PERFECTIME LTD. v. KO MING BOR AND ANOTHER

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

MISCELLANEOUS PROCEEDINGS NOS. 1161 AND 515 OF 1994

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J U D G M E N T

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1. By an agreement for sale and purchase dated 4th October 1993, "the purchaser", Perfectime Limited, agreed to purchase and "the vendors",Messrs Ko Ming Bor and Ho Shuet Wah, agreed to sell the property atShop M on the ground floor and cockloft of Chung Nam Mansion, Nos.68-88,Ma Tau Chung Road and Nos.2-4 Mok Cheong Street, Kowloon, Hong Kong("the said property") at the price of HK$7,080,000.

2. The vendors are executors of the estate of one Lam Kwan Sze, deceased. Lam's predecessor-in-title was a corporation by the name ofChung Nam Land Investment Company Limited ("Chung Nam") which sold and assigned the said property to Lam by a deed of assignment dated3rd January 1964. This 1964 assignment was affixed with Chung Nam'scompany seal and signed by one of its directors described as "the managing director", one Mr Chu Shek Lun. The same Mr Chu had apparently assignedthe said property to Chung Nam by an earlier deed of assignment dated 30th May 1963. The seal of Chung Nam was also affixed on the 1963 assignment and it was signed by the one and same director, viz. Mr Chu Shek Lun. No other director of Chung Nam signed on it.

3. The Articles of Association (Article 46) of Chung Nam however provided that "all deeds or instruments requiring the seal of the company shall be signed by two directors".

4. The main issue between the parties in these proceedings is whether the vendors have shown a good title to the said property in the lightof the fact that both the 1963 and 1964 assignments were executed by only one director as opposed to two directors as provided for in the Articles of Chung Nam.

5. The vendors issued a vendor and purchaser summons on 28th February 1994 in MP515 of 1994 and sought for a declaration that therequisitions and objections of various letters of the purchaser's solicitors hadbeen efficiently answered by the vendors and a declaration that a good title tothe said property had been shown by them in accordance with s.13 of theConveyancing and Property Ordinance, Cap.219.

6. On the other hand, the purchaser issued an originating summons on 12th May 1994 for the determination of the question of whether the vendors have shown a good title to the said property in accordance with the said agreement and other relief.

7. Section 4(1) of the Conveyancing and Property Ordinance, Cap.219 provides that:-

"A legal estate in land may be created, extinguished or disposed of only by deed."

8. Section 32(1) of the Companies Ordinance, Cap.32 provides that:-

"(1) Contracts on behalf of a company may be made as follows:-

(a) A contract which if made between private persons would be by law required to be in writing and unsealed, may be made on behalf of the company in writing under the common seal of the company."

9. Section 20(1) of Cap.219 further provides that:-

"20(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."

10. Mr K.Y. Thong, counsel for the purchaser, submitted that s.20(1) however does not apply in this case because the seal is affixed by only one director. At Common Law he submitted that the deed would be void if the formalities had not been observed. Sarah Nield, the Conveyancing and Property Ordinance at page 75 said:-

"At Common Law, the deed would be void if these formalities had not been observed (Cope v. Thames Haven Dock and Railway Company (1849) 3 Exch 841)."

In Gore-Brown on Companies, Vol.1, 44th Edn. paragraph 5.8, the learned editors say:-

"The mere affixing of the seal of a corporation is sufficient without witnesses, and, unless the articles provide 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."

In the case of Whole Year Development Limited v. Lung Chiu Yee Julia, MP No.966 of 1993, (21st June 1993 per Mayo, J.), the facts are similar tothe present case. A company's articles provided that every instrument towhich its seal is affixed should be "signed by a director and countersigned byanother person who should be either the secretary or secretary-treasurer oranother director or some other person appointed by the director for thepurpose". The two signatories witnessing the affixing of the seal on the deedof assignment, purportedly executed by the company were neither thedirectors nor secretary of the company nor any person appointed by thedirectors for this purpose. Mayo, J. held that since the requirements for dueexecution of the deed were not complied with, there had been no conveyance of the legal estate. It was accordingly held that the vendor had no title to offer the purchaser. In other words, non-compliance with the formalities for affixing the common seal meant that the purported assignment was void and hence no title of interest passed. At page 4 of his judgment, he said:-

"[Mr Edward Chan, Q.C., counsel for the Defendant (Vendor)] also placed reliance upon Lord Russell's test in MEPC v. Christian Edwards 1981 AC 205:-

'In my opinion if the facts and circumstances of a case are so compelling to the mind of the court that the court concludes beyond reasonable doubt that the purchaser will not be at risk of a successful assertion against him of the incumbrance, the court should declare in favour of a good title shown.'

I regret that I am unable to accept the validity of these submissions. I agree with Mr C.H. Chan that Rolled Steel Products provides no assistance to the Defendant's contentions. It was dealing with an entirely different situation.

It did not purport to in any way rectify a situation such as arises in the present case where the requirements of Articles of Association of a Company for the due execution of a Deed had not been complied with. I agree with Mr C.H. Chan that unless there has been such compliance there has been no conveyance of the legal estate. I do not consider that the MEPC test has any application to such a situation as the Defendant has no title to offer to the Plaintiff."

11. In the case of Qualihold Investments Limited v. BylaxInvestments Limited, HCMP No.1382 of 1991, (28th November 1991 per Keith, J.), an assignment was purportedly executed by one 2nd confirmorFullway. Article 102 of the Memorandum and Articles of Association ofFullway provided that every document required to be sealed with the seal ofFullway should be deemed to be properly executed if sealed with the seal ofFullway and signed by any two directors or the managing director. Article 71provided that the qualification of a director shall be the holding in his ownright of ten shares in Fullway. In purported execution of the assignment byFullway as the 2nd confirmor, the assignment was executed by only one of itsdirectors, Lydia Wu. The evidence before the court shows that not only did she appear not to have been the managing director of Fullway on the date ofthe assignment, but also that she did not, on that date, hold in her own rightten shares in Fullway. Keith J. at page 8 said this:-

"The Request and Direction

'If the purchaser before completion re-sells the land to another. it is to the sub-purchaser's interest to obtain a conveyance direct from the vendor, no notice being taken of the original contract, as this would prevent the raising in the future of any question whether the original purchaser incumbered his interest before the re-sale and the sub-purchaser had notice thereof. Where there is no increase of price on the re-sale, the vendor may well agree to this if the original purchaser signs a memorandum authorising him to convey the land direct to and to receive payment of the price from the sub-purchaser: Williams, op. cit., at pp. 642-643.'

It follows that since a memorandum was sufficient for Fullway to request and direct the MTR to assign the shop to Sunnyway, the mere fact that that request and direction was contained in an assignment which was not properly executed is immaterial. However, the fact that it was contained in a document signed by only one of the directors of Fullway is another matter altogether. That is because one director, not being a Managing Director, has no authority to do anything on behalf of a company unless authorised by the Board of Directors to do so: see, for example, Gower, Company Law, 14th ed., p.194, and the case cited at footnote 58. There is no evidence that Lydia Wu was authorised by the Board to do what she did. It follows that in my view Fullway's purported requested and direction to the MTR to assign the shop to Sunnyway was ineffective.

The Receipt

Section 18(1) of the Conveyancing and Property Ordinance (Cap.219) provides:

'A receipt for consideration in the body of an instrument shall be a sufficient discharge to the person paying the consideration and, in favour of any other person acting on the faith of the receipt, shall be sufficient evidence of payment.'

Since the sub-section applies to all instruments and not just deeds. Fullway's acknowledgement of receipt of the sum of $1,345,000.00 paid to it by Sunnyway did not have to be contained in a deed. However, the fact that it was contained in a document signed by only one of the directors of Fullway when there is no evidence that she was authorised by the Board to do so means that the acknowledgement of receipt was not sufficient evidence of its payment."

Further Keith J. said at p. 13:-

"The issue is not whether Fullway is likely to challenge the Plaintiff's title. but whether the Defendant's title was sufficiently doubtful to justify the Plaintiff in not proceeding with the completion of its agreement with the Defendant."

Keith J. decided that the plaintiff is justified.

12. Mr Boey, counsel for the vendors, relied on the case of Chung Yiu Ki v. The Attorney General HCMP No.2611 of 1987, 23rd December 1987 per Godfrey J. (as he then was). In this case, an assignment by a corporate predecessor in title of the plaintiff in 1940 appeared not to have been under seal. Godfrey J. held that that did not matter for the following reasons:-

(1) Under's.13 of Cap.219, the title offered to the purchaser need not and should not go back beyond 25 years to 1948 (s.13 has now been amended and the relevant period is now 15 instead of 25 years);

(2) Since the corporation took the benefit of the assignment it was bound by it whether or not it was properly executed or not. In other words, it is now precluded from seeking to set aside the assignment;

(3) Besides the limitation period for doing so has long since past.

13. Mr Boey further relied on another case Peking Fur Store Limited v. Bank of Communication, HCMP No.2083 of 1993, 29th July 1993 per Godfrey J. (as he then was). In this case, the deed of assignment of property had been executed by a corporation in manner which did not conform with the express provisions of its articles. However, there was evidence that the board of directors had passed a resolution which not only authorised the transaction to be carried into effect by the assignment, but also authorised the signature of the assignment by one director only. It was held that since the company was precluded from contending that the assignment was invalid "the company's seal was affixed to the assignment and a new estate passed accordingly, despite the formal defect in execution" (see page 3 thereof).

14. However, Mr Thong submitted that, which I do accept, the two cases of Godfrey J. (as he then was) are distinguishable. In the case of Chung Yiu Ki, the vendors' title should not be investigated beyond 25 yearsinto 1940. Here, under our new s.13, although the 1964 and 1963 deeds are beyond 15 years, that was the assignment from which the vendors derivedtheir title within the 15 years period. In the case of Peking Fur Store Limited,the vendor had produced a copy of a resolution of the board of directors which not only authorised the transaction to be carried into effect by theassignment but expressly authorised the signature of the assignment by onedirector only. It was decided that there is no risk that the company maysucceed in proceedings to have the assignment declared invalid.

15. However, in the case before me. I do accept the submission of Mr Thong from the aforesaid authorities cited that the 1964 assignment was void for want of another director's signature in accordance with the Articles of Association of the Company. Accordingly there had been no conveyance of the legal estate in the said property to the vendors.

16. The purchaser is also claiming damages beyond the cost ofinvestigation of title. Mr Thong accepted that the general rule is that apurchaser's right to damages is subject to one important qualification. Thelearned editor in Barnsley's Conveyancing Law and Practice, 3rd Edition at p.584 said that:-

"A purchaser's right to damages is subject to one important qualification. Where non-performance of the contract results from the vendor's inability to make a good title. the only damages recoverable are the expenses incurred by the purchaser in investigating the title. He cannot recover damages for loss of the bargain. This is known as the rule in Bain v. Fothergill, where the House of Lords affirmed a principle first established one hundred years earlier by the decision in Flureau v. Thornhill."

However, he relied on the non-application of this rule in certain circumstances. It has further been said at page 586:-

"Even when the title is subject to a defect which prima facie attracts the rule. a vendor cannot rely on it unless he has used his best endeavours to remove the defect. In Malhotra v. Choudhury, it was not applied because the vendor who alone was contractually bound to sell had taken no steps to secure his wife's consent to the sale of a house vested in their joint names. It was the vendor's unwillingness. not his inability, that caused the failure to convey, and this was indicative of bad faith. This best efforts requirement introduces uncertainty into the application of the rule. Whether or not a vendor has failed to take proper steps to cure the defect is a question of fact, and will depend on the nature of the defect. involved. In Malhotra v. Choudhury the court declined to state what steps ought to have been taken. Yet it should be relatively easy to determine whether he has discharged the duty if consent of a third party, eg a landlord or non-contracting co-owner, has not been obtained. The task will be more difficult when the defect takes the form of some obscure or long-forgotten incumbrance created by a predecessor in title and not coming to light until after exchange of contracts. Whilst the vendor will not ordinarily be obliged to engage in speculative litigation to perfect his title, he will have to show reasonable efforts to secure release of the adverse claim. In Sharneyford Supplies Ltd v. Edge, a vendor contracted to sell with vacant possession a maggot form occupied by tenants entitled to the protection of Pt II of the Landlord and Tenant Act 1954. They refused to move out and the sale was never completed. The vendor was unable to rely on the exception to limit his damages. As he had never served any notice to quit on the tenants, it could not be said that he had taken all reasonable steps to acquire vacant possession. The fact that this step, if taken, would probably have been quite unproductive was no excuse. Moreover, the tenants had offered to surrender the tenancy on payment of ?12,000. In Parker LJ's view the vendor's unwillingness to buy out their interest also betokened a failure to use his best endeavours."

Have the vendors made the best endeavour to remove the defects? The vendors' solicitors have written to Messrs Lo & Lo, the then solicitors for theChung Nam Company. Messrs Lo & Lo replied to the effect that they haveno further instructions and contact with the company and could not assist inthe matter. I was told by counsel for the vendors that the vendors' solicitorshad confirmed from the Company's Registry that this company is still inexistence with a registered address. They have written to Chung Nam butreceived no reply. The letter they have written to Chung Nam was not placedbefore me. Although I would say that they can exert more endeavour tocontact this company in order to secure a confirmatory assignment to cure thedefect by say visiting the registered address of the company, I cannot say thatthey have not made their best endeavour to cure the defect for the purpose oftaking the case out from the general rule in Bain v. Fothergill. I, therefore, donot consider the purchaser is entitled to further damages as claimed.

17. In conclusion, because of the want of one further director to sign the 1964 assignment, the assignment is void and the vendors failed to show a good title in the said property in accordance with the said agreement dated 4th October 1993. I therefore declare in HCMP1161of 1994 that Requisition No.1 in the letter dated 28th September 1993 from the purchaser's solicitors to the vendors' solicitors in respect to the title to the said property had not been sufficiently answered by the vendors. I also declare that good title had not been shown in accordance with the said agreement. I make an order nisi that the vendors shall forthwith return to the purchaser the sum of $708,000 being the amount of its deposit and pay the purchaser interest thereon at the rate of 9.5% per annum from 28th February 1984 until judgment and thereafter at the judgment rate. I also make an order nisi that the vendors do pay to the purchaser its costs of investigating the title of the property and the costs of and incidental to these proceedings to be taxed if not agreed. The purchaser is also entitled to a declaration that it is entitled to a lien on the title deeds and documents of the said property for the payment or repayment to the purchaser of the aforesaid deposit and interest, the said costs and expenses of investigating title and the costs recovered by the plaintiff in these proceedings. The vendors' summons in HCMP515 of 1994 is dismissed with costs to the purchaser to be taxed if not agreed.