A recent Hong Kong case reminded us of the importance of getting things right when executing documents in virtual closings, particularly in relation to deeds.

In the case of Penta Investment Advisers Ltd v Allied Weli Development Ltd (formerly known as Hennabun Capital Group Ltd) – [2014] HKCU 2365, the Hong Kong Court of First Instances had to determine whether a guarantee (the Guarantee) was properly executed by or on behalf of the guarantor and thus binding on it. Even though the Guarantee was upheld, the case provides highlights some of the arguments that can be raised which may delay an otherwise simple debt claim.

The guarantor, a BVI company called Allied Weli Development Limited (formerly known as Hennabun Capital Group Limited) (the Guarantor) provided the Guarantee to Penta Investment Advisers Ltd (the Beneficiary) in respect of the performance of certain investments made by the Beneficiary.

When the investments failed, the Beneficiary made a claim under the Guarantee. The Guarantor sought to avoid liability for a number of reasons connected with the execution of the Guarantee. The main argument raised by the Guarantor’s counsel was that the director who signed the Guarantee did not intend to execute it on behalf of the Guarantor and for the Guarantor to become legally bound by it because:

1. the Guarantee was presented to her for signing without her being given any details about the transaction (and the negotiations had been handled by her predecessor);
2. she signed in the part of the execution block labelled “in the presence of”, rather than in the proper place provided – she claimed that this was evidence that she was only executing the Guarantee as a “witness” to the negotiations, rather than as a formal execution;
3. no board resolutions had been passed approving the form of the Guarantee and authorising the director to execute it, and she claimed that she did not intend to execute the Guarantee in the absence of such resolutions; and
4. the seal was not affixed until many days later by the company secretary, not in the presence of that director.

In the alternative, the Guarantor claimed that even if the director did execute the Guarantee on behalf of the Guarantor, she did not have the actual or ostensible authority to do so.

The judge rejected all of the defences of the Guarantor, and held that the Guarantor was liable to pay out under the Guarantee.

While it is reassuring that the judge did not accept the Guarantor’s arguments, it is worth noting that it took the Beneficiary in this case over two years to get this judgment.

As signing by exchange of pdf signatures (so-called “virtual closings”) become the norm, this case is a timely reminder of the need to ensure that execution formalities are respected, especially when dealing with deeds. In particular, it is critical to ensure that:

1. the person executing the documents has proper authority from the company (i) to enter into the transaction and (ii) to formally execute the documents;
2.  the document has been executed properly in the right place of the signature block and in the right manner; and
3. the recipient of the documents has authority from the authorised signatory to release and date the documents.

Norton Rose Fulbright has developed a detailed signing protocol for virtual closings which minimises the risk of a party being able to make the kind of arguments raised by the Guarantor in the above case.