David Wedgwood, Partner and Yannis Constantine, Trainee
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Introduction
This article deals with recent changes in the procedural rules to be observed when companies and other corporations enter into deeds and written agreements. Those documents form the legal basis of many company transactions such as; leases, mortgages, supply contracts, etc. The formalities governing execution of those documents are highly technical, but there are now statutory saving provisions, which give reassurance in many situations. Hence companies and third parties can now assume a document is valid in most, but not all, circumstances, once they have established a few simple facts.
The new provisions
The recent changes were to a large extent successful in simplifying the procedure and tackling some former inconsistencies. This article discusses those technical changes and their importance for businesses.
Prior to the recent changes, the law relating to the execution of Deeds and other documents, comprised of a patchwork of statutes and case law, which resulted in some uncertainties and inconsistencies. As a result, the Law Commission Report of 1998 recommended changes, which were brought into effect by the Regulatory Reform (Execution of Deeds and Documents) Order 2005 (“the RRO”) pursuant to Section 1 of the Regulatory Reform Act 1991. Under the RRO, amendments were made to overlapping provisions of Section 74 of the LPA, Section 36(a) of the Companies Act 1985 (“the CA”) and Section 1 of the Law of Property (Miscellaneous Provisions) Act 1989, (“the LP(MP)A”). The RRO did not change the position regarding foreign companies as set out in the Foreign Companies (Execution of Documents) Regulations 1994 (“the FCEDR”), nor did it effect fundamental changes in the law. It was more intended to; “iron out the deficiencies and create accessible, user friendly rules” as the Department for Constitutional Affairs guidelines claim. Barring a few concerns set out below, the rationalisation has been widely welcomed. However, whether any regulations on this issue will ever be well known and simple, is doubtful.
Execution of deeds: the Common Law position
In Common Law, leaving aside the statutory presumptions discussed below, any corporation, including overseas corporations, can execute Deeds or other documents by affixing its seal in the manner prescribed by its constitution. The Common Law presumption, however, that things have been done correctly, is easily rebutted. It should be noted however, that neither the statutory provisions nor the Common Law rule, avoid the necessity to establish the corporation’s identity and legal status. Under the Common Law one would then have to establish that the corporation was executing the documents using the correct method and personnel. This would mean further research into the Company’s Articles of Association, and possibly Company Resolutions & Appointments; this can be problematic. As such the statutory provisions below are now commonly relied upon to the exclusion of the Common Law. The Statutes cover most corporations, including local authorities, building societies; companies incorporated under the Companies Act, other statutes, such as the Charities Act, and overseas corporations, as detailed below.
Execution of deeds: the statutory position
Section 74(1) of the LPA provided that a purchaser for valuable consideration can presume good execution where a Deed is validly sealed by a corporation with a director and company secretary, but not two directors, in attendance.
Section 36 A(4) of the CA allowed a similar presumption where the document is not sealed, but signed by a director and secretary, or two directors. The CA provision applied to all documents. Article 3 of the RRO amended Section 74(1) of the LPA to allow sealing by two directors, and, although seals are rarely in practice, the clarification is useful. The RRO also extended Section 74 to all documents, not just deeds.
The statutory presumptions above hold good to Limited Liability Partnerships, if the document is executed in accordance with Section 74 of the LPA or Section 36(a) of the CA, as applied by the Limited Liability Partnerships Regulations 2001.
In practice most transactions now take advantage of the statutory saving provisions in Section 74 of the LPA and Section 36(a)(6) of the CA. However, both provisions only apply to a purchaser for value.
Gifts
The position where one party is not giving any obvious consideration, remains difficult. Such documents are often drafted as deeds, as they lack consideration. Caution must be applied as where a Deed is not executed correctly, there is no general rule that the transaction will take effect as a contract. A non-effective transaction can obviously have dire consequences. This has lead to the practice whereby documents are often drafted so as to include some nominal consideration.
The Law Commissioners did consider widening the recent statutory savings provisions, but declined to do so. As such, there will be some instances where parties dealing with a company will have to revert to the common law position and seek full assurances.
Execution of deeds by Overseas Companies
Under common law it is necessary to establish that the corporation exists and is acting within its powers. Both these facts are determined through reference to the relevant overseas jurisdiction’s law.
The Foreign Companies (Execution of Documents) Regulations 1994, amending the CA at s36A(2), provides that a company, purchasing or selling for value, may execute a document or a Deed without using a seal, if the person executing does so pursuant to the laws of the relevant territory and the powers of the overseas company. These two issues are again matters of that overseas jurisdiction’s law. It is, therefore, remains the case that the position regarding overseas companies can be complex. This often leads to a request for a legal opinion from a foreign lawyer (with appropriate insurance) or foreign notarisation.
The complexity regarding the effectiveness of the execution of a document by an overseas company can be mitigated by Sections 23 and 24 of the Land Registration Act 2002 and the Land Registration Rules 2003, where the overseas company is selling registered land in the UK. Here the registered proprietor will be deemed to be acting intra vires in relation to Land Registry documents, executed correctly.
Execution on behalf of another (attorneys)
Article 7 of the RRO amends the LPA, the CA and the LP(MPA) and clarifies the position on deemed execution by another. This rectifies the anomaly, not only in the LPA, but also in the Powers of Attorney Act 1971, which implied that appointments of agents under such instruments must be to an individual person, not a corporation. The position is now that a company can, not only execute a document directly as a director of another company, but also act under a Power of Attorney or as an agent.
Common Directors of Several Companies
The RRO has now also clarified that where a director is a director of more than one company and is signing one documents on behalf of more than one company, he must do so using separate signatures for each company.
The face value requirement: a deed has to say it is a deed
A person acting in good faith may enforce a validly (on the face of it) executed document against a company, despite the transaction being unauthorised by the company’s constitution. Such transactions are largely validated through s35 of the CA.
Further to Section 1(2)(a) of the LP(MP)A, which introduced the “face value” requirement in that the document must identify itself as a Deed, the RRO has now confirmed that the sealing of a document by a company is not in itself sufficient to show intention to create a deed.
Delivery of deeds (time of execution)
The position in relation to when a deed is delivered has now been harmonised through the RRO, so that there is a rebuttable presumption of delivery at the time of execution.
Previously, the LP(MP)A held that for a document executed by a company under Section 36(a)(6) of the CA, there was an irrebuttable presumption of delivery upon execution, with respect to a transaction involving land. Indeed, the case of Johnsey Estate (1990) Ltd –v- Newport Market World and Others [1996] seemed to imply that this extended to documents executed under a seal. This resulted in practical problems, as it was often useful to hold executed documents pending completion. The position is now that documents can be held in this way, although it is best to make it clear that that is the case.
The position in relation to deeds held in escrow remains as before, in that such documents can be delivered, but their effect is suspended until the escrow condition is satisfied. The obligations nevertheless are effective from the date of delivery/completion.
Authority to Hold Up Completion
A further welcome change introduced by the RRO was that solicitors for companies can now not only hold Deeds, but also any other document pending completion.
Former section 1(5) of the LP(MC)A provided that where a solicitor or a legal conveyancer delivered a deed in relation to the disposition or creation of an interest in land there was a presumption that he had the authority to do so. This presumption was limited to transactions involving an interest in land.
Schedule 2 to the RRO removes this restriction and by deleting the words ‘involving the disposition or creation of an interest in land’ it extends the presumption to other types of transactions.
Execution of deeds outside the UK
It has long been the case that Sections 38 and 39 of the CA allows a company to execute a Deed abroad through an attorney or through the use of a facsimile of its common seal, although again here authorisation has to be established.
Conclusion
The new regulations do not affect a fundamental change in the law of Deeds, and are seen by many as merely correcting flaws in the 1989 legislation. The recent changes in the statutory presumptions of execution and delivery, together with clarifications as to other requirements, have certainly led to an improvement. That is not to say that the position is always well known, simple and rational, partly because some issues are complex and do not lend themselves to simplification. There are still some areas where commentators feel that the position remains unsatisfactory, in particular, the fact that the statutory protection on execution extends only to a purchaser and not a volunteer. However, in most cases, the statutory saving provisions governing the execution of Deeds and documents by companies offer considerable security, in relation to such documents.
For further information email David Wedgwood or call 020 7940 4000.
