Being foot-faulted – getting the formalities wrong

Signed, sealed and delivered

It is not so long ago that a client rang me and asked how she should sign an agreement. I was tempted to explain in the most patronising way possible that she should pick up the pen in her hand and apply it to the paper in such a way as to trace out her name. Actually, her question was not a stupid one – in fact, there are formal rules for how a company should execute at least certain sorts of documents and you ignore them at your peril.

Few contracts are (to use the old expression) “signed, sealed and delivered”. Indeed, many modern companies no longer have a company seal as the legal requirement for one such has disappeared. So just how does a company execute contracts?

Legal background

The biggest problem is when a company is dealing with a deed. Some transactions have to be executed in the form of a deed – principally when dealing with land. Some parties choose to execute a contract as a deed as it gives two advantages: firstly, there is no requirement for consideration and, secondly, the limitation period for suing on the contract is extended from six to twelve years. There is a third “fuzzy” advantage in that it focuses the minds of those present when a deed is used – it is somehow more “formal” than a simple contract and makes people pay closer attention.

The execution of documents by a company is dealt with in sections 43 to 52 of the Companies Act 2006: if you actually remember the gory details set out in those sections, you probably need to get out more as they are long and complex. The really important thing is this: if you are executing anything other than an ordinary commercial contract, then you really need to remind yourself of what appears in those sections and follow them to the letter.

Section 43 deals with “company contracts” and states that a company can either use its seal (if it has one) or a contract can be entered into on its behalf by anyone acting under its authority, express or implied. A recent case serves as an example of implied authorisation. In Stavrinides v Bank of Cyprus [2019] EWHC 1328 (Ch) Stavrinides’ businesses owed the Bank of Cyprus around £3m for which security had been provided. When it came to demanding repayment, he produced a letter signed by the Bank’s relationship manager purportedly agreeing to accept £1.65m in full and final settlement. There is of course an inherent improbability that a bank would take £1.65m in place of £3m where it has full security. That manager did not have express authority to agree such a deal and so the question was whether he had implied authority. The judge held that he did not: Stavrinides well knew that all letters emanating from the Bank were signed by two signatories and he also knew that the relationship manager was at the lowest level of authority within the Bank. The Bank, in short, had not held out the relationship manager as having the authority to execute such a transaction.

Section 44 deals with more complex matters – execution of documents (such as a deed) BY a company. Again, the company’s seal can be used but this is relatively rare these days. It comes down to getting the signature right. The eye eagerly turns to subsection (2), which provides that the signature can be applied either by two authorised signatories (basically any director or the company secretary) or by a single director “in the presence of witness who attests the signature”.

What happens if you get it wrong?

How to get it wrong

Bioconstruct v Winspear [2020] EWHC 7 (QB) is a very recent example of getting it badly wrong. The facts are so bizarre that you would think that they were invented by a malicious law tutor to punish the students.

Winspear père was the director of Northrn [sic] Energy Limited which was going to guarantee the obligations of Biopower Group Limited. Winspear père was reluctant to give a personal guarantee, but happy to provide the guarantee of Northrn. Winspear fils was the sole director of Stevenson Renewables Limited which was providing security in the form of land – which necessitated that the document should be executed as a deed, not a simple contract. In fact, things changed and Winspear père was required to provide a personal guarantee.

There were various drafts and Winspear père executed a version on behalf of Northrn. He took the execution pages along with him to a meeting designed to finalise the document. At that time, the document was changed to make Winspear père a personal guarantor. That document took the following form:

• Winspear fils had authorised his father by email to execute the document for Stevenson Renewables and the document exhibited a Board resolution to that effect
• Biopower executed the document by a director, Kevin O’Donnell, whose signature was not attested
• Winspear père initialled the pages containing the operative provisions and then attached the execution pages he had brought with him – those execution pages were signed when he was signing on behalf of Northrn, not personally

Let’s take a look at each of these attempted executions.

Winspear fils – section 47 Companies Act 2006 provides that a company can authorise a person to execute a deed on its behalf but this authorisation must itself be in the form of a deed. Email will not do – and exhibiting the Board resolution could not save the defect. Stevenson Renewables had not validly executed the document.

Biopower – there was just the signature of one director, no-one had signed to witness it. That signature was therefore ineffective.

Winspear père – the judge followed the decision in Mercury Tax Group v HMRC [2008] EWHC 2721 (Admin) which found that you cannot take signature pages from an earlier and different document and validly apply them to a later document. In that case, a tax adviser got clients to execute incomplete documents and then applied the signature pages to later versions of the document. The judge found that you cannot “recycle” signature pages in this way – a document was a “discrete physical entity” either in one copy or in counterparts and had to be executed as such.

The Law Society had issued Guidance Notes on the execution of documents and considering that Mercury should be confined to its own facts. The judge in Bioconstruct thought differently – this is tremendously important going forward when executing documents. Don’t rely on the Law Society’s guidance any more, go back to the provisions of the Companies Act and follow them to the letter.

So – as regards Winspear père, he had signed a document but in the capacity of representing Northrn, not his personal capacity. This was fatal. Applying the old signature pages to a fresh document was not a valid way of executing it. It was true that he had initialled the pages of the document, and initials could in theory constitute a signature, but the initials were not attested by a witness and so were invalid as an execution of the document as a deed. In any case, he had not initialled the signature pages.

This all meant that the document had not been validly executed. The sting in the tail was that the doctrine of estoppel could not be used retrospectively to validate the document: the defects were apparent on the face of the document and estoppel could not override the specific requirements of the statute.

Winging it – just getting over the line

In the aptly named case of Signature Living Hotel Ltd v Sulyok [2020] EWHC 257 (Ch) Signature executed a guarantee to support a loan made by Sulyok to another company. The loan was not repaid and Sulyok made a statutory demand prior to starting winding up proceedings. The document was signed for Signature by a sole director without the attestation of a witness.

As a deed, the document was therefore invalid – as we have seen, a signature by a single director would need to be witnessed by someone who attested the signature. However, the judge accepted that, even though the document failed as a deed, it could still take effect as a simple contract as all the other requirements for validity were present. The document was not a deed and did not have to be as the transaction did not concern land. Consequently, it could take effect as a simple contract and being in writing complied with section 4 of the Statute of Frauds Act 1677, which requires a guarantee to be in writing and signed.

Conclusion

Leave nothing to chance – if you are closing a deal and hear the words “company” and “deed” within a few sentences of each other, you really have to go back to basics and just check that you have complied with the formalities set out in the Companies Act 2006.

Above all, the practice of “re-cycling” signature pages is one to be avoided. After Mercury, the Law Society sought to limit the effect of that decision and some solicitors have followed that guidance, but going forward that would be extremely unwise after this judgment. If you have executed important documents recently where signature pages have been “re-cycled”, it may be as well to get them checked over and re-executed if necessary.

Disclaimer

As always, this is intended as a general update on the law. If you have a specific problem, then always take professional advice before proceeding as the devil is in the details.