Joey loves making cheesecake. She has been selling cheesecake on her own website

Question

Joey loves making cheesecake. She has been selling cheesecake on her own website. She has been the online business as a sole proprietor with initial success, receiving favourable comments from customers. Many customers encourage Joey to expand her business by opening a bakery.

Joey discusses her plan with her friend Martin, a manager in charge of operating a café in a five-star hotel. Martin is interested in investing in her new company. He persuades Joey to open a café rather than just a bakery. He says a café offers a wider variety of desserts including cookies, pastries, and cupcakes, together with coffee and tea, to attract more customers. They plan to incorporate a company in the name of JM Café Limited to run the business.

Before they incorporate the company, Martin knows that a supplier is in urgent need to dispose of many cardboard boxes of coffee beans due to a cash flow problem. Martin tells the supplier that he will buy all the boxes of coffee on behalf of JM Café Limited below market price (although at that time the company has not been set up yet). He signs ‘JM Café Limited’ on both the supplier’s order form and the delivery note of the goods.

Separately, Joey has ordered some flour in her own name from her cousin at market price, without letting Martin know.

After the new company has been incorporated, the market price of the coffee beans drops significantly. Martin claims that he was purchasing the coffee beans in anticipation of the incorporation as promoter of the new company. As regards the flour, the market price has risen 10% and Joey thus makes a profit by selling the flour to JM Café Limited at the new market price, but she does not tell Martin.

According to the shareholders’ agreement drawn up in respect of the new company, Joey and Martin each hold 50% of the company’s ordinary shares. Joey and Martin are both directors of the company.

Joey and Martin have incurred promotion expenses. The board of directors intend to reimburse the promotion expenses to the extent as allowed by the law.

Required:

a Are Joey and Martin promoters of the company?

b Is Joey allowed to keep the profits for selling the flour to the company? Please explain your answer.

c Can the company refuse to confirm the coffee bean deal made by Martin on its behalf as the promoter? Why or why not?

d Can Joey and Martin successfully claim back their promotion expenses from the company? Why or why not?

Explanation / Answer

Ans a) Yes, Joey and Martin are promoters of the company by virtue of their efforts in floating and soliciting business ( coffee bean and flour ) for the company.

b) Yes, Joey can keep the profits as she entered into contract with third party in her own name. She did not act as a promoter here so she cannot be denied these profits in lieu of concealment of material facts.

c) Yes, company may refuse to confirm the coffee bean deal of Martin as pre-incorporation contracts are promoter's personal liability. They can be enforced only when ratified by company's board of directors. Thus, pre-incorporation contracts are not legally enforceable on the newly created entity or business.

d) Yes, Joey and Martin successfully claim back their promotion expenses from the company as the contract allows for the promoters to claim promotional expenses for the risk they bear and the expenses they incur for the incorporation of the company.

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