It is crucial that the finance documents on any banking transaction are executed correctly. You may have negotiated a great set of documents but if you don’t get them signed correctly they will be of little value to the parties in practice.
Execution requirements vary depending on the type of document being signed. You may be contracting with a number of different entities and various different documents may be included in the transaction. It is important that each party understands the relevant signing requirements so that all agreements are legally binding and cannot later be challenged.
This blog considers some common questions about the signing of deeds and documents.
Does a signature on a simple contract need to be witnessed?
The execution formalities for simple contracts (as opposed to deeds) are just that – simple – which is hardly surprising when you consider that many agreements can be made informally and do not even need to be in writing to become legally binding. Only the parties to the agreement need to sign the document and those signatures do not need to be witnessed.
However, despite no witnessing requirement, it can still prove helpful in evidence if a dispute about the validity of the agreement arises. Of course the signature being witnessed will be of no use if the document was signed fraudulently, as this could mean that the signature was also witnessed fraudulently.
Which documents must be executed as a deed?
A small number of documents require execution by way of a deed. Particularly relevant to the banking sector are mortgages and charges, sales by a mortgagee, deeds appointing trustees, powers of attorney and releases, and variations of existing deeds. A failure to follow the relevant statutory requirements when executing these documents can affect their legal validity. For more on the requirements of deeds, see our previous Talking Finance blog.
A deed can be used even where not mandatory when it is unclear whether valuable consideration has been given or where the parties wish to obtain the longer limitation period of 12 years which will apply to claims brought under deeds. This is why guarantees are often entered into as deeds.
Who can be a witness?
An individual executing a deed must have their signature witnessed. A party to a deed cannot be a witness to another signature to that same deed. A signatory’s spouse, co-habitee or civil partner is able to act as a witness and an employee of a party is also permitted to witness that party’s signature. However, independent witnesses should be sought to ensure any evidence can be provided in an unbiased manner, if and when required.
A minor can act as a witness but this should be avoided as it can cause problems if the signature is challenged. Any witnessing minor should at least be of sufficient maturity for the evidence given to be regarded as reliable.
Our recent Talking Finance blog considers the importance of witnessing in more detail.
Why does a lender sign a legal charge even though they do not execute it as a deed?
A legal charge, or a debenture containing a legal charge, may include an agreement to create a legal mortgage, particularly as the term includes any equitable charge. The security must therefore be signed by the lender in order to comply with section 2 Law of Property (Miscellaneous Provisions) Act 1989. The lender is signing merely to satisfy the section 2 requirements and does not need to enter into the legal charge by way of deed. If section 2 is not adhered to then any equitable charge may fail. In practice, this should not be an issue if a full legal charge exists or is taken but it is included as an added protection. Look out for our upcoming blog on this as part of our ‘back to basics’ series.
When is a common seal required?
Some documents previously required execution by affixing a company seal but this requirement no longer applies and the documents can be executed by either two authorised signatories (a director and the company secretary, or two directors) or a single director in the presence of a witness.
Some companies still use a common seal to execute documents as they like the formality and ceremony that comes with the process. However, executing a document in this way will not result in it automatically being considered as a deed and the document must still be expressed to be a deed, where appropriate.
Who should sign the document if the company’s common seal has been applied?
This will be set out in the company’s articles of association. The Model Articles provide that this can be decided by the directors. If the directors do not nominate a signatory, then one authorised person (a director, company secretary or any other person authorised to sign) can sign in the presence of a witness.
Can the same individual sign as a director and the secretary of a company?
No – two authorised signatories are required and a single individual cannot sign in different capacities.
Can the same signatories sign just once for a number of companies of which they are directors?
If a document is signed by a director (or secretary) of more than one company it must be signed separately by that individual in each capacity.
When a document requires the signature of two directors, can they sign separate counterparts of the same document?
The legal requirements refer to ‘a document’ which is signed by two people, not to multiple documents. Also, a ‘counterpart’ has been held to be a separate deed which, when taken together with the main deed and any other counterparts, forms one deed. So to constitute a valid counterpart the document must be executed as a deed itself by one party.
So, a document signed by one director (without a witness) has not been validly executed as a deed and cannot be a counterpart. A second document containing the signature of another director cannot make the two documents into a counterpart. But this problem could be overcome by having the document executed by a single director in the presence of a witness.
These are some of the more obscure questions relating to the execution of deeds and documents, and they highlight the difficulties with a range of signing scenarios that are commonplace on transactions.
This blog post was written by Elliot Gibson. For further information, please contact:
Elliot Gibson, PSL assistant, Banking & Finance
T: 0161 836 7707