Introduction
In Hong Kong, all contracts for the sale of property should be made in writing and signed by the vendor and the purchaser of the property or some other person lawfully authorized by the vendor/purchaser for that purpose. The manner of execution of such contracts is therefore vital. Parties to a property transaction usually sign a provisional agreement for sale and purchase at the conclusion of negotiations. Where the vendor/purchaser is a company, the way how this company signs a provisional agreement for sale and purchase may call into question. 

In a recent case Liu Jun v China Well Properties Ltd DCCJ 2759/2011, the Court had to decide whether a preliminary sale and purchase agreement (“Agreement”) signed by the vendor (“Defendant”) by one of its two directors was validly executed and whether the Agreement was binding on the Defendant.

Facts
The purchaser (“Plaintiff”) signed the Agreement on 3 May 2011 for the purchase of a property (“Property”) and gave a cashier order which represented the initial deposit to the estate agent (“Estate Agent”) who helped negotiating the terms of the subject sale and purchase transaction. The Agreement was signed by the Plaintiff in her personal capacity while Ms. Lau (“Lau”), one of the directors of the Defendant, appended her signature together with the round rubber chop of the Defendant at various positions where the Defendant should sign thereon. However, the Estate Agent, on 4 May 2011, told the Purchaser that the transaction had to be called off because another director of the Defendant, Ms. Lai (“Lai”), did not agree to sell the Property. Therefore, the Plaintiff commenced the present proceedings to claim compensation which was equivalent to the amount of the initial deposit against the Defendant pursuant to the provisions in the Agreement.   

The Plaintiff’s case
The Plaintiff attempted to rely on the indoor management rule to argue that the Agreement was signed by Lau on behalf of the Defendant while the Purchaser was acting in good faith and not aware of any irregularities within the Defendant. Therefore, the Defendant should be bound by the Agreement. 

The Defendant’s case
Initially, Lau refused to sign on the Agreement as she had not obtained the consensus of Lai. But on the assurance from the Estate Agent that the Agreement would only be binding when it was duly approved and signed by Lai, stamped with the company chop and delivered to the Plaintiff upon the Defendant’s instructions, Lau eventually signed the Agreement. Further, despite the Estate Agent was told that Lai was not agreeable to the sale and would not put her signature on the Agreement, the Estate Agent nevertheless stamped the company chop of the Defendant on the Agreement and released the Agreement to the Purchaser contrary to the instructions of Lau.

Discussion

Whether the indoor management rule applied
The indoor management rule (also known as the rule in Turquand’s case) is the common law rule that a third party dealing in good faith with a company is not bound to inquire whether acts of internal management have been regulated and is entitled to presume that the acts within the company’s constitution and powers have been properly and duly performed. The Court held that the Plaintiff could not rely on the indoor management rule since the Plaintiff did not plead the factual basis upon which to argue that Lau had held out to the Plaintiff that she had the apparent authority to enter into the Agreement. Even if the Plaintiff was entitled to rely on the rule, the mere signature of Lau, without describing her as a person “duly authorized by the board”, would still be insufficient to trigger the application of the rule. The Court further held that, applying Grande Trade Development Ltd v Bonance International Ltd [2001] 2 HKLRD 759, there was no presumption that Lau must have been duly authorized by the board merely because she was a director of the Defendant.

Whether the Agreement was duly executed by the Defendant
The articles of association of the Defendant stated that a director’s meeting could only be held in the presence of two directors. While the Defendant only had two directors, i.e. Lau and Lai, the decision to sell the Property must be made with the consensus of both of them.  As Lai opposed to the sale, there had not been a board resolution of the Defendant authorizing the sale. It followed that the Agreement was signed without authority. The Court therefore held that the Agreement was not binding on the Vendor.

Conclusion
Since the Court held the Plaintiff was not entitled to rely on the indoor management rule to establish liability of the Defendant and that the Defendant was not bound by the Agreement, the Plaintiff’s claim against the Defendant was dismissed.  

The above case is another example which illustrates that a preliminary agreement for sale and purchase should not be casually executed. Where a property transaction involves a company, it is advisable to check whether the articles of association of the company have been complied with upon execution of the agreement. It is also essential that a board resolution of the company is obtained which approves the sale or purchase of the subject property. In general, both the purchaser and the vendor should consult their lawyers in order to fully understand the formalities and contents before entering into a binding preliminary sale and purchase agreement.

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.