, the parties entered into a sale and purchase agreement whereby the Defendant agreed to sell and the Plaintiff agreed to buy the premises known as 98/42700 equal and undivided shares of Wing On House together with the right to the sole and exclusive possession of office No. 1708 on the 17/F subject to and with the benefit of the Deed of Mutual Covenant (Memorial No. 2199290). The parties agreed that there was no Sub Deed of Mutual Covenant. A deposit was paid. Completion was to take place on 10.1.95.

2. The Defendant as vendor was required under clause 6 of the agreement and s. 13 of the Conveyancing and Property Ordinance Cap. 219 to prove a good title. The relevant part of clause 6 is as follows :

"The Vendor shall pursuant to s. 13 of the Conveyancing and Property Ordinance Chapter 19 prove a good title to the said Premises at his own costs and expenses and at the like expense shall furnish to the Purchase such certified copies of any deeds or documents of title wills and matters of public record as may be necessary to complete such title. ....."

3. Before the formal agreement was signed, the Defendant's solicitors had forwarded to the Plaintiff's solicitors all the title deeds on 2.6.94.

4. On 29.6.94 and 19.12.94, the Plaintiff's solicitors raised two grounds of objection to title:

a. Defective execution of the Deed of Mutual Covenant.

b. Failure to explain/justify the allocation of the undivided shares.

5. The reply by the Defendant's solicitors to the first requisition was that the DMC was validly executed under common law and in any event defective execution of the DMC was not relevant. As regards the second requisition, the Defendant's solicitors suggested that the Plaintiff should check the Land Registry Control Card of the Lot which would provide the answer to the manner in which undivided shares were allocated to the property.

6. On 19.12.94, the Plaintiff's solicitors referring to the case of Lee Tak Chun v East Well International Ltd and Anor (MP857/94) pointed out to the Defendant's solicitors that it was the duty of the vendor to provide accurate details of how the shares were allocated to the property and demanded proof in this respect.

7. On 4.1.95, the Defendant's solicitors provided the Plaintiff's solicitors with a table showing 1 000 undivided shares were allocated to the 17/F and how these were divided and allocated to the individual units of No. 1701-1711 and the store room on that floor and this showed that 98 shares were allocated to office unit No. 1708. They also informed the Plaintiff's solicitors that to their knowledge no document existed to show such allocation of shares.

8. On 9.1.95, the Plaintiff's solicitors wrote back indicating that the answer was insufficient and stated:

".... Your explanation by simple tabulation is not sufficient. Furthermore, your simple tabulation is also not helpful in explaining when and how the service charge units are allotted to the Property. Therefore the rights benefits and liabilities of the respective owners of units on the 17th floor cannot be defined as the undivided shares and service charge units have not been properly and validly allotted to them.

We stress that it is your client's duty to produce deeds or documents necessary to complete the title and it is not discharged by simple confirmation of the no existence of them and by a simple table."

9. The reply from the Defendant's solicitors on the same day was :

"... the sub allocation of the undivided shares to those office units were made in proportion to the area of each office unit and same are calculated as follows..."

Then there followed a table setting out respectively the approximate area of the units in relation to the shares allocated to them and office unit No. 1708 with 793 s.f. was allocated 98 undivided shares.

10. On 10.1.95, the Plaintiff's solicitors informed the Defendant's solicitors that the two tables provided were not sufficient to answer the requisitions reminding the Defendant's solicitors of the duty of the vendor to produce deeds and documents to prove good title. No further answer was provided by the Defendant's solicitors and the Plaintiff on the same day, rescinded the contract and asked for the return of the deposit.

11. The DMC (Memorial No. 2199290) was signed on 15.12.81 by the first purchaser Plusever Ltd. with the developer, two confirmers and the management company. Plusever Ltd. had bought the 25th floor from the developer. The DMC was signed on behalf of Plusever Ltd. by only one director of that company.

12. At the request of the Plaintiffs, the Defendant's solicitors provided to the Plaintiffs the Articles of Association of Plusever Ltd. and Article 20 which deals with execution of company documents reads as follows :

"The seal of the company shall not be affixed to any instrument except by authority of a resolution of the board of directors, and in the presence of a director and of the secretary or such other person as the directors may appoint for the purpose, and that director and the secretary or other person as aforesaid shall sign every instrument to which the seal of the company is so affixed in their presence."

13. The Plaintiff contends that the execution of the deed was not in accordance with Article 20 which requires sealing in the presence of two directors or one director plus the secretary or any other person the Board may appoint and both should sign.

14. The Defendant has a different interpretation of Article 20 that only one director's signature would be sufficient and therefore there is nothing wrong with the execution.

15. 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 unless s. 35 of the Companies Act 1985 applies..."

"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, although it is customary, for them to do so. Where the articles have such a 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; but there is no direct authority to this effect."

16. It should be noted that s.35 of the Companies Act 1985 does not apply to Hong Kong and s.20 of the Conveyancing and Property Ordinance Cap. 219 does not apply to documents executed before commencement of the Ordinance.

17. Thus, the general principle is that a document not executed in the manner required under company articles is not binding on the company.

18. In Peking Fur Store Ltd. & Bank of Communications (1993) 1 HKC 625, company articles required that the company seal should not be affixed to any instrument except by authority of a resolution and in the presence of a director and a secretary/other person appointed by the directors, and the seal should be affixed in their presence (This is similar to Article 20 of Plusever Ltd.). The assignment was signed by one director only. Godfrey J. held the assignment was formally defective. However, there was a resolution authorising signature by one director only. The risk of title being challenged was considered to be remote and the requisition raised in relation to execution of the assignment was held to be satisfactorily answered.

19. Two cases referred to by the Plaintiff TCB Ltd. v. Gray (1986) AER 587 and Cope v. T.H.D.&R. Co. 8 EX 841 Vo. 154 E.R. show the requirement for transactions with a company to be carried through in accordance with its articles and if it has not been sealed or executed with the required formalities, it is not binding on the company. In Perfectime Ltd. & Ko Ming Bor and another (MP1161 & 151/94) Yam J. held that an assignment signed by one director only was not binding when company articles required two directors to sign.

20. The defendant relies on the general rule stated by Godfrey J. in the Peking Fur case (at 627):

"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"

It also contends that TCB Ltd & Gray and the case of Cope could be distinguished because in these two cases, no company seal was affixed.

21. In my judgment this general rule is applicable where the execution is in accordance with the articles or if not, enquiries show that the execution is authorised, but not otherwise. Whether or not there was a company seal, the principle in TCB Ltd & Gray and the case of Cope remains to be that execution must be in accordance with the articles or the transaction would not be binding. The case of Peking Fur was decided on the basis that there was a resolution making the risk of challenge remote but execution not in accordance with company articles would still be defective. I hold that the execution of the DMC by Plusever Ltd. was defective.

22. The Plaintiff submits that the DMC is the instrument which divided the lot into 42 700 equal and undivided shares and allocated shares to each floor of the building. It also provided for the rights and obligations of and among the co-owners of the building. The validity of the DMC goes to title and is not irrelevant to the title of office unit No. 1708. If the DMC is not binding, the Defendant would not be able to convey the right to exclusive possession of office unit No. 1708 together with the rights and benefit of the DMC. The Defendant must show title for the 98/42700 shares. If the DMC is invalid, the Defendant would not be able to trace how the 98 shares were created or allocated and good title would not have been shown.

23. Thus, it is submitted that the importance of the DMC in relation to proof of title cannot be ignored and where the execution of the DMC is defective, the Plaintiff's solicitors were justified in raising the requisition.

24. The notional division of the lot and the allocation of shares to each floor is made in the schedule, reference to which is in paragraph (3) of the recital, in the DMC. Paragraph (5) of the recital sets out the purpose of entering into the deed which includes defining and regulating the rights, interests and obligations of the owners in respect of the lot and the building and to make provision for sharing expenses by the owners.

25. Clause 2 in Section I of the operative part of the DMC gives Plusever Ltd. the right to exclusive possession of the 25th floor excluding other co-owners and Clause 1 there in gives other co-owners the right to exclusive possession of other parts of the building except the 25th floor to the exclusion of Plusever Ltd. Clause 3 gives all the co-owners the right to the common parts of the building. Clause 7(b) provides for sub allocation of undivided shares by any owner but such sub allocation must be in proportion to the floor area of the building held therewith unless the manager otherwise agrees.

26. Thus, in the absence of a binding DMC in such terms, Plusever Ltd. as tenant in common with other co-owners of the land and building would not be precluded from the use of the 17/F or other parts of the building and other co-owners would similarly not be precluded from the use of the 25th floor or any other parts of the building. Without a provision such as Clause 7(b) sub allocation of shares need not be in proportion to the floor area and the Defendant's reply that 98 shares were allocated to unit No. 1708 according to its floor area of 793 s.f. would be without basis. Without the DMC, the developer would not be able to give to purchasers exclusive possession of their respective floors or areas to the exclusion of other co-owners.

27. The Defendant asserts that even if the DMC is devoid of effect because it was defectively executed, this does not affect the Defendant who derived title not from Plusever Ltd. but from the developer. In any case, despite its defective execution, the DMC is still binding on Plusever Ltd. and its successors in title by reason of the rule in Halsall v. Brizell (1957) Ch. 169. This rule may be found at page 182:

"But it is conceded that it is ancient law that a man cannot take benefit under a deed without subscribing to the obligations. If authority is required for that proposition, I need but refer to one sentence during the argument in Elliston v. Reacher (1908) 2 Ch. 665 at 669 where Lord Cozen Hardy M.R. observed: "It is laid down in C. Litt. 230b that a man who takes the benefit of a deed is bound by a condition contained in it, though he does not execute it.""

28. The submission for the Defendant is that Plusever Ltd. and its successors who have enjoyed the benefits of the DMC will be bound by it.

29. Reference is made to Goodtex Land Co. Ltd. & Lung Kwong Emporium Co. Ltd. (MP 2234/93). In this case, there was no Deed of Mutual Covenant and an assignment of 1/6 of the lot together with exclusive right and privilege to use the 1st floor of a 6 storey building without exclusion of other co-owners was held to have operated to create an undivided 1/6 share in the lot and as a matter of commercial necessity such exclusion would have to be implied. It was also held that the absence of a DMC in itself would not be enough to justify holding that the title is in any way defective.

30. The case was decided on the basis of its special circumstances that the properties have been enjoyed with the title for upwards of thirty years without any such problem and any risk of title being challenged is fanciful. The case does not decide that a DMC bears no relation at all to title.

31. In Lee Tak Chun & Eastwell International Ltd. and Global Luck Property Ltd (MP 857/94) there was a Deed of Mutual Covenant dividing the land into 31 000 undivided shares and by a Sub Deed of Mutual Covenant 7 692 shares were allocated to one of the two towers erected on the land. Shares were allocated to each level with level 35 being allotted 227 shares. Level 35 was subsequently divided into 12 units. 147 out of these 227 shares were assigned with exclusive possession to 8 of the 12 units. There was no instrument showing how the shares were allocated to each of these 8 units. Subsequently 20 shares and the exclusive right to use one unit were assigned. There was also no instrument to show how the 20 shares were allocated to this unit. Jerome Chan J. held that it was necessary for the vendor to show how the shares were allocated to the unit failing which a requisition on that ground would not be sufficiently answered.

32. The Defendant is obliged to show how the 98 shares came to be allocated to office unit No. 1708 and where the Deed of Mutual Covenant is ineffective, this must be shown by way of other documents.

33. The Defendant argues that before the DMC was executed the developer had already made the notional division of 42 700 shares and allocated 1 000 shares to the 25/F. The assignment of the 25/F to Plusever Ltd. made it clear that the developer had done so. The assignment to Plusever Ltd. expressly reserved to the developer and others the right to exclusive possession of other parts of the building. The allocation of 98 shares to office unit No. 1708 can be traced through the assignments of the different units on the 17/F namely No. 1701-1705 to Yu Kee, No. 1706-108 to Brakley and No. 1709-1711 to Broach Rich and in each of these assignments, allocation of undivided shares was made reserving to the developer and others the right to exclusive possession of other parts of the building. The shares owned by Brakley were subsequently by successive assignments divided and allocated to each of the office units comprising No. 1706-1708, reserving to the vendor in each case the right to the exclusive possession of other parts of the 17/F and the building. In this manner, 98 shares were allocated to 1708. Each of these assignments was registered with the Land Registry and therefore the allocation of 98 shares to office unit 1708 could be also traced from the Control Card of the Lot in the Land Registry. The Defendant submits that these documents were sent to the Plaintiff's solicitors before the requisitions were raised and Lee Tak Chun can be distinguished since in that case there was no document capable of showing how the allocated shares were made whereas in the present case, the assignments and Control Card in the Land Registry clearly show the manner the shares were allocated. Thus, it is submitted that irrespective of the validity of the DMC, the requisition raised was sufficiently answered.

34. The rule in Halsall v. Brizell contemplates the benefit being conferred and the obligations imposed under the same instrument. The property conveyed to Plusever Ltd. under the assignment included not only the undivided shares and the sole and exclusive right to use the 25/F but also the benefit of the DMC and the rights in common with the co-owners and the right of way. Plusever Ltd. took these benefit and rights from the assignment. It would be difficult to see how Plusever Ltd. could be bound by the covenants of the defective DMC.

35. The assignment of the 25/F to Plusever Ltd. has the same defect in execution as the DMC for the same reason. It was signed by one director of Plusever Ltd. only. The express reservation by the developer in the assignment would be of no effect. Without the reservation, the developer could not have given to purchasers of the 17/F the right to exclusive possession of their parts to the exclusion of other co-owners. In addition, how 1 000 shares were allocated to the 17/F cannot be ascertained from the available documents. It cannot be said that the allocation of 98 shares to office unit No. 1708 has been sufficiently traced and explained.

36. The Plaintiff's solicitors were justified in raising the requisitions.

37. The test whether a requisition has been sufficiently answered is to be found in Active Keen Industries Ltd. v. Fok Chi Keong (1994) 1 HKLR 396 at p. 405:

"In these circumstances, it is not surprising that the law should have developed in such a way as to impose an obligation on the vendor to answer requisitions and objections: that is to say, to bring forward facts and circumstances known to him which might be material to the title which he has contracted to pass to the purchaser on completion."

and at p. 407

"A requisition as to title is not an occasion for the parties' solicitors to bandy propositions of law; each part must decide for himself, ultimately, what the legal position is, based on the facts known to himself; although obviously, if one party can persuade the other to his own point of view on the law so much the better.

and at p. 413:

"The contractual duty to answer requisitions properly is not an onerous one. All that is required of the vendor is candour and common sense. The purchaser is not an adversary. The parties have already arrived at an agreement and normally, it is as much in the purchaser's mind as it is the vendor's that completion should take place. A good title or a good marketable title does not mean a perfect title. If there are, or might be, blemishes upon it, these should be faced squarely."

38. In the circumstances, the requisitions have not been satisfactorily answered and the Defendant has not been able to show a good title. I make declarations sought by the Plaintiff in paragraphs 1 and 2 of the originating summons.

39. I also make the declarations in terms of paragraphs 3 and 4 of the originating summons with interest at judgment rate from the date of deposit until payment.

40. The Defendant is ordered to reimburse the Plaintiff agent fees in the sum of $74,880.

41. The costs and disbursements incurred by the Plaintiff in the investigation of title and the costs of this application shall be borne by the Defendant.