Execution Of Company Documents
The correct execution of documents can be pivotal to the success or failure of litigation. Indeed, arguments as to the validity of documentation are commonplace, particularly when there appears to be a question mark over execution.
More often than not, problems arise when executing ‘deed/s’. When considering drafting a legal document, two routes are normally available to the drafter: to draft ‘under hand’ or as a ‘deed’. The latter of these routes is the one most travelled due to the significant advantages the deed offers over a contract under hand. For one, there is no need to show consideration in a deed (an essential component of a binding contract) and secondly, the enforcement period offered by such a document is twice as long as its counterpart: 12 years.
When is a document a deed? Section 1 of the Law of Property (Miscellaneous Provisions) Act 1989 provides the answer. Firstly, the document itself must make it clear that it is intended to be a deed by the person making it or, as the case may be, by the parties to it (whether by describing itself as a deed or expressing itself to be executed or signed as a deed or otherwise). Secondly, the document must be ‘executed as a deed’.
Whether the deed is validly executed largely depends upon the type of entity executing the deed. For the purposes of this article we shall focus on execution by a company.
Section 46(1) of the Companies Act 2006 provides that a document is validly executed by a company as a deed if, and only if: (a) it is duly executed by the company; and (b) it is delivered as a deed. Furthermore, section 44 of the Act provides that a document will only be held to be validly executed by a company if: (a) the common seal of the company is affixed to it; or (b) it is signed on behalf of the company by two authorised signatories or by a director of the company in the presence of a witness who attests the signature.
In practice, it is not uncommon to see signatories fall short of these requirements. In one of our recent cases, an Indemnity and Guarantee was purportedly executed by the defendant only and did not bear the company’s seal nor had it been signed by a second authorised signatory. Furthermore, the signature had not been witnessed by anybody. In the circumstances, the Indemnity and Guarantee had not been validly executed as a deed.
Nevertheless, failure to validly execute as a deed is not necessarily fatal to its enforcement. Historically, the Courts have been willing to find that a document that is expressed to be a deed, but has not been properly executed as a deed by one or more of the parties, may take effect as a simple contract provided that:
i. All the elements required for a simple contract are present;
ii. The transaction effected by the document is not one for which a deed is required;
iii. In the case of a document executed by a company, those signing the document had the necessary authority to do so.
With regard to the first issue, we were able to identify for our client that all the pre-requisites for a simple contract were present and clearly identifiable – i.e. offer, acceptance, intention to create legal relations and consideration. Notwithstanding that it needn’t be recorded on the face of the document.
Moving to the second issue, section 4 of the Statute of Frauds 1677 provides that a guarantee must either be in writing or there must be some written note or memorandum of it. In either case the document must also be signed by the guarantor. This is the extent of the formalities required for a guarantee. It need not be made by deed so long as it is in writing and signed by the guarantor. An indemnity need not be in writing at all.
Finally, the third issue. The signatory was at all material times a director of the defendant and would therefore be deemed to have implied authority to sign the Indemnity and Guarantee. However, having checked the Memorandum and Articles of Association for the defendant via Companies House, it was clear that express authority was given to directors of the company to give guarantees on behalf of the company. As such the signatory had both express and implied authority to sign the Indemnity and Guarantee on behalf of the defendant.
In light of these findings, we took the view that the Indemnity and Guarantee was not rendered invalid by virtue of the fact that it had not been properly executed as a deed, and our client was free to enforce.
Clearly the best way to avoid issues arising in relation to execution is to ensure that it is done properly and the relevant statutory requirements are satisfied. It is not however a perfect world and mistakes/omissions can occur. When this happens, despite the arguments that can be raised, it may not necessarily be game over.
If you are faced with difficulty in this regard then please do not hesitate to contact our team and we will be happy to take a look at the paperwork and advise you accordingly.