ON HONG TRADING CO. LTD. v. BANK OF COMMUNICATIONS

HCMP3099/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.3099 OF 1999

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J U D G M E N T

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1. A company registered in the British Virgin Islands ("BVI"), Perfect Venture Holdings Limited ( "the Mortgagor"), purchased a property in Flat B, 18th Floor and carparking space nos.112 and 113 on the First Parking Floor of Woodbury Court, No.137 Pok Fu Lam Road, Hong Kong ("the Property") on 11 June 1997, and on the next day, entered into a first legal charge in favour of the defendant ("the first mortgage"). The first mortgage was first registered in the Land Office on 23 July 1997.

2. At some stage, the details of which are not material for our purposes, the Mortgagor defaulted in repayment under the first mortgage and an Order for Possession was obtained by the defendant against it on 2 December 1998, and later a Writ of Possession, combined with Fieri Facias, was obtained and the defendant took possession of the Property on 1 April 1999.

3. On 21 April 1999, the defendant advertised the sale of the Property by public auction which was to take place on 28 April 1999. The plaintiff saw the advertisement on 27 April 1999 and viewed the Property on 27 and 28 April 1999 and successfully bid for the Property at the auction at the price of $12 million.

4. The following are some of the terms of the Auction Contract :

(1) Special Condition 1 :

"The completion date was to be 27 May 1999."

(2) Special Condition 2(a)(I) provides :

"The Vendor are selling as Mortgagee in possession and in the exercise of the power of sale and shall not be required to enter into any covenant in the Assignment to the Purchaser other than the usual limited covenant that the Vendor has not encumbered the property and the concurrence of any other persons in the assurance of such property shall not be required and every Purchaser shall assume that the events have happened entitling the Vendor to exercise their power and no Purchaser shall raise any objection or requisition in respect thereof."

(3) Special Condition 2(a)(II) provides :

"Upon payment of the balance of the purchase money, the Vendor shall execute or procure to be executed in favour of the Purchaser a good and valid assignment of the Property sold to him such assignment to be prepared by and at the expense of the Purchaser and to be approved by the Vendor's solicitors at the Purchaser's expenses in accordance with the Law Society Scale Fee."

(4) General Condition 8 provides :

"Upon payment of the balance of the purchase money the Vendor shall execute in favour of the Purchaser a good and valid assignment of the Property and will not be obliged to convey the Property to any person other than the Purchaser."

(5) General Condition 15 provides :

"The title deeds and documents in respect of the Property in the Vendor's possession may be inspected at any time by appointment prior to the sale during business hours at the office of the Vendor's Solicitors. No objections or requisition in respect of the title to the Property shall be raised by the intended purchasers or the Purchaser before or after the sale. The Purchaser hereby declares that the Purchaser having been provided with the opportunity to inspect all documents of title to the Property whether or not he has inspected the same shall be deemed to purchase the full notice of the contents thereof and declares that he accepts the Vendor's title to the Property without further enquiry or requisition."

(6) General Condition 19 provides :

"Without prejudice to the generality of Clause 15 hereof, the Purchaser shall not make any objection or requisition on the ground that any deed or instrument of title affecting the Property purchased by him was executed under a Power of Attorney, but shall assume without enquiry that at the time of execution of any such deed or instrument of title the Grantor of such Power of Attorney was alive and that the Power of Attorney was in full force, virtue and effect and unrevoked and that the Grantee or his substitute thereunder had full power and authority to execute the deed or document of title. So far as the Grantor is a corporation, the Power of Attorney was also given and executed in accordance with its constitution and the laws of country where it was incorporated. The Purchaser shall not make any objection or requisition on the ground that any deed or instrument of title was not duly executed in accordance with its constitution and the laws of the country where it was incorporated. And the Purchaser shall not call for the original certified or other copies of the Power of Attorney or make any requisition or raise any objection in respect thereof. No requisitions or objection shall be raised as to the execution of the title deeds and documents in respect of the Property. The Purchaser shall assume without enquiry that all the title deeds and documents are duly executed."

(7) General Condition 24 provides :

"Time shall in all respect be of the essence of these Conditions."

5. A number of requisitions were raised by the plaintiff's solicitors' letter of 15 May 1999. The one which I have to deal with for the purposes of this case is Requisition No.4, which was as follows :

"4. Mortgage not duly executed by the Mortgagor (without Common Seal)

In Mortgage dated 11 June 1997 M/N 7172540 and re-registered M/N7483184 the Common Seal of the Mortgagor, Perfect Venture Holdings Limited, was not affixed to the Mortgage. Please prove that the Mortgage is valid. This is very crucial as your clients' title to sell as mortgagees in possession very much depends upon the Mortgage being valid and enforceable in law."

6. The actual mortgage was signed under these words : "SEALED with the Common Seal of the Mortgagor and SIGNED by" Leung Man Ho David and Chan Sau Mui Kandy, its Directors in the presence of the solicitor. The actual signatures of both Mr Leung and Ms Chan were under the chop "for and on behalf of Perfect Venture Holdings Limited". It is accepted that this is a rubber chop.

7. Mr Andrew Cheung for the plaintiff, developed this point in argument as follows. This first mortgage was not sealed with the common seal of the Mortgagor, a BVI corporation. The "for and on behalf of" rubber chop used by the directors of the Mortgagor was obviously not its common seal. Here, he says, although the Mortgagor had intended to use its common seal, the seal or chop it used clearly was not the seal of the company but a chop to authorize agents of the company to sign on its behalf. Mr Cheung says, quite validly, where one finds the words "for and on behalf of the company", it is clearly not the act of the company but the act of agents even if on the company's behalf.

8. Mr Cheung goes on to say, and this is not in dispute, that in the absence of proof to the contrary of the applicable law in the BVI, the BVI law is presumed to be the same as Hong Kong law.

9. The crux of the plaintiff's case is section 93(1)(b) of the Companies Ordinance, Cap.32 of the Laws of Hong Kong. This provides that :

"(1) Every company -

...

(b) shall have as its common seal a metallic seal on which it shall have its name engraven in legible characters;

..."

The metallic element does not appear in United Kingdom legislation, in either the 1929 or the 1948 Companies Acts. Section 93(1)(b) was referred to by the plaintiff's solicitors in correspondence with the defendant's solicitors, but the defendant's solicitors did not provide evidence that the BVI law is different in that regard.

10. Mr Cheung therefore says that as the first mortgage was not properly executed by the Mortgagor, no legal charge by deed was executed by the Mortgagor in favour of the defendant. It follows, he says, that the defendant did not have a statutory power of sale under the Conveyancing and Property Ordinance, Cap.219 and he refers to sections 44(1) and 51(1), and paragraph 8 of the Fourth Schedule. For ease of reference, I ought to set out these provisions :

"44. Mortgage of legal estate

(1) After the commencement of this section, a mortgage of a legal estate, including any second or subsequent mortgage of that legal estate, may be effected at law only by a charge by deed expressed to be a legal charge.

..."

"51. Powers of mortgagee and receiver

(1) Unless the contrary intention is expressed, there shall be implied in any legal charge or equitable mortgage by deed, the powers, exercisable by the mortgagee, a receiver (acting personally or through their agents) and any person entitled to give a receipt for the mortgage money on its repayment, mentioned in the Fourth Schedule.

..."

"8. To sell and assign the mortgaged land, subject to any prior estates, interests and rights to which the mortgaged land is subject, but free from the mortgage and all other estates, interests and rights to which the mortgage has priority, in such manner and subject to such lawful conditions as the mortgagee or receiver thinks fit; with power to vary or rescind any contract for sale, buy in at any auction and to resell without being answerable to the mortgagor for any loss occasioned."

11. Mr Cheung goes on to submit that as the first mortgage was not validly executed by the Mortgagor, there was no express or written power of sale in favour of the defendant bank either. In other words, the defendant had no power to sell the Property to the plaintiff at all. Clearly, if this is correct, this is a serious and fundamental defect in the defendant's title as it goes to the whole root of its power to sell the Property.

12. Mr Cheung also says that this constitutes a breach of Special Condition 2(a)(I) and the defendant cannot, in compliance with Special Condition 2(a)(II) and General Condition 8, execute a good and valid assignment to assign to the plaintiff the Mortgagor's estate in the land and to discharge that land from the mortgage under which the sale is made and any subsequent mortgage, and he refers to sub-sections 53(1)(a) and (b) of the Conveyancing and Property Ordinance, which are in these terms :

"53. Sale by mortgagee

(1) Where a mortgagee or receiver sells under an express or statutory power of sale, the assignment shall operate -

(a) to assign to the purchaser the mortgagor's estate in that land, subject to any other mortgage having priority to the mortgage under which the sale is made; and

(b) to discharge that land from the mortgage under which the sale is made and any subsequent mortgage.

..."

13. Mr Paul Lee for the defendant submitted that the so-called rubber chop was the only common seal of the Mortgagor at the time of the execution of the mortgage. The execution clause in the mortgage states that it was sealed with the common seal of the Mortgagor and there were two signatures of the Mortgagor's directors. He says that the mortgage was described as a deed and it was the clear intention or inference that the chops stamped on it was, or intended, to be used as the common seal. Mr Lee refers to a board resolution, first exhibited to an affirmation filed yesterday which shows that the rubber chop had been adopted as the company's common seal. He says that section 93(1)(b) of the Companies Ordinance does not supercede the common law and merely provides an alternative mode of sealing by a company. In particular, he says, there is nothing in the Companies Ordinance which mandates a common seal for conveyancing transactions.

14. Further, he points to the Articles of the Mortgagor and says that they do not stipulate that a common seal must be metallic, or that, for the Mortgagor to make a deed, it must use a common seal. Mr Lee submits that there is no authority that the company can only make a deed by the use of its metallic seal. He says that the law as to sealing is only that the deed must be executed in accordance with a company's Articles of Association and be sealed with a formal engraved seal, and he refers to Odgers' Construction of Deeds and Statutes, 5th Ed., 1967, p.7. The whole passage reads as follows :

" The indulgence and the matter of sealing does not extend to companies, building societies or industrial and provident societies. Their deeds, must be executed in accordance with their articles of association be sealed with a formal engraved seal. Where a seal had never been affixed and an attesting witness was not called, the court held that it could not presume sealing."

Mr Lee also refers to a passage in Palmer's Company Law at para.27-13 to which I need not refer.

15. Mr Lee relies on section 20 of the Conveyancing and Property Ordinance which I ought to read. Subsection (1) provides :

"(1) In favour of a person dealing with a corporation aggregate in good faith, his successors in title and persons deriving title under or through him or them, a deed shall be deemed to have been duly executed by the corporation if the deed purports to bear the seal of the corporation affixed in the presence of and attested by its secretary or other permanent officer of the corporation and a member of the corporation's board of directors or other governing body or by 2 members of that board or body."

16. Mr Lee's point is that it is clear that the position in conveyancing is different because section 20 refers only to the seal and not to the common seal of the corporation. For the purposes of conveyancing transactions, any seal, and not necessarily a metallic seal, is good enough to give validity to the deed of the corporation. He says that section 20 is merely a deeming provision to protect purchasers. It does not have the effect of overriding the rule that a deed may be validly executed if it is executed in accordance with the company's Articles of Association.

17. There was an opinion before me of the law of the BVI but Mr Lee did not rely on it He was, in my view, correct not to have done so. It came, in any event, too late and the relevant section of the legislation referred to, namely, section 68 of the International Business Company Act, Cap.291, suggests that if a deed is required, a common seal is necessary for its valid execution. For completeness, I set out sub-section (1)(a) and (3) of section 68 :

"68. (1) Contracts may be entered into on behalf of a company incorporated under this Act as follows -

(a) a contract that, if entered into between individuals, is required by law to be in writing and under seal, may be entered into by or on behalf of the company in writing under the common seal of the company, and may, in the same manner, be varied or discharged;

...

(3) Without affecting paragraph (a) of subsection (1), a contract, agreement or other instrument executed by or on behalf of a company by a director or an authorised officer or agent of the company is not invalid by reason only of the fact that the common seal of the company is not affixed to the contract, agreement or instrument."

18. Mr Lee goes on to say that even if the rubber chop was not the common seal, it was a seal of the Mortgagor and under Article 127, the Mortgagor may have more than one seal. The chop in question had the name of the Mortgagor clearly engraved on it. It should therefore be a seal in the proper sense of the word.

19. Mr Lee made the further point that on the basis of these submissions, the plaintiff's requisitions are not well-founded and the defendant was not obliged to answer them.

20. Mr Cheung's retort is that section 93(1)(b) of the Companies Ordinance is mandatory. Where a deed has to be executed by a company, it can only validly do so with a metallic seal. Mr Cheung's comments on

article 127 is :

(1) it was never supplied until the defendant filed evidence in these proceedings on 5 August 1999;

(2) that the resolution adopting the seal used on the Mortgage was not supplied until yesterday; and

(3) there is still no evidence that, under BVI law, a rubber chop or seal is valid as the company's common seal.

21. Mr Cheung submits that the common law and section 20 of the Conveyancing and Property Ordinance provide no answer to the points which he made as to the validity of the execution of the mortgage. At common law, the general rule is that a corporation contracts under its common seal, and it is only in that way that a corporation can express its will and do any act. Furthermore, and for this purpose, he refers to Sihombing & Wilkinson, Hong Kong Conveyancing Law and Practice, (Vol.1), paragraph VI at 153 :

"Where the corporation is required to execute a deed, it must affix its seal to any deed executed in its name."

He makes the point, correctly in my judgment, that section 20 does not apply, as "the deed does not purport" to bear the seal of the corporation. He says, again in my judgment correctly, that bear in this context must mean an imprint or a metallic imprint of the seal and he makes good the point by contrasting the position of an individual under section 19(2) which allows one of a number of requirements to be fulfilled in order for the document to be valid. I agree with Mr Cheung on this point.

22. In my judgment, section 93(1)(b) of the Companies Ordinance clearly applies to all companies in Hong Kong and it is clear that where a deed has to be executed by such a Hong Kong company, it can only do so validly if it uses its common seal which has to be a metallic seal. The law makes no exception for conveyancing transactions. As for article 127 of the Mortgagor's Articles of Association, that was provided too late and, in any event, it does not show that the deed can be executed without a common seal. There is still no evidence of what can constitute a common seal under the law of the BVI.

23. Mr Lee then relies on General Conditions 15 and 19 which I have already read. His reliance, however, was on a somewhat limited basis. He accepted that if the defendant did not have a power of sale because the legal charge was invalidly created, neither clause 15 or 19 would avail him. He says, however, that the signatures of the directors on the mortgage were sufficient to convey the equitable estate to the bank. The effect of clauses 15 and 19 is that the plaintiff is obliged to accept title even if equitable title was the only estate conveyed to it by the bank. This was the extent of Mr Lee's reliance on those two clauses.

24. The short answer, it seems to me, is that if the execution by the company is invalid for want of the metallic seal, there is nothing to show that it is valid or that it constitutes a valid execution by some other mode. The lack of the metallic seal renders the document invalid and not only as a deed for want of valid execution by the company. Moreover, when the mortgagor has the legal title, and a mortgagee purports to exercise a power of sale and covenants to pass a good and valid assignment, that must mean the assignment of the legal title.

25. Mr Cheung addressed interesting arguments based on a number of authorities such as Jumbo King Limited v. Faithful Properties Limited [1999] 3 HKLRD 757; Becker v. Partridge [1966] 2 QB 155 and Want v. Stallibrass (1873) LR 8 Ex 175. In the light, however, of Mr Lee's very limited reliance on clauses 15 and 19, it is not necessary for me to consider those submissions which are briefly to the effect that the deficiency in execution leads to the vendor not having the right to sell at all. It is such a fundamental defect that unless it was spelt out in the clearest possible terms in the contract of sale, the purchaser would not be taken to be bound by those terms, which have the effect of exemption clauses, whether as a matter of construction of the agreement or perhaps by way of a free standing equitable principle which has particular relevance in the contract for the sale of land.

26. Mr Cheung goes on to say that, in any event, the defendant was in repudiatory breach of Special Condition 2(a)(I) as it was not selling in the exercise of the power of sale since it did not have one, as well as Special Condition 2(a)(II) and General Condition 8 by reason of its failure to execute the good and valid assignment. He says that these are distinct breaches not covered by General Conditions 15 and 19.

27. The defendant's last stand, as it were, is that it offered to execute in good time a confirmatory mortgage and assignment with the full cooperation of the Mortgagor. Whilst this would normally be good enough, here we have the complication of encumbrances subsequent to the registration of the first mortgage on 23 July 1997. On 19 September 1997, a second mortgage was executed in favour of one Yip Sing Sing, and on 9 April 1999, a lis pendens was registered against the Property by a company known as Sun Well Asia Investment Limited.

28. In my judgment, the execution of a fresh confirmatory mortgage, under which the defendant may acquire an express or statutory power of sale, would not be good enough for the plaintiff as there will be serious doubts, to put it no higher, as to whether an assignment in favour of the plaintiff executed pursuant to the power of sale arising under the confirmatory mortgage entered into after the second mortgage and lis pendens, can confer priority on the plaintiff over the second mortgage and lis pendens. The plaintiff, in my judgment, should not be forced to live with these uncertainties.

29. In the circumstances, in my judgment, the defendant has failed to answer the requisition raised by the plaintiff's letter of 15 May 1999 and good title to the Property has not been shown. The plaintiff is entitled to the declarations sought in paragraphs 1 and 2 of the Originating Summons in these proceedings. There is no dispute that, if I make these two declarations, the plaintiff is entitled to the return of its deposit of $1.2 million, and also the defendant is liable to pay to the plaintiff the stamp duty of $450,000, if the plaintiff cannot get a refund from the Stamp Office, agent's commission fees of $120,000, costs and expenses of investigating the title in the sum of $52,210 and interest at the rate of 11.5% from the date of the Originating Summons, which is 25 May 1999, to the date of judgment and thereafter at the judgment rate.

30. I will now hear the parties as to costs and any other matters that they feel necessary to address to me.

[Submissions on Costs]

31. The plaintiff is entitled to the costs of these proceedings.