Question

Golding Pty Ltd operates a gold valuation business in Ballarat. It has three directors: George, Bess and Xian. George had signed a mortgage and guarantee in favour of Big Bank Ltd on behalf of Golding Pty Ltd. The guarantee secured a personal loan made by Big Bank Ltd to George. The mortgage was over Golding Pty Ltd’s land in Mt Clear. Both documents were signed by George and appeared to have been signed by Bess. However, George had forged Bess’s signatures on the documents and Bess was completely unaware of the transaction.

Golding Pty Ltd’s constitution provided that such loan agreements could only be executed if authorized by directors’ resolution. No such resolution had occurred, and indeed neither Bess nor Xian knew about the personal loan, the mortgage or the guarantee.

Big Bank Ltd had not undertaken searches to determine whether George and Bess were directors of Golding Pty Ltd prior to accepting the mortgage and guarantee as security and making the loan to George.

George has failed to repay the loan and has now left Australia. Big Bank Ltd is attempting to enforce the guarantee and mortgage against Golding Pty Ltd.

Required:

Discuss whether Big Bank Ltd can enforce the guarantee and mortgage (contracts) against Golding Pty Ltd

Answer 1

Since Golding Pvt Ltd’s constitution clearly states that any such loan agreement must be authorized by director’s resolution, which is not the case here, the guarantee becomes void. Further to this, Big Bank Ltd has failed to perform its own due diligence before approving the loan; it is a fault on their side. Had they performed their check properly, they would have found out that George forged Bess’s signature. This completely weakens Big Bank Ltd’s claim for enforcement of guarantee.

Due to facts discussed above, Big Bank Ltd doesn’t seem to have a legal right to enforce the guarantee and mortgage against Golding Pty Ltd.