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Discharge of mortgage: The need to
affix a seal
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Dr. G.Y.C. Mok, PhD reviews the Court of Appeal decision
in Au Wai Ming’s 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 company’s
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 Qualihold’s 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 Ming’s 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 HKMC’s 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 judge’s
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
Judge’s 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 Judge’s
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. |
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© Dr. G.Y.C.
Mok 2010 |
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