Alan and Bill are the only shareholders and directors of Sailaway Pty Ltd (Sailaway) which distributes and sells yachting clothing and equipment. As well as a warehouse and attached shop, Sailaway owns a large block of waterfront land which it uses for storage. Alan is also the chairman and majority shareholder of Broadacres Pty Ltd (Broadacres) which buys rural land for subdivision into hobby farms. Broadacres needs to borrow $1.5 million to fund its latest purchase. It already has a large overdraft and has no unencumbered assets to use as security for another loan. Alan organized a loan of $1.5 million to Broadacres from ABC Bank on the basis that Sailaway would guarantee the loan by executing a mortgage over its waterfront land. Alan signed the mortgage documents as a director of Sailaway and forged Bill’s signature as the other signatory. Tom, the local manager of ABC Bank, had been involved in earlier dealings with Sailaway and knew that its business did not include property development. He was on holidays but had left detailed notes to be used in his absence. While he was away the documents and other 5 matters regarding the loan to Broadacres were organized by a substitute manager, John, who had quickly scanned through Tom’s notes but did not ask Alan any questions about Sailaway’s involvement.

Broadacres is now in financial difficulties and has defaulted on the loan from ABC Bank. ABC Bank is now seeking to enforce its rights under the mortgage against Sailaway.

Advise Sailaway whether it is bound by the mortgage.