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On 1 July 2010 its board resolves to open a chain of hotels, and to raise capital to do this by issuing shares. On 4 July 2010 Brad Cooper, its Managing Director, telephones his friend, Camilla Cash and offers her $600,000 worth of shares. He also phones Bob Broke and offers him $100,000 worth of shares. Both Camilla and Bob accept these offers, but in light of subsequent events now wish they had not and want their money back. On 30 July 2010 United Industries prepares and issues a prospectus which includes the following statement:
We confidently predict that a minimum of 50,000 people will use our hotels’ facilities within the first year and that this division of our company will be making a profit within two years.
The prospectus also contains a summary of United Industries’ financial position prepared by Lofty & Gray, United Industries’ accountants. This summary includes a statement by the accounting firm’s managing partner, Mr Bland, that “in respect of this summary only, Lofty & Gray guarantee the accuracy of this notice”. The accounts are later found to be inaccurate, in that the accountants have overstated the company’s assets by $1 million.
Unfortunately United Industries did not mention in their prospectus the fact that their application for liquor licences for their hotel chain was still being considered by the State Liquor Licensing Board, which grants the licences 18 months after the hotels open. Because they have been unable to serve liquor during this period, the hotels are not yet profitable, and shares in United Industries plummet in value, and so many investors lose their money.
Advise United Industries Ltd on the legal issues arising out of these facts, citing authority for your answer.
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