A company’s internal management may be governed by:
- a constitution;
- the replaceable rules set out in the Corporations Act 2001; or
- a combination of both.
A company may choose to adopt a constitution rather than use the replaceable rules in the Corporations Act 2001:
- If it is a proprietary company it does not have to lodge its constitution when applying to register the company. However, the constitution must be kept with the company’s records so it is available if required.
- If a public company adopts a constitution or a combination of replaceable rules and constitution, a copy must be lodged with ASIC when applying to register the company.
If the company states its objectives in its constitution, it is restricted to them unless they are later changed by a special resolution of the members. A company’s constitution may define legal rights, duties and restrictions of the company. If you decide that the company should have a constitution, you should get legal advice on its content.
Alternatively, a company may take advantage of the replaceable rules in the Corporations Act 2001 to govern its internal management. It does not need to have a written constitution of its own.
Section 141 of the Corporations Act 2001 contains a summary table of the replaceable rules which govern areas such as:
- Officeholders’ appointment;
- Inspection of company’s books;
- Director’s and member’s meetings; and
- Dealing with company’s shares and dividends.
The act has designed the replaceable rules to apply to all companies, and as a result are broad and quite general. As the name suggests, they are “replaceable” and a company can adopt a constitution to replace part or all of them.
Generally speaking, where a company adopts a constitution, it will specify what replaceable rules to modify as well as set out rules governing corporate activities and the relationship between the company, its directors and shareholders.
What is the effect of a constitution?
A constitution is a contract between:
- the company and each member;
- company and each director;
- company and the company secretary, and
- a member and each other member.
Adopting a constitution
A company can adopt a constitution before or after registration. If the company adopts a constitution before registration, each member must agree (in writing) to the terms of the constitution. If the company adopts a constitution after registration, the company must pass a special resolution to adopt the constitution.
A company can change or repeal its constitution by passing a special resolution (i.e. at least 75% of the votes cast must be in favour).
Special rules for Companies (sole director/shareholder proprietary companies)
A proprietary company with a single shareholder who is also the sole director has no need for a formal set of rules governing its internal relationships – whether those rules are the replaceable rules under the Corporations Act 2001, or otherwise set out in a constitution. Accordingly, s.135(1) of the Corporations Act 2001 provides that the replaceable rules do not apply to such companies.
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Where the replaceable rules do not apply by operation of s.135 of the Corporations Act 2001, it does not mean that sole director/shareholder proprietary companies have to adopt a company constitution (although they may do so if they wish). Such companies only need rules to allow them to conduct business and which deals with contingencies. The Corporations Act 2001 sets out some basic rules that are only applicable for sole shareholder/director proprietary companies, especially regarding the rights and powers of the director – as follows:
- s198E(1) sets out the powers of directors of single director/single shareholder proprietary companies
- s198E(2) deals with the power of a single director/single shareholder proprietary company to sign, draw, accept, endorse or otherwise execute negotiable instruments
- s202C deals with remuneration of a single director who is also the single shareholder of the company and reimbursement of all expenses incurred by that director in connection with the company’s business
- s201F sets out special rules for the appointment of directors for single director/single shareholder companies.
You cannot modify the rules in S198E, 202C and 201F although a sole shareholder/director proprietary company may still have a constitution.
If an additional director is appointed or an additional person takes up shares in a single director/single member company, the replaceable rules will automatically apply to the company – except to the extent that they are displaced by a constitution adopted by the company.
You should seek legal advice on the form and content of your company constitution. So please contact Allied Legal at email@example.com should you have any further questions. You should regularly review your company constitution and, if necessary, update it to ensure that it complies with legal requirements and best standards from a government perspective.
Reference: ASIC website