Authority to enter into contracts on behalf of Zooming Co Pty Ltd

1. Whether Wendy has the authority to enter into contracts on behalf of Zooming Co Pty Ltd?

Relevant legal rules:

“Apparent authority which arises by law in certain circumstances where consent from the principal is absent and the person has the appearance of authority". [1] 

“To support a claim of apparent authority, Lord Diplock held that it must be shown:

that a representation that the agent had authority to enter on behalf of the company into a contract of a kind sought to be enforced was made;

that such representation as made by a person or persons who had “actual" authority to manage the business of the company either generally or in respect of those matters to which the contract relates;

That the contractor was induced by such representation to enter into the contract, that is, he or she in fact relied on it.

That under its [constitution] the company was not deprived of the capacity either to enter into a contract of the kind sought to be enforced or to delegate authority to enter into a contract of that kind to the agent". [2] 


In this case, although Wendy has retired, Zooming Co Pty Ltd authorises Wendy to enter into contracts with third parties for amounts up to $20,000 provided that she informs one of the directors in advance. Therefore, Wendy has actual authority to enter into contracts on behalf of Zooming.

2. The indoor management rule.

Relevant legal rules:

At common law, the indoor management rule provides protection for the third party as it hard for an outsider to know whether the company enters into contracts under proper internal management. In the case of Royal British Bank v Turquand (1856) 119 ER 886, the court held that when acting in good faith, “parties dealing with companies have the right to presume that the internal processes of the companies have been properly carried out" . [3] 

Under the statutory, in ss 128 to 129 of the Corporations Act reinforce the indoor management rule which state that “an outsider dealing with a company can make a series of assumptions, even when there is no constructive notice given, or where the dealings involve fraud or forged documents" . [4] 


Although Wendy gives Fred her old business cards which wrongly state that she is the managing director of Zooming, and Wendy does not obey the rule of informing one of the directors when she enters into contracts with third parties for amounts up to $20,000, Fred can assume that Wendy is properly appointed and have authority to exercise the powers, and the internal acts of management have been properly performed. Hence, the indoor management rule works, Zooming is bound to these contracts.

Question 1 (b)

Limitations to the indoor management rule.

Relevant legal rules:

“The indoor management rule does not apply when the outsider is put on inquiry from surrounding circumstances" [5] : Morris v Kanssen [1946] AC 459.

“A person is denied the benefit of the indoor management rule if the facts or evidence show that the person ought to have known of any discoverable defects where a reasonable person would have been prompted to make inquiries" [6] : Northside Development v Registrar General (1990) 170 CLR 146.

There are some limitations to the use of s 129, the Corporations Act s 128(4) states: “there is imputed knowledge, where the person merely suspects the assumption is correct. There has to be sufficient information for the person to be suspicious that the assumption should not be relied on and further investigation of the facts is warranted" [7] .


The circumstances surrounding the contract should put Oasis Pty Ltd on inquiry. That is, when the director enters into the contract to purchase a Cessna sea plane for $100,000, Oasis should make inquires that whether Zooming whose main business is the manufacture of speed boats will gain advantage from purchasing a sea plane. Moreover, since Zooming is a small family company, the contract of $100,000 is a big contract. Oasis should be suspicious about the validity of the contract and should make further inquiry, as a result, Oasis will find that the secretary’s signature is forged. Thus, if Zooming denies the contract, Zooming is not bound by the contract entered into by Macey.

Question 2 (a)

1. Whether Michael was a promoter of Delicious Dining?

Relevant legal rules:

The term “Promoter" has no fixed definition at common law or Corporations Act. In the case of Twycross v Grant (1877) 2 CPD 469, Chief Justice Cockburn held that a promoter is the “one who undertakes to form a company with reference to a given project and to set it going, and who undertakes the necessary steps to accomplish that purpose" . [8] “The concept of a ‘promoter’ also extends to people who are not directly responsible for incorporation. It includes inactive persons who play a passive role in forming the company if they agree to share in the profits arising from the established company" [9] : Tracy v Mandalay Pty Ltd (1953) 88 CLR 215.


In this case, Michael takes no part in organising the formalities for the incorporation of Delicious Dining, but he is one of Delicious Dining’s three directors and shareholders. As a shareholder, he will gain from Delicious Dining’s profit. In the case of Tracy v Mandalay Pty Ltd (1953) 88 CLR 215, the High Court held: “those persons who leave it to others to get up the company upon the understanding that they also will profit from the operation may become promoters" . [10] Thus, Michael is a promoter of Delicious Dining.

2. Duties of a promoter.

Relevant legal rules:

Promoters own fiduciary duties to the company and must act honestly in the best interest of the company and avoid conflicts of interest [11] : Aequitas v AEFC (2001) 19 ACLC 1006; [2001] NSWSC 14; Americana Leadership Colledge v Coll [2003] NSWSC 295.

When a promoter enters into contracts with the company, the promoter have a duty to make full and complete disclosure to an independent board of directors [12] : Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218. Moreover, a partial or incomplete disclosure is inadequate, the disclosure must be explicit [13] : Gluckstein v Barnes [1900] AC 240. When the company has no independent board of directors, full disclosure to the existing or potential shareholders as a whole is equally effective: Aequitas v AEFC (2001) 19 ACLC 1006; [2001] NSWSC 14. [14] 


As a promoter, Michael must act honestly, in the best interest of the company. Michael discloses a profit for $100,000 to the existing shareholders, Amanda and Kate, but does not disclose the discount of $80,000. This means that the disclosure made to the existing shareholders is inadequate. Thus, Michael breaches his fiduciary duty and is liable to the company for his secret profit.

Question 2 (b)

Remedies for breach of duties.

The common law allows for a range of remedies. When the promoter has a personal interest in a contract with the company and fails to make disclosure, the company could rescind the contract. [15] Michael fails to make disclosure of his secret profit from the contract with Delicious Dining. Therefore, Delicious Dining has the right to take legal action to rescind the contract and recover the money paid: Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218. Alternatively, Delicious Dining could recover the secret profit without rescission of the contract: Gluckstein v Barnes [1900] AC 240.

Question 3

1. The amount of fundraising.

Disclosure documents are often required when companies receive capital in the form of investor equity or corporate debt. “Under s 706 of the Corporations Act, an offer of securities for issue needs disclosure to investor unless ss 708 or 708AA says otherwise". [16] Under s 709 of the Corporations Act, there four types of disclosure documents: a prospectus; a short form prospectus; an offer information statement and a profile statement. [17] 

Under s 709(4), if the amount of money to be raised is $10 million or less, a prospectuses need not to be prepared. The Corporations Act is intended to facilitate more efficient capital raising. [18] If Jaan’s choose the option of raise $10 million and keep operations domestic, Jaan’s needs to prepare an offer information statement which is simplified, less demanding and lower than for a prospectus. If Jaan’s want to raising $20 million, a prospectus or short form prospectus is required. Usually, the prospectus is a detailed, and lengthy, full-disclosure document.

Preparing for an offer information statement is more complex, time-consuming, and expensive. Additionally, as a small custom made ski manufacturing company, it may be risky to expand to overseas markets for a new product. Therefore, it may be a better choice to raise $10 million and keep operations domestic.

2. Ways of fundraising.

Companies have choices when raising capital. Following factors may influence the choice whether to raise capital through the issue of shares or debenture: payment, repayment of principal and priority, taxation, membership and corporate control. [19] 

If Jaan’s raises fund through debenture, Jaan’s has to pay a fixed rate of interest to debenture holders regardless of Jaan’s performance and profitability, while the amount of dividend for shareholders is generally determined by the directors. Moreover, debenture holders have a right of repayment in full on maturity of the loan, while shareholders have no right to the return of their capital. The most important is that debenture holders are external to the company, while shareholders are generally entitled to excise membership. [20] In this case, the investors includes rich local business people, they can provide constructive advices on the operation of Jann’s as shareholders. Although the tax expense is not deductible for issuing shares, it is a better way for Jaan’s to raise fund by issuing shares.

In conclusion, it may be a better choice to raise $10 million by issuing shares and keep operations domestic.

Question 4

Advice for disgruntled shareholders.

Misstatement in, or omission from, disclosure document.

Relevant legal rules:

Corporations Act s 728(1) states [21] : A person must not offer securities under a disclosure document if there is:

a misleading or deceptive statement in the disclosure document; or

an omission from the disclosure document of material required by ss 710-715; or

a new circumstance that has risen since the disclosure document was lodged; and would have been required by ss 710-715 to be included in the disclosure document if it had arisen before the disclosure document was lodged.


During the offer period, there is a significant change in the price of the material that Jaan’s skis and board are to be made from, but the disclosure document does not reveal the new circumstance. In addition, members of the prospectus due diligence committee used New Zealand figures for snowboarding popularity and sales to arrive at profit forecasts. That means the profit forecasts are based on an unreasonable ground. A prospectus with incomplete material that can be describes as ‘tricky’ [22] : Fraser v NRMA Holdings Ltd (1995) 127 ALR 543. Besides, the directors of Jaan’s aware those circumstances have arisen, they does not provide any supplementary or replacement document. In conclusion, the disclosure documents provided by Jaan’s contravene s 728.

Remedies available to disgruntled shareholders.

Relevant legal rules:

Under the Corporations Act, there are criminal penalties for, and civil remedies in respect of breach of s 728. [23] Corporations Act s 729: A person who suffers loss or damage because an offer of securities under a disclosure document contravenes subsection 728(1) may recover the amount of loss or damage from persons identified in s 729. [24] 

Cadence Asset Management Pty Ltd v Concept Sports Ltd (2005) 56 ACSR 309; [2005] FCAFC 265.


According to s 729, the shareholders may bring a recovery claim for a misleading statement or material omission or failure to include a new matter in the disclosure document against: the person making the offer; or each director of the prospectus due diligence committee; or a person named in the disclosure document with their consent as a proposed director; or an underwriter to the issue or sale named in the disclosure document with their consent; or a person named in the disclosure document with their consent as having made a statement that is included in the disclosure document or on which a statement made in the disclosure document is based; or a person who contravenes, or is involved that contravention in the contravention of, subsection 728(1). The shareholders may recover the amount of loss from those people.

Advice for Jaan’s directors of their potential defences.

Relevant legal rules:

As the Corporations Act sections 731-733 provide defences for breach of s 728(3), defendants identified in s 729 as liable for detective disclosure documents may avoid their civil and criminal liability if they can satisfy one of the defences set out in sections 731-733. [25] 


Based on s 731, liability can be avoided if the Jann’s’ directors can prove they made all inquiries and believed on reasonable grounds that the change of the price of the material has no significant influence on their operation the loss is incurred by global warming, and New Zealand figures is representative, and there is no misleading or deceptive statement or any omission from the prospectus,. According to section 733(1) (2), if the Jann’s’ directors can prove that they placed reliance on the New Zealand figures given to them by someone other than an employee or agent of the directors, or external experts and professional advisors, the liability can be avoided. [26]