XCHRX HUA RONG FINANCE LTD. v. MEGA CAPITAL ENTERPRISES LTD. AND ANOTHER

HCMP1110/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. HCMP 1110 OF 1998

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J U D G M E N T

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The facts

1. The Plaintiff's case is that it had entered into a mortgage agreement with the 1st Defendant on 15th May 1997 in which the 1st Defendant charged its property to the Plaintiff as a security for repayment of money advanced by the Plaintiff. Two loans of $1.5 million and $454,000 had been advanced by the Plaintiff. The 1st Defendant failed to respond to the Plaintiff's demand for repayment and the Plaintiff proceeded, by way of originating summons, against the 1st Defendant for payment of the money advanced and possession of the property.

2. Master Jones dismissed the application for judgment and gave directions for the conduct of the case. The Plaintiff now appeals.

Forged board resolution

3. The 1st Defendant consisted of three directors, namely, the 2nd Defendant, Ms Yeung and Ms Lau. The Plaintiff, in entering into the mortgage agreement with the 1st Defendant, had obtained from the 2nd Defendant a resolution of the board of directors of the 1st Defendant signed by all three directors. The resolution was that the 1st Defendant was to apply for the loan of $1.5 million on the security of the property, the board authorised the seal of the 1st Defendant to be affixed to the mortgage agreement and the 2nd Defendant was authorised to sign the agreement on behalf of the 1st Defendant.

4. Ms Yeung and Ms Lau, on behalf of the 1st Defendant, had filed affirmations to the effect that they had never signed the resolution and they had never agreed to enter into the mortgage agreement or borrow the money from the Plaintiff. In other words, the resolution was a forgery.

Turquand's rule and exception

5. The doctrine, based on the case of Royal British Bank v. Turquand [1855-56] 5 E & B 248 is that persons personally dealing with limited liability companies are not bound to inquire into their indoor management and would not be affected by irregularities of which they had no notice. But as clearly established in cases such as Ruben v. Great Fingall Consolidated and Others [1906] AC 439, Kreditbank Cassel G.m.b.H. v. Schenkers, Ltd. [1927] 1 KB 827 and South London Greyhound Racecourses Ltd v. Wake [1931] 1 Ch 496 that the doctrine applies only to irregularities that otherwise may affect a genuine transaction. It cannot apply to a forgery . The forged document is a nullity.

6. Mr Xavier, Counsel for the Plaintiff, relying on Uxbridge Building Society v. Pickard [1939] 2 KB 248 argued that the above cases referred to by Mr Shum, Counsel for the 1st Defendant, are distinguishable because the officers there did not have the actual, apparent or ostensible authority to act, whereas the 2nd Defendant who was a director of the 1st Defendant had the actual, apparent or ostensible authority to bind the 1st Defendant.

7. The question to be asked is this : what authority did the 2nd Defendant have? The position in fact was discussed by Clauson J. in Wake. After referring to the comment of Atkin LJ in Schenkers where it was said that if you are dealing with a director in a matter in which normally a director would have power to act for the company, you are not obliged to inquire whether or not the formalities required by the articles have been complied with before he exercises that power, the learned judge went on to state that :

"but there is no evidence before me even to suggest that the affixing of a company's seal to a document is a matter in which normally a single director would have power to act for the company. It is within common experience that the affixing of the seal is a matter with which the board deals and not a director, and it is commonly so understood. In the case of this particular company the constitution of the company by the article to which I have referred makes it quite plain that the affixing of the seal is not a matter in which normally a director would have power to act for the company. It is specifically laid down by the article that the affixing of the seal is a matter for which the authority of the board of directors and not of a single director is required. Accordingly, I do not see, in the circumstances, as I have found them, how I can avoid holding that this document is a forgery, so far as the affixing of the seal is concerned, that the impression of the seal has been put upon it without any authority of the company, and that this is not a case in which the doctrine can be called in aid that, where the person who takes the document is dealing with a director in a matter in which normally the director would have power to act, he need not trouble about formalities."

8. The same reasoning applies in this case. Under Clause 131 of the 1st Defendant's Article of Association, the 1st Defendant's seal could only be affixed by a person under the authority of the directors or a committee of directors. The 2nd Defendant, as a single director, did not have the authority, actual or otherwise, to act in that regard unless she was approved by the directors. The cases therefore are not distinguishable. The only representation that the Plaintiff can show in this case by the 1st Defendant is that of the forged resolution.

9. Mr Xavier also referred to the work of Professor Gower who commented on the true basis of the cases cited by Mr Shum. I really do not see how, in the circumstance of this case, the Plaintiff could obtain much assistance from his comments.

The decision

10. The Master, therefore, was correct in refusing to grant the judgment to the Plaintiff. The appeal by the Plaintiff against the Master's decision on the judgment is dismissed.

[Discussion with Counsel on the directions]

11. As the issues are now quite well defined, pleading is not necessary. I would therefore change the directions ordered by the Master. The originating summons is adjourned for argument to a date to be fixed, the estimated time is two days. The deponents of the affirmations are to be tendered for cross-examination. Liberty to apply is granted to the parties.