Conveyancing and Property Ordinance with discussion on the validity of Directors Act and Execution of Documents under Seal after HK Business Registration

In the Hong Kong company incorporation services Conveyancing and Property Ordinance deems to protect the third parties or outsiders against any fraud or irregularity. Not only this but validity of acts of directors and execution of such documents which are supposed to be under seal, also provides sort of protection to the outsiders so that investment friendly atmosphere is kept intact. Now we shall conclude our discussion on protection of outsiders by shedding some light on trio of these protection schemes.

Conveyancing and Property Ordinance

Cap. 219 is called the Conveyancing and Property Ordinance in Hong Kong company incorporation services and Section 20 (1) of this ordinance deals with the matters related to the execution of deeds made by the company itself or by the corporation. This section of ordinance is supposed to be in favour of that specific person who is acting in good faith with the company after Hong Kong limited company formation hence the alleged deed shall considered to be fully executed, provided alleged deed bears the seal of the company and was affixed in the presence of the secretary of the company or any permanent officer of the company along with  the director of the company or any governing body or otherwise by any two members of the company’s board of director. Basically, this provision was enacted to restrain person from the formality of enquiry as it was the fashioned formality for the execution of deeds, as per the constitution of the company. There is the sort of test to assess the good faith of the person and this test says that provisions of Cap. 219 shall only operate where circumstances give rise to the rebuttable presumption regarding the execution of deed. Let’s make it clear by referring to the situation where person who complained or seek protection as per Section 20 (1) of Cap. 219 or any other provision of Cap. 219, does not considered that affixing of seal on the deed was not in compliance with the constitution of the company then such person would not be entitled to rely on the provisions of ordinance as this situation held him/her, to not be in good fair within the statutory provisions. Referring to the case of Re Moulin Global Eyecare Holdings Ltd presents of the situation where third party was not held to be entitled to enforce the transaction against the company because there were evidences of constructive irregularities within the company regarding conferring of authority, to enter into transaction. Although the deed presented by the third party was in complete compliance with the standards and criterion of Section 20 of Conveyancing and Property Ordinance. So, it can be inferred from this legal example that, even though deed is in compliance with the provisions of ordinance, if there are serious of irregularities or any events which creates doubts regarding intention and fairness of the third party then such unfairness would legitimately result in loss of entitlement.

Section 23 of Conveyancing and Property Ordinance generally deals with the instruments and says that; instrument shall be continued to be exercised unless there was no proof or evidence on the contrary, regarding the exercise of instrument, duly and legitimately. For any presumption to proceed or commence, it is required that that document deems to be presented, should appears to have been exercised and executed in accordance with the constitution of the company and the script of Section 20 of Conveyancing and Property Ordinance.

It must be noted that the script and literature of Sub-section 20 of Conveyancing and Property Ordinance and the Sub-section 23 of Conveyancing and Property Ordinance basically resides upon the context of the conveyancing such as the question which asks that; what would be sufficient for the vendor in order to illustrate good affiliation or title with the property to be conveyed, by the way of discharge of obligations as per the terms of sale and purchase deed.

Validity of Director’s Acts

After Hong Kong limited company formation matters related to the validity of the acts of the directors are dealt with the Section 461 of Cap. 622. As per the Section 461 (1) (a) – 461 (1) (b) of Cap. 622; acts of the directors are valid as long as they have not been done prior to the defect in the appointment of director or evidences reveal that the alleged director is not qualified to hold the office of the director. In the case of Morris it was held that as per the English equivalent of the provisions of the Section 157 of Predecessor Companies Ordinance, these legal liabilities are imposed on the matter of defective appointment and are not extended to the matters where either no appointment is made or there is the situation where director ceases to hold the office of the director and thus acting as the de facto director. But scope of Section 461 of Cap. 622 is much wider than the provision of the predecessor companies ordinance and the equivalent England’s provision. Section 461 of Cap. 622 is extended to the validation of director’s acts even if the person is ceased to hold the office of the company’s director or even if person is not entitled to participate in the polling mechanism, to vote on the specific matter. Such extended scope of Section 461 of Cap. 622 is clearly illustrated in the legislation as the Section 461 (1) (c) – 461 (1) (d) of Cap. 622.

Section 461 of Cap. 622 not only extended the scope of validation but also overturned the rule set out in the case of Morris, but this does not mean that the court’s remarks in the case of Morris is of no use because this case is very helpful and guiding case law in deciding for the matters where no appointment of director is made. Section 461 (2) (a) of Cap. 622 extends the scope of Section 461 of Cap. 622 and widens up the coverage of this provision to the validity of even those person(s) who purportedly acting or acted as the director of the company, irrespective of the circumstances as per which appointment of body corporate or under-age person as the director of the company, is considered as the contravention of legal or corporate limitations.

It must be noted that, if any person has any objection or reservation on the appointment of the director or objection upon irrelevant qualification of the director, then such objection could not be relied upon these statutory provisions. This legal interpretation is supported by the arguments of the Court of First Instance where Hon’ble court communicated that:

Section 461 of Cap. 622 is aimed only to provide protection to the third parties and where any member is challenging the appointment of director, on account of any procedural irregularity or upon irrelevant qualification, then director is not supposed to rely upon the Section 461 of Cap. 622 so as to defend their appointment or justification of any conduct vis-à-vis members.

Court of First Instance also observed that; director can rely on their own wrong doing and to conduct the business of the company upon the detriment of the members so as to obtain the office of director. English Court also interpreted this law on the same grounds and communicated that:

This statutory provision deems to authorise and validate the acts of the directors in favour of those dealing with the company and this provision cannot be used to validate any act which the person transacting with the company does not want to validate such as validation of litigation against those acting with the company. Same applies to the director(s) and they are not allowed to Section 461 of Cap. 622 in their own favour or to validate any such transaction which amounts to the breach of duty or any unfairness on the part of the alleged directors.

Validations of the Documents executed under Seal

Section 127 (3) – 127 (5) of Cap. 622 provides for the situation where execution of documents signed by the specific officer or authorised official of the company in a same way documents under seal of the company is executed. Section 127 (6) of Cap. 622 moves one step ahead and deems to protect the third party or outsider, for such protection purchaser or the outsider needs to be in good faith then any alleged document would be considered as having been executed by the company if such document is in compliance with the Section 127 (3) of Cap. 622.

Let’s discuss the issue of presumption of validity as the script of Section 127 (6) of Cap. 622 applies in the favour of outsider or purchaser, if and only if outsider or purchaser is fair in his or her transactions or corporate affairs. The condition for the purchaser to be in the good faith is basically derived from the bona fide purchaser for value without any prior notice. There is the test to assess such matters. The test was enacted in the case of Thanakharn and this test suggests that; test should be done by keeping in mind the statutory presumption of apparent authority and a test similar to as done in the case of Akai Holdings so that situation could be more clearer and consistency in the law could be promoted.

Now there is the need to define the word “purport” because Section 127 (6) of Cap. 622 deems to be applied in the circumstances where the documents are purported to be signed in accordance with Section 127 (6) of Cap. 622 after Hong Kong business formation. The word “purport” is basically the “Impression the document coveys or is being conveyed by the document”. Consider the situation where the document was signed by the person who stated himself or herself to be the director of the company, then such document shall purport to be signed and authorised, even if the signatory is not even the director of the company. One more example would better elaborate this legal obligation, so consider the situation where person holds the apparent authority to transact for the company then any formal invalidity of the document could be relied upon the Section 127 (6) of Cap. 622 and this document shall be executed as it has been duly executed.

The case of Lovett indicates towards the situation where English court favoured the view which says that provisions (Section 127 (6) of Cap. 622) can be relied upon by the outsiders only in the situation where person signing for the company does neither holds apparent nor actual authority or where the abuse or unfairness was depicted through the forged signatures. But the legal commentators here in Hong Kong says that; Section 127 (6) of Cap. 622 cannot be applied to the situations where there is not even a slight evidence regarding the authority and where there are forged signatures. So, this gives us the message that; Section 127 (6) of Cap. 622 deems only to set the rebuttable presumption of validity and does not deems to negate or cure the forgeries. Hence, Section 127 (6) of Cap. 622 deals with the validity of the documents and was introduced to provide alternate as under Cap. 622 seals were not longer compulsory in the Hong Kong.

Ratification under Agency Principle

Consider the situation after Hong Kong business formation where the director of the company had given notice to the third party on the behalf of the company and the third party does not sense the validity and the consequences of the notice as company would not be able to rely on the legislation to enforce the transaction to third party. So, to ratify the transaction against the third party, company would need to furnish the ratification pursuant to the principles of agency law. Any person having actual authority can enforce such transaction for the company. Where the board holds the legitimate authority board can do so by the way of resolution and in case general meeting has this prerogative then general meeting can do so by passing an ordinary resolution. It must be noted that there is no need for the ratification to be express, hence it can be implied and once the ratification has been done, third party is permitted to enforce the transaction against the company with no need to rely upon the principles of Indoor Management Rule and the Agency Laws.