Grand Trade Development Ltd. v. Bonance International Ltd.

CACV001002/2000

CACV 1002/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 1002 OF 2000

(ON APPEAL FROM HCMP 2342 OF 2000)

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Coram: Hon Rogers VP, Le Pichon JA & Sakhrani J in Court

Date of Hearing: 19 June 2001

Date of Handing Down of Judgment: 26 July 2001

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J U D G M E N T

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Hon Le Pichon JA:

1.On 16 October 2000, Chung J dismissed the vendor and purchaser summons taken out by the plaintiff/purchaser for a declaration that the defendant/vendor had failed to prove a good title or to answer requisitions satisfactorily. This is the plaintiff's appeal from the dismissal.

2.The underlying contract related to the sale and purchase of a flat in Bowen Place, Bowen Road, Hong Kong. Requisitions were raised relating to two assignments of the property in the vendor's chain of title. By an assignment dated 29 April 1995, Manibest Investments Limited ("Manibest") as vendor assigned the property to Winkit Properties Limited ("Winkit"). On 20 December 1996, Winkit, in its turn, assigned the property to the present vendor. In each case, the assignor/vendor executed the assignment by sealing it with the common seal of the company and signing it by one of its directors. In Manibest's case, it bore the seal of the company and was signed by "Adrian John King representing FK Directors Limited, [Manibest's] director".

3.Article 23 of the articles of association of Manibest provided as follows:

"(a) The Seal of the Company shall be kept by the Board of Directors and shall not be used except with their authority.

(b) 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 Chairman of the Board, or such person or persons as the Board may from time to time authorize for such purpose."

Articles 20 and 21 of Winkit's articles of association are substantially identical to paragraphs (a) and (b) of article 23 of Manibest's articles. (For convenience, I will refer to article 23(b) of Manibest's articles and article 21 of Winkit's articles as "the deeming provision"). The 1995 and 1996 assignments bore the seal of Winkit and was signed by "its director, Chan Siu Kit".

The judgment below

4.The judge below concluded that a document of a company is duly executed if it is affixed with the company's seal unless other matters are required by the articles of association, and declined to follow the decisions in Li Ying Ching v Air-sprung (HK) Limited [1996] 4 HKC 418 and Ho So Yung v Lei Chon Un [1998] 2 HKC 697 where the articles were similar to those under consideration and where it was held that it was necessary to show due execution of the document and the deeming provision in the articles did not assist the vendors. He also declined to follow Lo Wing Wah v Chung Kam Wah [2001] HKLRD 227 insofar as it required a document to be both sealed and signed. So far as the deeming provision was concerned, he observed that they were intended for the benefit of a company as well as those dealing with it. But how matters would be facilitated by the deeming provision was not explained. Be that as it may, the judge went on to hold that there was no reason to conclude that the articles provided for a "reverse deeming", that is to say, that a document is deemed not to be properly executed when it had not been signed in the manner provided for. In any event, it would appear that the judge found that the deeming provision did not have the effect of imposing any other requirements such as signatures and the mere affixing of the seal was sufficient. He further concluded that the affixing of the seal alone was sufficient to trigger the presumption of due execution contained in section 23 of the Conveyancing and Property Ordinance, Cap. 219.

5.The judge then went on to consider the requisitions raised and the answers to them. Whilst he found that the relevant correspondence could have been better worded, he accepted the defendant's submission that the relevant facts were fully known to both parties' solicitors, that the requisitions and answers related to pure points of law, and that provided the battle line was sufficiently clearly drawn (as in this case) with the plaintiff insisting that the defendant should produce evidence relating to due execution of the assignments and the defendant denying that there was such an obligation, it was irrelevant whether the arguments put forward in the defendant's letters were based on correct legal principles.

6.The judge did not consider it necessary to deal with the other points raised by the defendant having found in its favour on both the defect of title and requisitions points.

The requisition as to due execution

7.The primary issue in this appeal is whether the requisition as to due execution had been satisfactorily answered. For this purpose, it is necessary to set out the relevant provisions of the agreement and the correspondence.

8.On 16 March 2000, the parties entered into a provisional agreement for the sale and purchase of the property with completion being on or before 3 May 2000. Although the provisional agreement envisaged that the formal agreement would be signed on or before 29 March 2000, that was not in fact entered into until 13 April 2000. The date fixed for completion remained unchanged. Clause 16.01 of the formal agreement gave the purchaser's solicitors 7 working days after the date of receipt of the title deeds and documents to raise requisitions and objections. Any further requisition on or objection to the vendor's reply to any previously raised requisition or objection had to be raised within 7 days after the receipt of such reply by the purchaser's solicitors. Curiously, under clause 15.03(a), the vendor's obligation was to produce title deeds only 7 days before completion. This is inconsistent with clause 16.01 inasmuch as it would not only deprive the purchaser of its right to making further requisitions but also deny it a reasonable time to consider the vendor's replies. Be that as it may, the title deeds were delivered on 25 April 2000. Not unreasonably, the plaintiff's solicitors wrote on the following day to request a postponement of the completion date to 15 May. Two days later, the defendant's solicitors replied and agreed to postpone completion to 5 May only. It will be seen at once that this time-table was wholly inadequate in order to give effect to clause 16 of the formal agreement. However, the parties proceeded on the basis of this compressed time-table.

9.On 3 May, the plaintiff's solicitors raised, amongst others, the following requisition in respect of the 1995 assignment:

"The assignment was executed by only one director on behalf of the vendor, not in accordance with its sealing provisions. Please prove due execution of the assignment..."

A similar requisition was raised in relation to the 1996 assignment. This elicited a reply later the same day in the following terms:

"Please refer to Law Society's Circular 105/90 (copy enclosed), in which it was clearly stated that in situation 2(c) as therein mentioned, we are not required to produce any authorization as section 23 of the Conveyancing and Property Ordinance Cap.219 could properly be invoked. We consider that the situation is still valid and not varied by the recent development of case law. No further proof of due execution of the subject Assignment is necessary."

Paragraph 2(c) of the Law Society's Circular stated that a conveyancing document may be executed by a corporation otherwise than in accordance with section 20(1) of Cap. 219 and cited a typical example. Paragraph 3 stated that the council had obtained a London QC's opinion on this matter and the opinion was that in the circumstances set out in paragraph 2(c), amongst others, a vendor was not required, in view of the provisions of section 23 of Cap. 219, to produce evidence of authorization by the board of directors in order to prove title.

10.The plaintiff's solicitors were not satisfied with the answer given. On the following day, which was the day before completion, a series of letters were exchanged. The plaintiff's solicitors wrote to the defendant's solicitors stating that they could not accept the answer and reiterated that they were entitled to the board resolution of the defendant in order to satisfy themselves as to the due mode of execution and relied on Wong Yuet Wah Mandy v Lam Tsam Yee [1999] 3 HKC. Later the same day, the plaintiff's solicitors wrote a second letter stating that even if the defendant's solicitors could reply before completion, the purchaser was entitled to have seven working days to consider the reply and whether or not to raise further requisitions. It was therefore suggested that a postponement of completion might be required.

11.The defendant's solicitors replied, distinguishing the case of Mandy Wong and opining that the execution by one director of the company in the capacity of the vendor to the assignment fell within the meaning of "duly executed" without the necessity of producing a board resolution and repeated their reference to the Law Society's Circular 105/90. The plaintiff's solicitors did not agree. They sent a third letter that day as follows:

"We do not see your client's obligation to produce the board resolution can be dispensed with since the second limb of argument you are relying requires your client to prove authorisation of such person (as the director of the Vendor herein) by the Board. A director signing the Assignment in question does not necessarily mean that he has the actual authority from the Board to sign on its behalf."

The defendant's solicitors replied the following day, which was the day fixed for completion, in the following terms:

"As put forward by you in the said letter, we would like to stress that there is no requirement as stated in the company's sealing provision that the production of board resolution is necessary to prove authorisation of such person by the Board, which means that a document executed by the company under seal by one person is a duly executed document without the production of a board resolution."

They also sought to distinguish the Mandy Wong case.

12.Further correspondence ensued on 5 May. The plaintiff's solicitors reiterated that they required evidence to show that the directors signing the assignments in question were duly authorized by the respective boards for such purpose. Later the same day, after the time for completion had passed, the defendant's solicitors informed the plaintiff's solicitors that the plaintiff's failure to tender payment was a repudiation of the agreement and, on that basis, forfeited the deposit.

Was the requisition properly raised?

13.Counsel for the defendant submitted that the correct requisition should have been made under article 23(a), the second part of which (stipulating that the seal shall not be used except with the board's authority) plainly contemplated that a board resolution would be necessary for the use of the seal. It was further submitted that even if the board had not authorized the use of the seal for the transaction in question, it would not matter so long as one of the two requirements in the deeming provision was satisfied. I have some difficulty in following the objection to the requisition raised. It is not as if any board resolution under article 23(a) had been produced. Had that been done and had it been evident that the assignment had been executed by the person authorized in that resolution as in Peking Fur Stores Ltd v Bank of Communications [1993] 1HKC 625 (considered below), that might well have been the end of the matter. But that did not happen. Nor was it the case that the articles had been satisfied. The reason for the requisition and at the heart of the dispute between the parties is the effect of the deeming provision, absent any evidence of a board resolution relating to the use of the seal for the transaction in question. I do not therefore agree that the requisition was not properly raised.

The Table A point

14.The essence of the plaintiff's submissions was that by adopting the approach that he did, the judge failed to give any effect to the deeming provision at all. Under section 11(2) of the Companies Ordinance, Cap. 32, insofar as the articles do not exclude or modify the regulations in Table A, those regulations are the regulations of the company. Article 114 provides:

"... every instrument to which the seal shall be affixed shall be signed by a director and shall be countersigned by the secretary or by a second director or by some other person appointed by the directors for the purpose."

If article 114 applied, there was a mandatory requirement of the signature of two persons. It was submitted that the purpose of a deeming provision was to provide a simpler and easier way of satisfying the requirement laid down in article 114. On this analysis, article 114 is not excluded and either article 114 or the deeming provision has to be satisfied for a proper execution of a document that has to be under seal. The alternative submission was that even if article 114 had been excluded by the deeming provision, on its true construction, a signature was nevertheless required. There would be little point in having a deeming provision if a signature was not required.

15.The defendant took issue with the submission based on Table A in that it was never raised in the requisitions which he submitted was fatal and was not a point that was taken below. Counsel for the defendant did not therefore see any need to elaborate on his written submissions on the Table A point. For my part, I am not persuaded that it cannot be raised because it was never mentioned in the requisitions. The legal effect of Table A, given the articles in question, is a matter of law and I do not see that the plaintiff is precluded from raising it where, as in the present case, the defendant was not taken by surprise, the point having been specifically raised in the Amended Notice of Appeal and it is not suggested that there was any need for further evidence to be filed because of it.

16.As to the substantive merits of the Table A submission, the reasoning has much to commend it. Before coming to a conclusion on this point, it would be convenient to consider two propositions advanced by counsel for the defendant, namely that:

(i) the deeming provision was not mandatory in nature so that the mere affixing of the seal was sufficient;

(ii) in any event, the legal estate passed by the affixing of the company's seal irrespective of whether the deeming provision was operative unless it could be shown that its execution was obtained by fraud, or there was some illegality in the transaction.

17.As to the first of the propositions, counsel for the defendant relied on the decision in Woo Turhan v Taiwan Fuji Trading (HK) Ltd [1995] 2 HKC 481. The question which arose in that case was whether the deed of mutual covenant was properly executed having been signed by only one person on behalf of the purchaser company whose articles required signatures by one director and the secretary or such other person as appointed by the directors. It was thus not a deeming provision: the articles mandated that designated person(s) "shall sign" every instrument etc. In these circumstances, Woo Turhan is not authority for the proposition advanced.

18.Having said that, it would appear that there are other decisions at first instance (e.g. Chan Sai Hung v Well Develop Limited [2000] 4 HKC 50 and Hongkong and Shanghai Banking Corp. Ltd v Ho Sin Yi HCMP 5420 of 2000, unreported) that support the proposition. In Chan Sai Hung, Deputy Judge Wesley Wong held, first, that the directors had unfettered power and discretion to use the seal under article 23(a) which was independent of the deeming provision and even if the assignment was defectively executed, the legal estate passed, citing Peking Fur Stores. In the HSBC case, the deeming provision was different inasmuch as there was a savings provision superadded, i.e. "unless otherwise determined by the Directors". Deputy Judge Gill held that failure to comply with a deeming provision, not being mandatory, did not invalidate the execution, and execution in accordance with the common law was sufficient again, citing Peking Fur Stores. But it is to be noted that the Table A point was neither taken nor considered in those cases and there are decisions at first instance that go the other way such as Li Ying Ching v Air-sprung (HK) Limited and Ho So Yung v Lei Chon Un referred to in [4] above.

19.It would be convenient at this point to consider the Peking Fur Stores case, a decision cited in support of the second proposition and referred to in the Woo Turhan, Chan Sai Hung and the HSBC cases. The plaintiff raised objection to the title in relation to the execution of an assignment on the ground that the execution on behalf of the assignor company was defective. The articles of that company were identical with the article considered in the Woo Turhan case, i.e. that designated persons "shall sign" every instrument to which the seal is affixed in their presence. The assignment in question bore the signature of one director only. The defendant produced a copy of a resolution of the board of the assignor company which not only authorized that the transaction be carried into effect by the assignment but expressly authorized the signature of the assignment by one director only. In view of the terms of the article relating to the affixing of the company's seal, Godfrey J (as he then was) held that as a matter of interpretation, the board was not entitled to authorize a single person to sign the instrument. He therefore held that the assignment was formally defective but that given the board resolution, there was no risk that the assignor company might succeed in proceedings to have the assignment declared invalid. The transaction was duly authorized and there was nothing to suggest that it was not carried into effect in accordance with the terms on which it was so authorized.

20.So far as the passing of the legal estate was concerned, Godfrey J held (at 627H) that upon the affixing of the seal, the legal estate passed notwithstanding the formal defect in execution. He referred to the 'general rule' stated by Willes J in Agar v The Official Manager of the Athenaeum Life-Assurance Society (1858) 3 CB (NS) 725, 756; 140 ER 927, 940:

"As a general rule, a corporation is bound by an instrument under its seal, unless it can be shown that its execution was obtained by fraud, or there is some illegality in the transaction."

But in rejecting the submission that the legal title cannot pass under an instrument which is not duly executed, Godfrey J held (at 628E) that since the company's seal was affixed to the assignment, the equitable title passed and the purchaser was entitled to any necessary further assurance required to perfect its title having regard to the covenant for further assurance which by virtue of Cap. 219 would be held to be implied in the assignment by virtue of section 35 and Part II of the First Schedule to Cap. 219. That, of course, was different from what he had held earlier (viz. that the legal estate passed on the affixing of the seal) but no further elaboration or explanation can be found in Godfrey J's judgment.

21.I do not read the Peking Fur Stores case as authority for the proposition that the affixing of the company's seal outside the strict requirements of the articles themselves is sufficient to constitute the document a deed of the company so that the legal estate necessarily passes. In Woo Turhan, the vendor sought to rely on the general rule stated by Willes J in the Agar case. In finding for the plaintiff purchaser, Leong J (as he then was) held the general rule to be applicable only where the execution was in accordance with the articles or if not, enquiries showed that the execution was authorized, but not otherwise. In other words, the general rule was not unqualified. It is tolerably clear that the resolution passed by the board in the Peking Fur Stores case was of central importance to Godfrey J's application of the 'general rule'.

22.The decision in the Agar case merits closer consideration. An action was brought upon certain debentures issued under the seal of the society and bearing the signature of two of the directors. Two objections were taken to the validity of the debentures. The first was that although the deed of settlement empowered the directors to issue such instruments, it required the sanction of the shareholders at a special general meeting and none had been convened. The second was that even if there had been such authority, the 28th clause of the deed required it to be signed by three directors. On the first question, Cockburn CJ considered the court bound by the rule in Turquand's case and as to the second, he concluded that the provision in the 28th clause had reference exclusively to the various transactions and instruments mentioned in the 27th clause which did not extend to debentures. Moreover, the statute (7 and 8 Vict. c.110, sections 44 and 46) declared a contract valid if signed by two directors. Having found that the debentures were not within the class of instruments which required three signatures, the Chief Justice dismissed the objection as to due execution. The other three judges were of the same opinion. Williams J agreed with the Chief Justice. Crowder J added, obiter, that "the want of the required number of signatures does not in the slightest degree affect the validity of the document". It was in this context that Willes J made the observations that he did regarding "the general rule".

23.In referring to the general rule, Willes J was referring to the historical practice in relation to seals. It was an incidence of all corporations aggregate that they should have seals. The circumstances in which seals could be affixed depended on whether the corporation was statutory or non-statutory or a trading corporation. If it was statutory, the provisions of the statute had to be complied with. If it was non-statutory then, in the absence of special and legally binding regulations the seal had to be applied at a meeting of the corporation and in pursuance of the resolution of the majority. The seal of a trading corporation could be applied by the person or persons who, as a matter of practice managed the affairs of that corporation. See 9(2) Halsbury's Laws of England (4 Ed) para 1020.

24.Willes J's statement was a reflection of the general law that if neither the memorandum, nor the articles, nor the general law prescribed any particular formalities for affixing of the seal then

"whoever, as a matter of practice, manages the affairs of a trading corporation, must, of necessity, be able to use the seal for those acts which he is authorized to perform."

See per Lord Cairns L.J. in Barned's Banking Co. ex parte The Contract Corporation (1867) LR 3 Ch. App 105 at 116. The statement was made in the context of a corporation where there were no regulations that specified the addition of signatures where a seal was affixed to the particular type of contract with which the case was concerned.

25.In my judgment, the general rule in accordance with the common law thus takes effect subject to the express provisions as to execution in the articles.

26.As I see it, the crucial question is the effect of the deeming provisions of the articles. According to the defendant, compliance with the requirements of the deeming provision would put beyond question the issue of authority. However, this presupposes (which may not be the case), that more stringent requirements had been prescribed by the board for the use of the seal since a 'deeming' provision must be intended to facilitate matters rather than the reverse. But what if the requirements of the deeming provision have not been complied with? If that is of no consequence as would appear to be the effect of Chan Sai Hung and HSBC cases, the point of having a deeming provision is not entirely evident.

27.This difficulty would not arise if Table A is merely modified by the deeming provision and not excluded inferentially. The requirements of Table A remain mandatory unless the deeming provision can be prayed in aid. In my judgment, that is the correct analysis since it is a framework in which the deeming provision has a natural niche.

28.In the present case, as noted above, any doubt on the question of title would have been allayed had the defendant been in a position to produce a resolution authorizing the transaction and naming the person authorized to append his signature to the assignment. But unlike Peking Fur Stores, no such resolution was ever produced.

29.As is evident from the correspondence, the defendant's stance was that all that was necessary was the affixing of the company's seal. It sought to overcome the difficulty created by the absence of a resolution by relying on various presumptions and rules said to operate in its favour. These are considered below.

Section 23 of Cap. 219

30.This provides as follows:

"An instrument appearing to be duly executed shall be presumed, until the contrary is proved, to have been duly executed."

This section only applies where, on its face, the instrument appears to be duly executed. It is common ground that the director who affixed his signature did not purport to sign as chairman. Had the relevant signatory 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. Failing such specific words appearing on the face of the assignment, sections 23 cannot apply. In Tread East Ltd v Hillier Development Ltd., HCA No. A907 of 1991 unreported, the assignment was sealed by the company and signed by Chan, described as "one of its directors as directed and authorized by the board of directors to sign". The relevant article provided that instruments requiring the seal of the company had to be "signed by two of its directors or in such manner as the directors shall from time to time by resolution determine". It was held by Godfrey J (and this point was not the subject matter for the appeal), the presumption of due execution in section 23 applied. In the present case, the absence of the additional words indicating that the director was the person authorized by the board to sign distinguishes it from the facts in Tread East and, in my view, is fatal to the application of section 23.

The rule in Turquand's case

31.This is now often called the 'indoor management rule':

"Persons contracting with a company and dealing in good faith have always been entitled to assume that acts within its constitution and powers have been properly and duly performed, and were never bound to enquire whether acts of internal management have been regular."

This formulation of the rule in the 2nd edition of Halsbury's Law of England was cited with approval by Lord Simonds in Morris v Kanssen [1946] AC 459 at 474. Lord Simonds went on to explain (at 475) that it is a rule designed for the protection of those who are entitled to assume, just because they cannot know, that the person with whom they deal has the authority which he claims. In other words, they are not affected by what is called the "indoor management" of companies and are entitled to assume that the internal procedures of a company have been regularly conducted in the absence of actual notice to the contrary. See Gore-Browne on Companies, 44th edition at 5.2.1.

32.In Turquand's case, the question was whether the company was liable on a bond signed by two of its directors under the seal of the company. Under its deed of settlement, the directors were authorized to borrow on bonds such sums as should, from time to time, by a general resolution of the company, be authorized to be borrowed. The Court of Exchequer Chamber affirming the judgment of the Court of Queen's Bench held that the company was bound notwithstanding that no resolution authorized the making of the bond had been passed. Jervis CJ held (at 332):

"And the party here, on reading the deed of settlement, would find, not a prohibition from borrowing, but a permission to do so on certain conditions. Finding that the authority might be made complete by a resolution, he would have a right to infer the fact of a resolution authorizing that which on the face of the document appeared to be legitimately done."

33.The application of this rule was considered by the Supreme Court of New South Wales in the Registrar General v Northside Developments Pty Ltd (1988-1989) 14ACLR 543. Article 56 of the articles of association provided that:

"... [T]he directors shall provide for the safe custody of the seal and the seal shall never be used except by authority of the directors and in the presence of one director at the least who shall sign every instrument to which the seal is affixed and every such instrument shall be countersigned by the secretary or by a second director or by some other person appointed by the directors for the purpose."

That mortgage was executed under seal of the company by RS, a director. The mortgage instrument also showed the signature of RS's son, GS, who purportedly signed as "company secretary". Whilst RS was indeed a director of Northside, GS was not the secretary of the company. The appointed secretary had resigned his office in November 1979. He had sent the company seal to the solicitors then acting for RS. They in turn had obtained the certificate of title to the land which represented the sole significant asset of Northside. Neither of the other directors knew of or was involved in the appointment of GS as "secretary" of the company. A statutory notice of the change of company secretary was filed by RS. It was common ground that the appointment of GS as secretary was invalid under the articles of Northside. The mortgage was given to secure a loan which was for the benefit of a company controlled by RS. The loan had nothing to do with Northside and was not authorized by it.

34.The issue was the extent to which the mortgagee was obliged to go behind the seal and signatures of the apparent officers of the company. On the face of the instrument, therefore, the document was perfectly regular. The issue posed was whether the validity of the mortgage instrument was fatally flawed because, as a matter of law or fact, the mortgagee was not entitled to rely upon the seal and the signatures appearing on it. It therefore raised the question of the scope and operation of the indoor management rule. After an exhaustive review of Turquand's rule, McHugh JA held (at 564):

"A company is bound by the affixing of its seal to a document if the company under its memorandum or articles might have had power to enter into the transaction and if, where required, the seal is affixed in the presence of and countersigned by persons who either by virtue of their offices or positions or the company permitting them to act in those offices or positions might have had authority to be present and countersign the document."

The transaction in question was one which Northside might have entered into by the affixing of its seal together with the signature of a director and the company secretary or a person authorized by the directors to sign. RS was a director and therefore a person who might have been authorized to affix the seal of Northside and sign the mortgage. Had GS been appointed secretary, he too was a person who might have been authorized to sign. Accordingly, he ruled that that indoor management rule applied.

35.The Northside case does not assist the defendant. On the face of the instrument in that case, the document was perfectly regular. This is not so in the present case. The signature here was that of a director but that itself was not sufficient to trigger the deeming provision. If the person appending the signature had been described as a person "duly authorized by the board", Turquand's rule would have applied. But that was not the case. Any person, whether or not a director, could have been authorized by the board but as far as I am aware, there is no presumption that if the signatory is a director, he must have been duly authorized by the board. What the position would have been had there simply been a signature without the description "director" is a question that does not arise for decision.

36.In the Northside case, McHugh JA opined (at 566) that if GS had simply affixed his signature to the mortgage without the description "company secretary", the mortgage would be binding on Northside as article 56 empowered the seal to be affixed together with the signatures of the director and any person authorized by the directors. However, McHugh JA said that specifically in "... the circumstances of this case ..." He went on to explain why that was so. He said that the other directors had been careless in the conduct of the affairs of the company; they had not troubled to make sure that they received or read correspondence relating to the company's affairs. Since they allowed a situation to exist whereby one director could take over the running of the company, they had allowed GS to be the secretary. In those circumstances, the company was bound as if GS were validly appointed the secretary. McHugh JA's statement is, therefore, strictly in accordance with the rule in Turquand's case. The company's articles permitted the sealing of a document accompanied by a signature of a director and the countersignature of the secretary. If the countersignature was that of a person whom the company was bound to acknowledge was its secretary, the fact that his appointment may have been invalid was a matter of internal management and not a matter which would affect an outsider dealing with the company, unless he were put on notice.

37.For these reasons, I have come to the conclusion that on the facts of the present case, the indoor management rule is of no assistance to the defendant.

Conclusion

38.In my judgment, the defendant's answer to the requisition, based on the rule in Turquand's case and/or section 23 of Cap. 219, was not a proper or sufficient answer. I would add that considerable care needs to be exercised in relation to the Law Society's circular 105/90. If a conveyancer is not able to show that a deed comes within either the terms of the articles of the company concerned or the provisions of Section 20 of the Conveyancing and Property Ordinance, then he or she may be well advised to insert a special provision in the sale and purchase agreement relating to the deed in question.

Clause 15.02 of the agreement

39.Counsel for the defendant raised a further defence. He contended that the defendant did not contract to sell any legal estate in the property and referred to clause 15.02 which, in pertinent part, provided as follows:

"The Vendor does not warrant or represent that a legal estate of and in the Property will be delivered by the Vendor to the Purchaser on completion and the Purchaser fully acknowledges that (I) the Property are sold absolutely subject to the terms and conditions contained in the Government Lease or Conditions of Sale or Conditions of Exchange or Conditions of Regrant or Conditions of Renewal insofar as no certificate of compliance has been issued so that only an equitable estate or interest of and in the Property will be delivered to the Purchaser on completion and (ii) ..."

40.Leaving aside the grammatical difficulties of the provision, the reference to an equitable estate or interest was in the context of no certificate of compliance having been issued. I do not read the clause as providing for the sale of only an equitable interest in property to the purchaser. It is clear from the agreement as a whole and in particular clause 1.01 that what was being sold was "all the estate right title interest..." of the defendant in the property. Clause 15.02 was only meant to deal with the difficulty arising from the absence of a certificate of compliance.

The order on this appeal

41.The order sought by the plaintiff is set out in paragraphs (1)-(12) of the amended Notice of Appeal. I propose first of all to deal with the controversial items.

Stamp duty

42.The plaintiff has paid stamp duty in the sum of $517,500 and seeks reimbursement of this amount. The defendant submitted that the plaintiff can claim a refund from the Collector of Stamp Revenue pursuant to section 29C (5A) and (5B) of the Stamp Duty Ordinance. The plaintiff is content with an indemnity insofar as it is unable to obtain a refund from the Collector. The proposal appears to me to be eminently sensible and one to which no objection could be taken.

Estate agents' commission

43.The agents have a claim to a sum of $140,000 by way of commission. Although it would appear that the agents have so far not asked for their commission, the plaintiff is potentially at risk and, again, I see no good reason why the defendant ought not to provide an indemnity to the plaintiff in respect it.

Conveyancing costs

44.The plaintiff seeks reimbursement of the sum of $92,380 paid to its solicitors in respect of the abortive transaction. Whilst the defendant accepts that it is liable for costs associated with the investigation of title, it submitted that it is not liable for any item of expenditure that does not fall within that description and relies on the rule in Bain v Fothergill (1874) LR7 HL 158. It therefore objected to the bill inasmuch as it included a fee of $37,000 in relation to the preparation of a mortgage for a loan of $7.8 million. In addition, exception was taken to two items of disbursements.

45.Dealing first with the disbursements objection, the items relate to a 'filing fee for mortgage' of $340 and 'registration fees' for the agreement for sale and purchase, assignment and mortgage totalling $1,110. As the transaction did not go through, whilst the registration fee for the agreement would have been incurred, that would not have been the case as regards the filing fee for the mortgage as well as the registration fees for the assignment and mortgage. Plainly, the amount of disbursements will need adjustment to take this fact into account. The registration fees for the assignment and mortgage total $660 and the filing fee $340. Accordingly, the amount of disbursements ought to be reduced by $1,000.

46.Turning now to the more substantial objection based on the rule in Bain v Fothergill, under this rule, if the reason for the discharge of the contract is the fact that the vendor is unable to make good title, the purchaser will recover the deposit, interest thereon, and conveyancing expenses but nothing else if the defect in the title is "one of title". In his judgment, Lord Hatherley observed (at 210):

"... having regard to the very nature of this transaction in the dealings of mankind in the purchase and sale of real estates, it is recognized on all hands that the purchaser knows on his part that there must be some degree of uncertainty as to whether, with all the complications of our law, a good title can be effectively made by his vendor; and, taking the property with that knowledge, he is not to be held entitled to recover any loss on the bargain he may have made if, in effect, it should turn out that the vendor is incapable of completing his contract in consequence of his defective title. All that he is entitled to is the expense he may have been put to in investigating that matter."

Strictly speaking, the legal costs incurred in respect of the mortgage loan of $7.8 million are not costs for investigating the title. They are therefore not recoverable if the rule applies. If the rule does not apply, they would be recoverable as damages under common law principles.

47.The rule developed in England because of the intricacies of deeds system conveyancing under which it was thought unfair that the vendor, who could not make good title to the land, should be penalized by having to pay substantial damages. See Sihombing & Wilkinson, Hong Kong Conveyancing Law and Practice Vol.1 (A) at XV [1602] and Barnett J in Roseric Limited v West River Development [1993] 2 HKC 404 who noted that the rule was based upon the complications and uncertainties of conveyancing in 19th century England. The rule has received judicial condemnation in England where it originated. See, for example, Sharneyford Supplies Limited v Edge [1987] Ch 305 where (at 318H) Balcombe LJ observed that:

"the rule ... is today impossible to justify. Its rationale depends on the difficulties of making title to land under English Law ... it serves no useful purpose anywhere within England or Wales ..."

Kerr LJ was no less forceful. He referred (at 325C-D) to 'the basic injustice of the rule' and (at 325F-G) to the fact that 'the rule was originally laid down for defects in title which lay concealed in title deeds', described in a memorable phrase attributed to Lord Westbury as:

"difficult to read, disgusting to touch, and impossible to understand."

He, too, was of the view that there was no justification for its retention. The English Law Commission recommended its abolition and the recommendation was 'to the relief of all and in the interests of justice' implemented by section 3 of the Law of Property (Miscellaneous Provisions) Act 1989. See Newbury v Turngiant (1991) 63 P&CR 458, CA, at 470, per Dillon LJ.

48.Does the rule apply in Hong Kong? Regrettably, the court did not have the benefit of considered submissions on this question. Counsel for the defendant asserted (and assumed) that this rule applied and counsel for the plaintiff simply reiterated his claim to the full amount of legal costs paid. In the Roseric case, after noting the historical origins of the rule and the difference Barnett J observed (at 413E-I):

"Hong Kong, however, has had a system of land registration since1844. The same problems and complications do not arise. That is to say, although problems of title arise from time to time, as the courts well know, they do not arise to the same degree or for the sort of reasons that obtained in England in the last century. Unlike the purchaser contemplated by Lord Hatherley, the Hong Kong purchaser does not, generally, entertain thoughts about the uncertainty of the vendor making good title. Rather, he often expects to deal with the real estate as a chattel and quickly dispose of it for profit ... In my view, ... the rule has no place in modern Hong Kong and should no longer be followed. Indeed, I am doubtful whether the rule should ever have been followed in Hong Kong - assuming it has been. Its importation into Hong Kong law would have been by way of section 3(1) of the Application of English Law Ordinance... For the reasons I have just set out, I do not think the rule to have been 'applicable to the circumstances of Hong Kong or its inhabitants' - section 3(1)(a)"

49.I share those sentiments. Whilst the rule appears to have been applied in a number of cases at first instance, its applicability would not appear to have been critically considered by this court. There was a parenthetical reference to it in the judgment of Godfrey JA in Kay Kam Yu v AIE Co Ltd [1996] 1HKC 239 at 253F, where it was simply assumed that the rule applied. The Court of Appeal did not directly address the question of its applicability. For my part, I do not consider that the rule is applicable for the reasons succinctly stated by Barnett J in the Roseric case. As Barnett J had said earlier in his judgment, the rule has been held to be inapplicable in other common law jurisdictions. Indeed, I would go further. The rule has not been acknowledged to be applicable in Hong Kong either by the Court of Appeal or the Privy Council or the Court of Final Appeal. There would not appear to be a body of decisions that would give rise to stare decisis. In contract, the rule in Bain v Fothergill came from the decision in Flureau v Thornhill (1776) 2 Wm Bl. 1078. The decision in Bain v Fothergill was itself made in large part upon the fact that the decision in Flureau v Thornhill had by then been followed for a century. The judges who decided Bain v Fothergill expressed themselves to be reluctant to disturb a rule that had existed for so long. This was despite the fact that the reasoning of the Flureau case was acknowledged to be unsatisfactory and that case had been decided at a time when the measure of damages for breach of contract generally had yet to be settled. For all these reasons, I also agree that in any event, it should not be followed. Even if I am wrong and the rule were applicable, then I see no reason why the exception in Malhotra v Choudhury [1980] Ch 52 ought not to apply. In the present case, the vendor has failed to take any steps whatsoever to secure a good title. I would therefore not disallow the costs associated with the preparation of the mortgage loan.

50.I would propose that the following order be made:

(1) That the appeal be allowed and the judgment below set aside.

(2) That it be declared that:

(a) good title to the property known as ALL THOSE 145 equal undivided 6569th parts or shares of and in ALL THAT piece or parcel of ground registered in the Land Registry as INLAND LOT NO. 8636 And of and in the messuage erections and buildings thereon now known as "BOWEN PLACE" No. 11a Bowen Road ("the Building") TOGETHER with the sole and exclusive right and privilege to hold use occupy and enjoy FIRST ALL THAT FLAT A on the SEVENTEENTH FLOOR of the Building and SECONDLY ALL THAT CAR PARKING SPACE NO. 26 on the LEVEL 3 of the Building ("the property") has not been shown in accordance with the Agreement dated 13th April 2000 and registered in the Land Registry by Memorial No. 8067801 whereby the plaintiff as purchaser agreed to buy and the defendant as vendor agreed to sell the property;

(b) the requisitions on and objections to the title to the property raised by the plaintiff's solicitors Messrs C.L. Chow & Lam in their letters of 3rd, 4th and 5th May 2000 have not been answered and/or sufficiently and/or satisfactorily answered by the defendant.

(c) the defendant was in repudiatory breach of the agreement by reason of its failure to give and show a good title and/or its failure to satisfactorily answer requisitions to the title to the property in accordance with section 13 of the Conveyancing and Property Ordinance, Cap. 219.

(d) the plaintiff is entitled to:-

(i) a purchaser's lien on the property for the return of the deposit, the conveyancing legal costs including the costs of investigating title, together with interest and costs recovered by the plaintiff in this application; and

(ii) enforce the lien in the case of default of payment of the aforesaid sums by the defendant.

(3) That it be ordered that:

(a) the defendant do forthwith return to the plaintiff the initial deposit and further deposit in a total sum of HK$1,380,000.00 paid by the plaintiff under the agreement;

(b) the defendant do indemnify the plaintiff the stamp duty in a sum of HK$517,500.00 paid by the plaintiff under the agreement to the extent that the plaintiff is not able to obtain a refund from the Controller of Stamp Revenue upon due efforts being made;

(c) the defendant do indemnify the plaintiff the estate agent's commission in a sum of HK$140,000.00 if and insofar as the same becomes payable by the plaintiff;

(d) the defendant do forthwith reimburse to the plaintiff the conveyancing legal costs including the costs of investigating title incurred and paid by the plaintiff in a sum of HK$91,880.00;

(e) interest be paid on the amount found due from the defendant to the plaintiff at the rate of 2 per centum above prime from the date of the writ until judgment and thereafter at the judgment rate until payment

(4) That there be an order nisi that the defendant do pay the plaintiff's costs here and below.

Hon Sakhrani J:

51.I agree.

Hon Rogers VP:

52.I agree. There will be an order as proposed.

Representation:

Mr Allen Lam instructed by M/s C.L. Chow & Lam for the Plaintiff/Appellant

Mr Lee Yee Hung instructed by M/s Jimmie K.S. Wong & Company for the Defendant/Respondent