Can an invalid deed be enforceable as a matter of contract?

Can an invalid deed be enforceable as a matter of contract?

Directors duties survive insolvency

In the recent case of Signature Living Hotel Limited v Andrei Sulyok Roxana Monica Cocarla [2020] EWHC 257 (Ch), 2020 WL 00929732 the High Court considered whether two deeds of guarantee which failed as deeds (because the formalities for a deed had not been complied with) remained enforceable as a matter of contract.

In his decision, the judge reinforced the general view that a deed can take effect as a simple contract if there is a defect in complying with the necessary formalities, so long as the contract would be valid as a simple contract at law (which requires consideration to be present) and it is not a transaction for which a deed is required (for example, a power of attorney).

The facts of the case

In 2018 Signature Living Hotel Limited (“Signature Living”), part of a group of companies involved in the development of hotels and residential units, sought loans from two individuals (the “lenders”) for the purpose of developing a Belfast Hotel. The loans were made into a separate group entity created for the project, and were guaranteed by Signature Living. The due date for repayment passed and the loans remained unpaid despite demands, so the lenders each served a statutory demand for payment on Signature Living. Signature Living then applied to the court for injunctions to restrain the lenders from presenting a petition (founded upon the statutory demands) to wind it up on the basis that it is unable to pay its debts as they fall due.

Signature Living contended that the deeds of guarantee were unenforceable against it and therefore could not form the basis of any insolvency proceedings, because, although they had been signed by Signature Living’s sole director, his signature had not been witnessed. The deed of guarantee therefore did not meet the requirement of:

  • section 1(2) of the Law of Property (Miscellaneous Provisions) Act 1989 which states that an instrument shall not be a deed unless it is “validly executed” as a deed;
  • section 46(1) of the Companies Act 2006 which states that “a document is validly executed by a company as a deed…if, and only if, it is duly executed by the company…”;   and
  • section 44 of the Companies Act 2006 (which sets out the formalities for execution of a document by a company) which requires that either two authorised signatories sign on behalf of the company, or a director signs in the presence of a witness who attests their signature.

The lenders acknowledged that the guarantees were unenforceable as deeds and the judge confirmed that, because it was clear from the face of the deeds that they were defective, it would not be possible for the lenders to rely upon any estoppel to assert that the guarantees were binding on Signature Living. However, the question of contention between the parties was whether, despite failing as a deed, the guarantees would still take effect as contracts.

Did the defective deeds take effect as simple contracts?

Signature Living sought to argue (relying on a statement of the judge in the well-known 2008 Mercury Tax case[1]) that where the parties intended to enter into a deed, their validity must be judged on that basis, and therefore a defective deed cannot survive as a simple contract.

Conversely, the lenders submitted (relying on an earlier 2005 case[2]) that the guarantees were enforceable as contracts because they were:

  • in writing (guarantees must be in writing by virtue of the Statue of Frauds 1677);
  • signed by the sole director of the company, being a person acting under the company’s authority, express or implied (meeting the formalities for execution of a simple contract by a company under the Companies Act 2006); and
  • supported by consideration (each guarantee stated that it was made in consideration of the lender entering into the loan agreement).

The judge agreed with the lenders. He held that, if an otherwise complete contract of guarantee is intended to be embodied in a deed but the formalities have not been complied with, the creditor can still enforce the agreement. He did not consider that the Mercury case constituted a “sea change in the law” on this point, but instead that the particular sentence of Underhill J’s judgment that was relied upon by Signature Living was unimpressive and without authority. The court was also satisfied that on the facts, the guarantees were sufficiently supported by consideration. 

Comment

Whilst there is no legal principle that a deed will always be saved in these circumstances (each case will turn on its own facts and the law as it stands at the particular time) it is undoubtedly a useful fall-back position for parties who have clearly reached a commercial agreement but have tripped up over the complex formalities of deeds in practice.

However, if seeking to rely on a defective deed as a contract, be aware of the other effects of a negotiated agreement taking affect as a contract and not a deed. For example, contractual limitation periods may be affected and purported attorney appointments will fail (but may still take effect as more restrictive agency arrangements). If the defect is discovered early, whilst the parties interests in the commercial deal are still aligned, it will usually be preferable to re-execute the deed correctly.

 

 

[1] R (On the application of Mercury Tax Group) & Another v HMRC [2008] EWHC 2721 (Admin), [2009] STC 743

[2] Lloyds TSB Bank plc v The Dye House Limited [2005] EWHC 1998 (Comm)

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