Discharge of mortgage: The need to affix a seal



Dr. G.Y.C. Mok, PhD reviews the Court of Appeal decision in Au Wai Mings case, arguing that it is not necessary to affix a seal on the release if the sum secured by the mortgage is fully repaid.

A. Introduction

In its recent decision in Au Wai Ming & Leung Mei Po Mabel v Kam Tze Ming Alfred & Cheung Pui Man [CACV 278/2008], the Court of Appeal has, after overturning the decision of the Trial Judge and refusing leave to appeal to the CFA, ruled, inter alia, that each separate set of signatures on the Release must bear a seal otherwise it is defective and consequently, the vendor failed to show or provide good title to the purchaser. In the opinion of the Author, and for the reasons set out below, the decision is fundamentally wrong and contrary to statutory requirement. It was very surprised to note that, although five law firms, a Senior and four other Counsel, together with four learned Judges were involved, none of them had considered the applicability of the rule in Walsh v Lonsdale (1882) 21 Ch. D.9 [a leading case in Equity]; or was aware that under Section 56 of the Conveyancing and Property Ordinance (CPO) the discharge of a mortgage by a signed receipt will be sufficient and that such receipt or release does not need to be sealed. This is in line with Section 115(1) of the Law of Property Act 1925 (LPA) and the decision in Simpson v Geoghegan (1934) in England.


B. 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 Section 4(2)(f) of CPO which provides that a receipt is not required by law to be under seal. In fact, under the New Territories Ordinance, a standard receipt would operate to reassign the mortgaged property. However, there cannot be a receipt for partial reassignment or partial discharge; and a deed of release is still required.


(a)    The statutory receipt


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


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


      By virtue of Section 56(3) of 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 attorney of the mortgagee). However, the receipt is not required to be executed under seal, as provided in Section 56(5) of 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. If the mortgagor is a limited company, a Memorandum of Satisfaction should also be registered at the Companies Registry, pursuant to Section 85 of the Companies Ordinance.


(b)    Reassignment or release by deed


      As a legal mortgage nowadays involves no transfer of any interest in the property, it is not really necessary to discharge a mortgage by reassignment or deed reassigning to the mortgagor, all the property in the land freed from the encumbrances secured under the mortgaged deed, although some banks still adopt this 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/flats to purchasers.


C. 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.

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.

The following chart illustrates the above points:-


D. The case of Qualihold Investments Ltd.


Although the assignment or the discharge of an equitable interest in the property can be effected by writing only, pursuant to Sections 5 and 56 of CPO respectively, it is interesting to note that in the case of Qualihold Investments Ltd. v Bylax Investments Ltd. (1991) 2HKC589, 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) 4HKC418, the same conclusion was reached by the Learned Judge and the execution not in accordance with the companys articles was held defective. The same reasoning was approved by the Court of Appeal in Polyson Jewellery Co. Ltd. v Liu Song Carlos (2002) 2HKC183(CA). The writer agrees wholeheartedly the aforesaid 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 Qualiholds case is that, though it is assigning an equitable interest in the property, the assignment or confirmatory assignment should still be duly executed as a deed as a matter of law if the express covenant, i.e. agreement by deed under seal [Russell v Watts (1885) 10AC 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 S35(1)(d) of CPO, even if it is not executed as a deed. However, it was held in Glegg v Bromley (1912) 3KB that there must be consideration for all equitable assignments, though consideration is not so required for a statutory assignment, as in Harding v Harding (1886) 17QBD442 and Holt v Heatherfield Trust Ltd. (1942) 2KB. Therefore, in the absence of consideration or the parties agree/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. [Note: The Regulatory Reform (Execution of Deeds and Documents) Order 2005 and the new Section 36AA of the Companies Act in UK, now permit individuals and corporations formed under the Companies Act to execute deeds without using seals.]


E. HCA 738/2007


The facts of Au Wai Mings case were very simple. The plaintiffs (purchasers) refused to complete a conveyancing transaction because the defendants (vendors) failed to show or give a good title because the release of a mortgage without the 2nd 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 granted by the defendants predecessor-in-title in favour of American International Assurance (Hong Kong) Ltd. (AIA) [the said Release]. AIA transferred the benefit in the said mortgage to AIG Finance (Hong Kong) Ltd. (AIG) which AIG in turn transferred to Hong Kong Mortgage Corporation (HKMC). The said Release which recorded that the sum secured by the said mortgage had been fully repaid and satisfied, was executed by AIG in dual capacity, itself and for HKMCs lawful attorney. On the execution page of the said Release, the common seal of AIG was affixed once only.


The Trial Judge ruled that AIG was not required to execute the said Release in its personal capacity and by Section 6 of Powers of Attorney Ordinance (PAO), AIG could just execute the said Release without mentioning itself being the attorney of HKMC. As AIG had executed the said Release once with the seal affixed thereon, there was no need for AIG to execute it twice as the attorney of HKMC and the plaintiffs claim was therefore dismissed with costs nisi to the defendants.


F. CACV 278/2008


On Appeal, the Learned Appeal Judges narrowed down the argument to three issues as follows:-


                (1)    Was the attorney 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 no. (1) above was in the affirmative, then it was unnecessary to consider questions no. (2) and (3) above and that plaintiffs Appeal would be dismissed. Without considering or knowing the existence of Sections 4(2)(f) and 56(5) of CPO, one of the Learned Appeal Judges gave a wise thought on the matter and relied on Section 20(1) of CPO to give his dissenting judgment, namely, it was the deed or the document itself which must bear the seal, but not each separate set of signatures. To understand his reasoning, it is appropriate to reproduce S20(1) of CPO as follows:


“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 been 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 on both signature columns of the said Release at the same time (which is highly likely to be the case here), then the dissenting judges above interpretation must be correct. Indeed, Section 74(1) of LPA in England provides similar provision but the wordings used therein are.................. where a seal purporting to be the seal of the corporation has been affixed to a deed, 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 the two sets of signatures are subscribed simultaneously.


As to questions no. (2) and (3) above, the Learned Judge confirmed the Trial Judges decision that the requisition raised was a matter of conveyance only, not of title. However, the Learned Judge was not satisfied with the answer provided by the vendors solicitors since they should have undertaken to have the seal affixed on the said Release before completion or within a reasonable time thereafter. It was, therefore, adjudged that the purchasers were entitled to refuse to complete.


As previously discussed, the Learned Appeal Judges reasoning on the 3rd issue had in fact lost sight of the exception to Section 4 of CPO, namely, a legal estate in land may be extinguished by a receipt which is not required by law to be under seal.


G. Conclusion


Since it is not a legal requirement that the said Release be sealed, it was not defective or void without the 2nd seal but so far as it relates to HKMC, it will be valid for only 6 years, not 12 years, under the Limitation Ordinance.


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 CA or CFA, it will have an adverse impact or effect on the legal profession.






© Dr. G.Y.C. Mok 2010
Senior Partner
George YC Mok & Co.


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