Sally agreed to provide a guarantee to Tuen Mun Bank in respect of a loan that the bank has agreed to make to TM Leisure Ltd (a company in which her husband Billy is the majority shareholder). Billy told Sally that her maximum exposure under the guarantee is for HK$100,000 and that her liability will end after six months. In fact, her liability is unlimited both as regards the amount and the duration of the guarantee. Sally and Billy executed a mortgage in favour of Tuen Mun Bank as security for their obligations under the loan and guarantee. TM Leisure Ltd has fallen into arrears with the mortgage payments. Tuen Mun Bank now intends to call upon Sally under the terms of the guarantee.

(i) Could its rights to do so be affected by the facts just explained? (10 marks)

(Ii) What steps could Tuen Mun Bank have taken to ensure that the guarantee and charge were enforceable against Sally? (5 marks)

(Question 2 Total)