Corporate Practice The Execution of Deeds and the Case of

Corporate Practice The Execution of Deeds and the Case of HCK China Investments Ltd v Solar Honest Company Ltd Stephen Vine takes a look at a recent Australian case highlighting the dangers faced by Hong Kong companies that fail to seal documents strictly in accordance with their Articles of Association I n the Federal Court of Australia case of HCK China Investments Ltd v Solar Honest Co Ltd [1999] FCA 1156, a lengthy judgment was delivered by the Honourable Justice Hely on a wide range of legal issues from illegality of contracts and the principles governing consideration in contracts to the equitable doctrine of resulting trusts. The outcome was, however, eventually decided on the question of whether or not certain documents were validly executed under Hong Kong law as deeds and, for the purpose of this article, I will limit my observations to this aspect of the judgment. The parties to the two escrow agreements in question, which were expressed to be governed by Hong Kong law, were a Hong Kong company, a British Virgin Islands (BVI) company and a Hong Kong firm of solicitors, which was acting as escrow agent. The arrangements related to completion of a reverse takeover of a publicly listed Australian company into which assets in the PRC had been injected. In respect of the first escrow agreement, the reason for making it under seal was concern as to the lack of consideration. The BVI company's articles required the affixing of the seal to be witnessed and attested to by the signature of a director or any other HONG KONG LAWYER NOV1999 person so authorised from time to time by resolution of the directors. A practical difficulty arose at the signing meeting in Australia, however, because the common seal of the BVI company was in the previous name of the BVI company, as no seal in the new name had been ordered when the BVI company had changed its name some months earlier. It was not disputed that the sole director of the BVI c o m p a n y had signed the document in Australia, intending it to be binding on the BVI company as a deed, and had instructed the Hong Kong solicitor to affix the new seal later. However, the judge concluded that this was done only after the solicitor's return to Hong Kong, without the sole director of the BVI company being present. Interestingly, the judge accepted that if he had found on the facts that the old seal had been affixed in the presence of the director, then the efficacy of the document's execution as a deed would not have been undermined. Expert evidence was first heard as to whether the BVI company had validly executed the document as a deed under BVI law. The BVI legal experts were agreed that under BVI law a company's sealing, to be valid, must be in accordance with its constitution, unless the sealing is apparently regular, and any irregularity is not known to the outsider seeking to rely on the investment. Such view was found to be consistent with the findings in Equity Nominees Ltd v Tucker (1967) 116 CLR 518 and Woo Turhan & Anor v Taiwan Fuji Trading (HK) Ltd [1995] 2 HKC 481. With respect to the presumption of regularity flowing from s 23 of the Conveyancing and Property Ordinance (Cap 219) (CPO), which provides that '[a]ny instrument appearing to be executed shall be presumed, until the contrary is proved, to have been duly executed', it was held that such presumption was rebutted by the evidence as to the facts, which showed that the seal had not been affixed in the presence of the BVI company's director. Further expert evidence was then heard on ss 20(2) and 19(2) of the CPO from two Hong Kong lawyers, who disagreed as to whether such sections could be read together so as to achieve the net result that the director of the BVI company had validly executed the relevant document under seal as agent for the BVI company. Section 20(2) of the CPO provides that '[w]here a person is empowered to execute a deed by a corporation, he may execute the deed as agent by signing the name of the corporation or his own name and by affixing his own seal', while s 19(2) of the CPO provides that '[a] document shall be presumed to have been sealed by an individual if the document signed by him ... (b) states that it has been sealed'. Despite neither of the experts citing any authority in support of their respective positions, the view of Mr Russell Coleman was preferred that under the general law, sealing of a document, whilst essential to a deed, was not required to be effected by the affixation of the executing party's own seal. It was noted, in particular, that the words 'or his own name and by affixing his own seal' had been so Con introduced by amendment of s 20(2) in 1988, departing from the model provided by s 19(2). Accordingly, the judge concluded that whilst s 19(2) allows sealing to be presumed in the circumstances to which it applies, it can have no operation where the question is not whether a document has been sealed, but whether the party executing the document has affixed his own seal. In this case, because the director of the BVI company had not affixed any seal at all (such as a red wafer or sticker), there was no seal on the document which he acknowledged to be his. In addition, the judge held the better view to be that s 19 only applies to execution of a deed by an individual, whereas s 20 applies to execution of a deed by a corporation. The Hong Kong common law doctrine of the Rule in Turquand's Case was then considered, which would ordinarily have entitled the Hong Kong company to assume that, as the common seal of the BVI company appeared on the document attested by the signature of its sole director, the document was therefore executed under the common seal of the company in accordance with its constitution. However, the judge noted that the Hong Kong solicitor was acting for both parties and that under Hong Kong common law, matters within her knowledge would therefore be attributed to the Hong Kong company. As the person dealing with the company was deemed to know of the irregularity, the rule did not apply. A second escrow agreement executed later in Hong Kong between the same parties was also found to have been ineffective as a deed. In this case, although the document was signed by the director of the BVI company, it was held that the Hong Kong company through its directors had actual knowledge that the seal of the BVI company had not been validly executed in accordance with its articles because the seal had been affixed later by the BVI company's secretary. HONG KONG LAWYER NOV1999 Accordingly, it was held that the Rule in Turquand's Case did not apply in this situation either. For although it was acknowledged that the directors of the Hong Kong company may not have known whether the BVI director was present when the seal was later affixed by the BVI company's secretary, they knew that it was signed prior to the seal being affixed and were therefore on notice that the seal might well have been affixed without the director of the BVI company being present and yet made no inquiry as to this. Because of this, the Hong Kong company was unable to rely on the indoor management rule. The judge commented that it was unfortunate that counsel had not made any submissions as to whether or not there was an operative estoppel under Hong Kong law. It was therefore unnecessary for him to consider whether any estoppel would have changed his conclusion. In my opinion, the outcome may well have been different if the court had been asked to consider the case law dealing with estoppel in the context of sealing documents. For example, it was held in TCB Ltd v Gray [1986] 1 All ER 587 that where a person executed a deed by stating that it had been 'signed sealed and delivered', but without in fact sealing it, and another person relied on the deed to his detriment, the person executing the deed was estopped from denying that it was sealed. It is interesting to note that this judgment, which would in any event only be of persuasive authority, was based entirely on brief arguments from two Hong Kong legal experts, and I cannot help wondering whether the outcome might have been entirely different if given a full hearing before the Hong Kong courts. However, I now understand that the case is being appealed and await the outcome of such appeal with interest, particularly if the aspect of estoppel is explored in any depth. In the meantime, if there is any doubt as to the lack of consideration and the slightest concern that a company's sealing formalities cannot be strictly complied with, I would recommend that a token cash consideration be in fact paid and that such payment and receipt be clearly recited in the relevant document. In respect of documents which have to be under seal in any event, this case demonstrates how careful practitioners need to be to ensure that the sealing formalities are strictly complied with whatever the practical difficulties of so doing. Stephen Vine Angela Wang & Co HCK China Investments Ltd v Solar Honest Company Ltd [1999] FCA 1156 Justice Hely m. IT ± & (escrow agreements) W (K »£f (escrow agent) 51 Corporate Practice A K®t&%sfcmttim&.fflm > HjfcHfltJ^ 19(2) (b) ma-wja? TTurquand -** (T R 1998 » 19(2) (indoor management rule) ° 19(2) ^^ aBr^ft (estoppel) jft 19 20(2) M Wife TCB Ltd o Gray [1986] 1 All ER 587 fr Eqi//fy Nominees Ltd v Tucker (1967) 1 16 CLR 518 & Woo Turhan Ef Anor v Taiwan Fuji Trading (UK) Ltd [1995] 2 HKC 481 FSSW 219 23 ta&^ -is • ati li f T u r q u a n d lr. rp x|V RJC ' ^^ 19(2) S 20(2) a '± n 20(2) »^5g = 52 HONG KONG LAWYER NOV1999