UK: Execution of deeds by companies

The Regulatory Reform (Execution of Deeds and Documents) Order 2005 (SI 2005/1906), which recently came into effect in England and Wales, implements proposals originally described as aiming to increase the efficiency of business transactions and remove any doubts that may exist about the law.

As highlighted in a number of consultations in the last ten years, the law has developed by accretion, building on common law principles and spread over various Acts and statutory instruments.

Discrepancies between statutory provisions have until now meant that - for companies particularly - different methods of execution could have significantly different legal consequences.

For an article explaining the new changes and highlighting some of the practical ramifications, please see below:

Full Article

"Who did this more than bloody deed?" asks someone in Macbeth: a sentiment echoed by lawyers who discover – sometimes too late – that the way a document has been executed means that it is not a deed after all.

Deeds are used to pass or confirm the passing of an interest, property or a right, or to create or confirm the creation of a binding obligation. Sometimes a deed is used so that an obligation will be binding despite the absence of consideration for it, or in order to extend the limitation period to 12 years. They are often highly important documents, and in some cases nothing less than a deed will do: for example, a power of attorney, or the transfer or creation of a legal estate in land (such as a lease) or the creation of a legal mortgage. In a takeover bid, an offeror seeking irrevocable undertakings to accept will normally take them by way of deed because otherwise (unless they are instead given in consideration only of its promise to make the offer) the offeror will not be able to count the relevant shares towards the 90% acceptances which will give it compulsory acquisition rights over the remaining offerees' shares. Getting it wrong can be disastrous.

The possibility of making a mistake stems largely from the fact that deeds require more formality than other legal documents: for example, a deed is not effective until it has been delivered – not physically, necessarily, but the person who has executed it must in addition show that he intends to be bound. This is not always well understood and can cause difficulties: some commentators, including the Law Society, have suggested that the doctrine of delivery should be abolished.

The Regulatory Reform (Execution of Deeds and Documents) Order 2005 (SI 2005/1906), which recently came into effect in England and Wales, implements proposals originally described as aiming to increase the efficiency of business transactions and remove any doubts that may exist about the law. The last major reform in this area happened 15 years ago - among other things, permitting individuals and Companies Act companies to execute deeds without using seals. These changes were intended to modernise the law and reduce inconvenience. Unfortunately, the law has developed by accretion, building on common law principles and spread over various Acts and statutory instruments. As highlighted in a number of consultations in the last ten years, discrepancies between statutory provisions meant that - for companies particularly - different methods of execution could have significantly different legal consequences.

The legislation is not concerned exclusively with deeds – in fact, one of the changes to section 74 of the Law of Property Act is to broaden its application beyond deeds to other "instruments" – but in practice the problems associated with execution of documents by companies have not arisen in relation to documents executed under hand, where it is normally a matter of authorising an individual to sign on behalf of the company (perhaps producing a copy of the board minutes to the other side), no attestation of the signature is needed and the doctrine of delivery does not apply.

The main statutory provisions for execution of deeds by companies are:

• section 36A of the Companies Act 1985 – which applies principally to companies incorporated under the Act and its predecessors – as augmented by the new section 36AA. These sections cover execution under the company's common seal, but also permit the company (whether it has a seal or not) to execute deeds by the signature of two directors or one director and the secretary. This has become the prevalent method for execution of deeds by companies;

• section 74 of the Law Property Act 1925, as augmented by the new section 74A, which applies to corporations aggregate (a category that includes companies covered by section 36A but extends also to other bodies corporate, such as local authorities and building societies). Except where execution is under power of attorney, the section applies only when the corporation's seal is used; and

• the Law of Property (Miscellaneous Provisions) Act 1989, which sets out the prerequisite features of deeds for individuals and companies alike.

Compliance with section 74 or section 36A means that the person taking the benefit of the deed potentially has two important statutory protections: if he is a purchaser in good faith for valuable consideration (which includes a lessee, mortgagee or other person acquiring an interest in property – including personal property and choses in action, such as contractual rights - for valuable consideration) he can presume that the document has been duly executed by the company or corporation, without having to concern himself as to whether its constitution and internal regulations have been complied with; and, even if he is not a purchaser, he is protected by a presumption that the deed has been delivered on its being executed (which is discussed in more detail below). These two factors – due execution and delivery – make the document a deed in accordance with the 1989 Act.

Since the legislative changes in 1990, many smaller companies have dispensed with seals altogether. There is an administrative advantage in having a common seal, however, because most companies' articles of association (reflecting equivalent provisions in Table A) permit the directors to resolve that sealing can be attested by someone who is neither a director nor the secretary. The boards of large companies that often have to execute deeds – for example, banks and insurance companies - typically give standing authority to specified employees (usually referred to as authorised sealing officers) so that one, or possibly two, of them can seal and sign deeds up to a certain level of significance on behalf of the company. But this does not confer the same statutory presumption of due execution on a purchaser as if sealing were witnessed in accordance with section 74 or the deed were signed in accordance with section 36A.

Section 74 used to provide that a corporation could execute a document by affixing its seal in the presence of one director (or member of the equivalent governing body) and the clerk, secretary or other permanent officer or his deputy. Under the new Order, a corporation can also now execute in accordance with the section by affixing the seal in the presence of two directors (or members of the equivalent governing body). For the purposes of section 36A of the Companies Act, of course, signature by two directors was always enough. In fact, the amendment means that section 74, while it still requires use of the seal, is otherwise more flexible than section 36A, because it is generally thought (by the Law Commission, among others) that signature by one director and a deputy secretary (or an assistant secretary) is not effective execution under section 36A.

The Order introduces clarifying amendments:

• into both sections that, where the relevant officer is itself a company or corporation, it should sign by the hand of an individual authorised to do so as a matter of its own internal organisation. In other words, for a corporate director to attest the affixing of a seal or to sign in accordance with section 36A, it should merely authorise an individual to sign on its behalf – there is no need to do what it would have to do if it were entering into the deed as principal rather than merely executing the deed as an officer of another company.

• into section 36A that, where more than one company is entering into the deed without using the seal but each of them has the same officers, the officers must sign the deed separately for each of the companies. There is no corresponding provision in section 74 – presumably because that requires the use of each corporation's seal. Where seals are used, there is nothing expressly preventing officers in common from signing in attestation once only in relation to all the companies, but this is likely to be considered unorthodox.

How can the person taking the benefit of the deed be sure that it has been delivered?

Section 74 was originally silent as to delivery (and the Court of Appeal ruled that there was no implied presumption of delivery on execution). Section 36A, in contrast, provided that there was a rebuttable presumption of delivery on execution, unless the deed was in favour of a purchaser, in which case the presumption was irrebuttable. It was unclear whether the irrebuttable presumption applied if the company used its seal but the deed was signed in attestation by two directors or a director and the secretary (according to one case, it did).

The inflexibility of the irrebuttable presumption caused difficulties, particularly in the context of transactions. For example:

• a deed will often be executed in advance as a matter of practical necessity or convenience: some parties to the deed may be in distant locations, or the document may be one among hundreds of others that have to be ready for the completion meeting. It would normally be intended that the deed was not to be delivered when it was executed, but only when everything was in place for completion to proceed; or

• some deeds may be executed and delivered in escrow, which means that they cannot be retracted but will only take effect if some specific condition is satisfied (such as completion of the other components of the transaction). If the condition is fulfilled, the deed is deemed to have been delivered not at that time but at the time it was executed. But the parties may wish it to take effect at a different time.

In either case, the irrebuttable presumption was an obstacle, especially as the common law provides that, when a person has delivered a deed, he may – depending on the way the obligations are worded - be held to it even if someone else who was supposed to enter into it fails to do so.

Perhaps the single most significant change introduced by the Order is that new sections 74A and 36AA provide that in all cases the deed is presumed to be delivered when executed unless a contrary intention is proved. This opens the way for the parties to establish – for example, by stating the fact in the relevant board minutes or in covering letters, or by exchange of letters or agreement – when delivery is to occur, regardless of whether a purchaser is involved.

On a related point, the Order amends the 1989 Act so that, where a solicitor, notary or licensed conveyancer (including their respective agents or employees) delivers a deed on a party's behalf, it is conclusively presumed in favour of a purchaser that he is authorised to deliver it. This protection was formerly only available in connection with land transactions.

One option for a company – especially when the appropriate officers are not going to be available at critical times - is to grant a power of attorney in favour of one or more individuals or another company in order that they may execute and deliver deeds on the appointing company's behalf. This is not a last-minute solution, as the power itself must be executed as a deed.

Until the Order amended it, the 1989 Act, which lays down the essential characteristics of a deed, contained no express reference to execution of a deed by one person on another's behalf. This omission, now repaired, was not usually seen as a problem in practice.

As a result of new wording in, variously, the 1925 Act, the 1985 Act, the 1989 Act and the Powers of Attorney Act 1971:

• it is now mandatory, when an individual attorney executes a deed on behalf of a company, that his signature is written in the presence of and attested by a witness.

• if the attorney is a company, it must execute the deed in the way that it would if it were itself entering the deed as principal rather than as attorney: in other words, using its seal in accordance with section 74, or by the signature of two directors or one director and the secretary in accordance with section 36A, or using its seal in accordance with its articles of association. (There are special provisions in section 74(4) under which an officer of a corporate attorney can validly convey interests in property if he does so in the name of the appointor and, if the instrument is a deed, in the presence of a witness who attests his signature.

• it is now clear that execution by an attorney confers the benefit of the statutory presumptions of due execution and delivery in the same way as execution by the appointing company would have done.

• it is expressly permissible for an individual attorney to sign the deed in the name of the appointing company, but it will be equally effective if the individual attorney signs in his own name. It is likely to be best practice for the attorney to state both names: for example, "X Limited by its duly authorised attorney, Y" or "Y, as duly authorised attorney of X Limited".

• except where it executes in accordance with section 74(4), mentioned above, a corporate attorney will necessarily use its own name as, in order to execute the document as a deed, it must use its own seal or execute under the hands of two of its directors or one director and the secretary. It is likely to be best practice to state both names.

The 1989 Act already provided that a deed must make clear on its face that it is intended to be a deed, but no particular wording was prescribed.

It is common practice for deeds – whether they are executed under seal or by signature - to state at the end that they have been executed as deeds, and sometimes to describe themselves at the head of the document (and throughout) as deeds. New wording inserted by the Order now spells out that executing the document under seal is not enough on its own to satisfy the face value requirement.

This has had some unlooked-for consequences. For example, the articles of association of some companies, particularly in the context of private equity transactions, contain a power of attorney in favour of the company, allowing it to do certain things on behalf of members to give effect to bad-leaver, drag and other provisions. As the 1971 Act requires powers to be granted by deed, the validity of the power depends on the fact that the Companies Act provides that a company's articles bind the company and its members to the same extent as if they had been signed and sealed by each member. Now that this is not enough to give the articles the effect of a deed, new articles cannot effectively confer a power of attorney (although much the same result can be achieved by authorising the company in the articles to take the necessary actions, without purporting to grant a power).

Again in relation to the Companies Act, irrevocable undertakings to accept a takeover offer that are given (as the Act specifies) under seal and for no consideration must now satisfy the face value requirement or they will be of no contractual effect.

Apparently by oversight, the Order does not deal expressly with execution by limited liability partnerships or by foreign corporations, despite the fact that in both cases the relevant statutory instruments rely on section 36A, stating that the section applies with the modifications set out in the instruments. On normal rules of statutory interpretation, the references to section 36A are to be taken as references to the section in its amended form. That means that the statutory instruments now incorporate inapt wording in places.

More seriously, neither of the statutory instruments refers to section 36AA, which sets out the prerequisites (due execution and delivery) for documents to be considered as validly executed as deeds by companies for the purposes of the 1989 Act, and contains the presumption (unless a contrary intention is proved) of delivery on execution. As a result of wording having been deleted from section 36A, the statutory instruments no longer say what is required for documents executed by LLPs and foreign companies to constitute deeds, and no longer confer a presumption of delivery.

The Department of Constitutional Affairs is considering the position.

The Order brings greater uniformity to the disparate statutory sources by amending them, but perhaps what was really needed was to bring everything together in one place – and this form of legislation could not do that.

The drafting changes are shown in highlighted extracts from the relevant Acts in guidance published by the Department of Constitutional Affairs, available at http://www.dca.gov.uk/pubs/deed-doc-guidance.pdf. The law is still rather technical and the effect of the newly-inserted language is not always self-evident to the ordinary reader. Some important common law concepts are not defined or expounded in the legislation: for example, the doctrine of delivery and the related doctrine of escrow. Although the Order has removed some pitfalls, it will still be necessary on occasion to seek expert advice.

It is also disappointing for business that the opportunity has not been taken to deal expressly with the electronic execution of documents

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

The original publication date for this article was 11/11/2005.