October 05 2001
The affixation of a company's seal on an instrument is usually carried out in the presence of two directors or one director and another permanent officer of the company. There has been a series of decided cases in Hong Kong concerning the validity of the instrument concerned where the seal of the company was affixed and attested by one single director.
The recent Court of Appeal decision in Grand Trade Development Limited v Bonance International Limited  HKEC 886, which overruled previous lower court decisions on the same point, will doubtless create headaches for local conveyancers.
In Grand Trade the purchaser's solicitors raised requisitions on two assignments in the chain of title that were executed by a single director from the company concerned. The articles of association of these two assignor companies were identical, in that they provided the following:
"The seal of the company shall be kept by the board of directors and shall not be used except with their authority.
Every document required to be sealed with the seal of the company shall be deemed to be properly executed if sealed with the seal of the company and signed by the chairperson of the board, or such person or persons as the board may from time to time authorize for such purpose."
The purchaser's solicitors asked for evidence relating to the due execution of the two assignments - that is, production of the relevant board resolutions. The vendor failed to produce these board resolutions and sought to overcome the difficulty created by the absence of a resolution by relying on various presumptions and rules, including Section 23 of the Conveyancing and Property Ordinance and the 'indoor management' rule. The judge at the lower court found in favour of the vendor and the purchaser appealed.
The Court of Appeal allowed the appeal and found in favour of the purchaser. It commented specifically on the vendor's arguments as follows.
Section 23 of Conveyancing and Property Ordinance
This section provides that "an instrument appearing to be duly executed shall be presumed, until the contrary is proved, to have been duly executed". The court held that this section only applied where, on its face, the instrument appeared to be duly executed. In Grand Trade the respective directors who affixed their signatures did not purport to sign as chairperson. Had the relevant signatories signed with a description such as "the person duly authorized by the board of directors" rather than simply as one of its directors, Section 23 would have been engaged. Failure to add these specific words were fatal to the vendor's claim and Section 23 could not apply.
Indoor management rule
This rule (established in the Turquand Case) enables any person contracting with a company and dealing in good faith to assume that acts within the company's constitution and powers have been properly and duly performed, and are not bound to enquire whether acts of internal management have been regular.
The Court of Appeal considered an Australian case, Registrar General v Northside Developments Pty Limited (1988-1989) 14ACLR543, where this rule applied. However, the court was of the view that the instrument in question, on the face of it, was not regular. If the person appending the signature had been described as a person "duly authorized by the board", the indoor management rule would have applied. Any person, whether a director or not, could have been authorized by the board, but there is no presumption that if the signatory is a director, he must have been duly authorized by the board.
This case will create problems for conveyancers, who have previously approved title based on lower court decisions on this point. Although a vendor could make specific reference to the lack of such board resolution in the sale and purchase agreement to cover this defect, any well-advised purchaser will be unlikely to accept such a provision, particularly in current market conditions where the purchaser is in a stronger bargaining position than the vendor.
For further information on this topic, please contact Pius Cheng at Baker & McKenzie by telephone (+852 2846 2478) or by fax (+852 2845 0476) or by e-mail (Pius.Cheng@BakerNet.com).
ILO provides online commentaries as specialist Legal Newsletters. Written in collaboration with over 500 of the world's leading experts and covering more than 100 jurisdictions, it delivers individually requested information via email to an influential global audience of law firm partners and international corporate counsel. Please click here to register for the service.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription. Register at www.iloinfo.com.