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In Au Wai Ming v Kam Tze Ming Alfred [2009] 4 HKC 469, the Court of Appeal overturned the decision of the trial judge and refused leave to appeal to the Court of Final Appeal and ruled, inter alia, that each separate set of signatures on the deed of release must bear a seal otherwise it is defective. It is submitted that the decision is fundamentally wrong and contrary to statutory requirement.Although six law firms, a senior and four other counsel, and four learned judges were involved, it is surprising that the applicability of the rule in Walsh v Lonsdale (1882) 21 Ch D 9, which is derived from the maxim that equity looks on as done that which ought to be done (ie in this case – where inadequate formalities have been employed), was not considered; nor was it made apparent that under s 56 of the Conveyancing and Property Ordinance (Cap 219) (CPO), the discharge of a mortgage by a signed receipt will be sufficient and that such receipt or release is not required to be sealed. This is in line with s 115(1) of the Law of Property Act 1925 (LPA) and the decision in Simpson v Geoghegan [1934] WN 232 in England.

Discharge of legal mortgage

Since legal charges do not actually involve a transfer of title, no formal reassignment or deed is needed. The corollary is s 4(2)(f) of the CPO which provides that a receipt is not required by law to be under seal. In fact, under the New Territories Ordinance (Cap 97), a standard receipt would operate to reassign the mortgaged property. However, in view of the wording used in s 56(1) of the CPO, there will not be a receipt for partial reassignment or partial discharge; a deed of release is still required.

The statutory receipt
The usual method adopted by banks and other financial institutions in Hong Kong for the discharge of a mortgage is to provide a statutory receipt. The bank endorses on, or annexes to the mortgage deed, a receipt for all the money secured by that mortgage pursuant to s 56(1) of the CPO. The wording of the receipt normally follows Form 6, Sch 3 of the CPO which states:

“The Lender acknowledges receipt of all money secured by the annexed/within written Charge.”

By virtue of s 56(3) of the CPO, the bank impliedly covenants by signing the receipt that, unless a contrary intention is expressed, it has not executed or done or knowingly suffered, or been party or privy to any deed or thing, whereby the mortgaged property or any part thereof is or maybe impeached, charged, affected or encumbered in title, estate or otherwise. The receipt must be signed by the mortgagee or the person in whom the mortgage is vested and who is legally entitled to give a receipt for the repayment of the mortgage money (including an agent or an attorney of the mortgagee). However, the receipt is not required to be executed under seal as provided in s 56(5) of the CPO.

As the receipt forms a part of the relevant title deeds of the mortgaged property, it should be shown to a subsequent purchaser as a link in the title and be registered at the Land Registry under the Land Registration Ordinance (Cap 128). If the mortgagor is a limited liability company, a memorandum of satisfaction should also be registered at the Companies Registry under s 85 of the Companies Ordinance (Cap 32).

Reassignment or release by deed
As a legal mortgage nowadays does not involve the transfer of any interest in the property, it is not really necessary to discharge a mortgage by reassignment or by deed reassigning it to the mortgagor. All the property in the land is freed from encumbrances secured under the mortgaged deed, although some banks still adopt the practice of discharging a mortgage. The reassignment is appropriate where only part of the sum secured by the mortgage is repaid since a statutory receipt is not effective in those circumstances. It is also quite common for banks and other financial institutions in Hong Kong to release a part of the secured property to developers in order to facilitate sales of individual units or flats to purchasers.

Discharge of equitable mortgage

Since an equitable mortgage does not create any legal interest in land, there is no need for a formal release by deed. In practice, however, many banks prefer this method of discharge.

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In the past, some banks and finance companies discharged equitable mortgages by merely writing ‘cancelled’ across the memorandum of deposit and handing it back to the borrower. If, however, the borrower insists upon having a receipt, the bank or the finance company may write a receipt on the memorandum of deposit or give a separate receipt to the borrower.

Qualihold Investments Ltd
Although the assignment or the discharge of an equitable interest in the property can be effected by writing only pursuant to ss 5 and 56 of CPO respectively, it is interesting to note that in Qualihold Investments Ltd v Bylax Investments Ltd [1991] 2 HKC 589 the court held that for the purposes of proof of title, where a corporate confirmor effects the confirmation by way of a deed, it must comply with the requirements of its articles of association in executing the deed. In Li Ying Ching v Air-Sprung (Hong Kong) Ltd [1996] 4 HKC 418, the same conclusion was reached by the court and the execution, that was not in accordance with the company’s articles of association, was held to be defective. The same reasoning was approved by the Court of Appeal in Polyson Jewellery Co Ltd v Liu Song Carlos [2002] 2 HKC 183. There is no doubt that the courts in these cases were correct in making these decisions as a deed must be executed under seal and if it is executed by a corporation, it must comply with the requirements of its articles of association as to the execution of a deed.

The rationale behind Qualihold’s case is that although it is an equitable interest that has been assigned to the property, the assignment or confirmatory assignment should still be duly executed as a deed, as a matter of law, if the ‘express covenant’, ie an agreement by deed under seal (Russell v Watts (1885) 10 AC 590) contained in the assignment is to be effective and to run with the land.

The ‘implied covenant’ in any assignment will run with the land by virtue of s 35(1)(d) of the CPO, even if it is not executed as a deed. However, it was held in Glegg v Bromley [1912] 3 KB 474; [1911–13] All ER Rep 1138 that there must be consideration for all equitable assignments although consideration is not required for a statutory assignment, as in Harding v Harding (1886) 17 QB D 442; and Holt v Heatherfield Trust Ltd [1942] 2 KB 1; [1942] 1 All ER 404. Therefore, in the absence of consideration or if the parties agree and/or intend to extend the limitation period to 12 years, an equitable assignment must be by deed. If a deed is required for confirmatory assignment, the corporate confirmor must execute and affix the common seal in accordance with its articles of association. There is, however, no legal requirement for a release to be executed under seal, or as a deed, unless the mortgage loan is only partly repaid where a deed of partial reassignment or release is required to be signed and sealed. It should be noted that the Regulatory Reform (Execution of Deeds and Documents) Order 2005 and s 36AA of the Companies Act (UK) now permit individuals and corporations formed under the Companies Act to execute deeds without using seals.

The facts

In Au Wai Ming [2008] HKCU 1085 (HCA738/2007, 15 July 2008) the plaintiffs (purchasers) refused to complete a conveyancing transaction because the defendants (vendors) failed to show or give a
good title. The release of the mortgage without the ‘second seal affixed’ was defective or would render the release invalid. The requisition raised by the purchasers’ solicitors related to the execution of a release of a mortgage (‘the Release’) which was granted by the defendants’ predecessor-in-title in favour of American International Assurance (Hong Kong) Ltd (AIA). AIA transferred the benefit in the mortgage to AIG Finance (Hong Kong) Ltd (AIG), which AIG, in turn, transferred to the Hong Kong Mortgage Corporation (HKMC). The Release, which recorded that the sum secured by the mortgage had been fully repaid and satisfied, was executed by AIG in a dual capacity, itself and for HKMC’s lawful attorney. On the execution page of the Release, the common seal of AIG was affixed only once.

Gill DHCJ held that AIG was not required to execute the Release in its personal capacity and by s 6 of the Powers of Attorney Ordinance (Cap 31), AIG could execute the Release without mentioning that it acted as HKMC’s attorney. As AIG had already executed the Release once before, with the seal affixed thereon, there was no need for AIG to execute it twice as the attorney of HKMC; the plaintiffs’ claim was therefore dismissed with costs nisi to the defendants.

The issues

On appeal, the court narrowed down the argument to three issues:

1. Was the attorney’s execution valid?
2. Was the defect a matter of conveyance and not of title?
3. Were the purchasers entitled to refuse to complete?

If the answer to question one was in the affirmative, then it would be unnecessary to consider questions two and three and the plaintiffs’ appeal would be dismissed. Without considering ss 4(2)(f) and 56(5) of the CPO, Hartmann JA gave wise thought to the matter and relied on s 20(1) of the CPO to give his dissenting judgment, namely, it was the deed or the document itself which must bear the seal but not for each separate set of signatures. Section 20(1) of the CPO provides:

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 ...

If the seal was affixed in the presence of the two AIG officers who signed in both signature columns of the Release at the same time (which is highly likely to be the case here), then the dissenting judge’s interpretation must be correct. Indeed, s 74(1) of the LPA in England provides a similar provision:

where a seal purporting to be the seal of the corporation has been affixed to a deed, and attested by persons purporting to be persons holding such offices as aforesaid, the deed shall be deemed to have been executed in accordance with the requirements of this section ...

It seems, therefore, that so long as the seal of the corporation has been affixed to a deed, it is sufficient. It is not necessary to affix two seals if two sets of signatures are subscribed simultaneously.

As to questions two and three, Yuen JA confirmed Gill DHCJ’s decision that the requisition raised was a matter of conveyance only and not of title. However, Yuen JA was not satisfied with the answer provided by the vendors’ solicitors since they should have undertaken to have the seal affixed on the Release before completion or within a reasonable time thereafter. It was, therefore, adjudged that the purchasers were entitled to refuse to complete.

As previously mentioned, the majority of the Court’s reasoning on the third issue seems to have lost sight of the exception in s 4 of CPO, namely, that a legal estate in land may be extinguished by a receipt which is not required by law to be under seal.

Conclusion

Since it is not a legal requirement that the Release be sealed, it was not defective or void without the seal but will be valid for only six years and not 12 years, under the Limitation Ordinance (Cap 347).

As the decision of Court of Appeal has virtually affected the normal practice of the conveyancing profession in Hong Kong and, unless this decision is not followed or is overruled by another decision
of the Court of Appeal or Court of Final Appeal, it will have an adverse impact or effect on the legal profession since the rule of law or CPO should be respected or complied with strictly within judicature and thereout.

Dr George YC Mok
Senior Partner
George YC Mok & Co
www.gycmokco.com.hk