#7393 - Constitution And Replaceable Rules - Corporations Law

Topic 4: The Constitution and the Replaceable Rules

The Corporations Act contains “replaceable rules” that govern the internal administration and management of companies. The heading of a section in the Act specifies whether that section is a RR. It will be mandatory unless the section says it is replaceable.

A company’s internal management can be governed by provisions of the CA as RR (135(1)), by a company constitution (136(1)) or a combination of both (134).

1. Who do replaceable rules apply to?

   1. Companies formed after July 1998 135(1)(a)(i)

      1. Companies formed prior were required to lodge other documents that had the legal effect of a CC

   2. Companies formed before July 1998 who have repealed their constitution 135(1)(a)(ii)

   3. Some RR apply only to pty companies, and are still mandatory for public companies 135(1)(b)

   4. RR’s apply unless displaced or modified by the CC 135(2)

      1. Mandatory rules must be complied with and companies cannot opt out by adopting a CC Scottish Colonia Ltd e.g. reporting requirements

   5. Who is required to have a CC?

      1. Compulsory for no liability companies 112(2)

      2. Compulsory for companies wishing to be listed on the ASX LR 15.11-15.13

   6. NB: RR do not apply to a one-person pty company 135(1)

2. Examples of replaceable rules (see section 144)

   1. Voting and completion of transactions 194

   2. Powers of directors 198A

   3. Negotiable instruments 198B

   4. Managing director 198C

   5. Company may appoint a director 201G

   6. Directors may appoint other directors 201H

   7. Appointment of managing directors 201J

   8. Remuneration of directors 202A

   9. Removal by members – proprietary company 203C

   10. Proxies and body corporate representatives (RR for pty and mandatory for public) 249X

3. When can a company adopt a constitution?

   1. On registration 117(3) and 136(1)(a)

      1. a public company must include the CC in the registration application 117(3)

   2. After registration if a company passes a special resolution and complies with any requirements specified in the CC 136(1)(b), (3) & (4)

      1. Special resolution: a resolution that has been passed by at least 75% of the votes cast by members entitled to vote on the resolution 9

   3. A court order can be made under 233 (oppression) that requires a company to adopt a constitution 233(1)(b)

4. Interpretation of constitutions:

   1. They are regarded as business documents and courts interpret them in a similar way to commercial contracts Dome Resources NL v Silber

   2. Courts are reluctant to imply further terms as this increases uncertainty and detracts from the rights of shareholders to rely on the CC as containing the full and complete C Lion Nathan Australia Pty Ltd v Coopers

5. The constitution as a statutory contract (suing on the constitution)

   1. 140: A CC and RR that apply have effect as a contract between ******** under which each person agrees to observe and perform the constitution and rules so far as they apply to that person

      1. Between the company and each member; and (a)

         • The company can take actions against its members to force them to comply with the provisions Hickman v Kent

         • Member enforcing against company

           1. Capacity test: Members can only enforce a statutory K to protect a [personal right] so far as it has accrued to that person as a member giving rights to the member or imposing duties on his/her in their capacity as a member Hickman as a right held in common with others Eley

              1. What rights attach to a person as their capacity as member? (Held common with others?)

                 1. Right to receive a notice of general meeting

                 2. Right to vote at a general meeting

                 3. Right to inspect register/obtain information

                 4. Right to payment of a declared divided

           2. It cannot be enforced on outsiders Eley

           3. The constitution does not have the effect of a contract between the company and a non-member even if it purports to do so

      2. Between the company and each director and company secretary; and (b)

      3. Between the member and each other member; (c)

         • Only those provisions in the C that apply to members in their capacity as members have effect

   2. Who is bound by the contract?

      1. Binding on present and future members of the company

      2. Can be altered without the agreement of all parties 136(2) via special resolution

   3. Consequences of contravention

      1. An exercise of power by a company is not invalid merely because: 125

         • It is contrary to an express restriction or prohibition in the company’s constitution

         • It is contrary to or beyond the objects in the CC

      2. Failure to comply with the RR is not a contravention of this Act 135(3)

         • they are private rather than public law obligations

         • allegations that a company acted contrary to the interests of its members may allow a member to seek a remedy under 233

         • Criminal and civil liability will not arise and it cannot be prevented by a statutory injunction 1324

   4. Remedies

      1. In an action by a member against the company, the appropriate remedies will usually be either a declaration or an injunction

         • Cannot normally obtain damages Sons of Gwalia Limited v Margaretic as the companies property should be reserved to company objectives not compensated shareholders

         • 563a defers claims by members upon winding up until all claims are made by creditors

      2. NB: the court is concerned in the substantive claims about personal rights. They will be unwilling to allow legal claims for things they consider to be administrative

      3. Breaches are important as they are often central to other orders, including:

         • Order for the company to be wound up 461

         • Remedies for oppression or unfairness 232

         • Statutory injunction where breach also involves contravention of Act 1324

         • Personal rights

6. Changing the constitution (Link: alteration of class rights)

   1. A company can modify/repeal its CC by a special resolution (passed by 75% of members entitled to vote on it 9(a)(ii)) of members voting at the meeting (136(2); 249L)

      1. NB: if a majority shareholder has 75% of the voting rights and leaves minority shareholders vulnerable to changes in the CC, this triggers an oppression remedy

      2. Change will be binding on all members even if they opposed it 140(1)

   2. Limitations to changing the constitution

      1. Have any entrenching provisions been satisfied?

         • A CC may provide that the special resolutions does not have any effect until a further requirements specified has been satisfied 136(3)

      2. Does the change increase financial liability/modify existing rights of current members?

         • A member is not bound by a modification made after the date on which they became a member (unless they agree in writing) so far as the change:

           1. Requires members to take up additional shares 140(2)(a)

           2. Increases the member’s liability to contribute to the share capital 140(2)(b)

           3. Imposes or increases restrictions on the right to transfer shares already held by the member 140(2)(c) unless in relation to a public company converting to a pty company 140(2)(c)(i)

      3. The alteration is ineffective in equity (and may give rise to personal actions and 232)

         • Test: the alteration must be Gambotto

           1. For a proper purpose (e.g. to protect the company from harm)

              1. Taking away a property right (ownership of shares) is not a proper purpose and should only be done in very limited circumstances

                 1. However expropriation of shares on registration, if exercised reasonably, the shareholder’s rights are limited by the constitution and may not have a right to be heard Associated World Investments v Aristocrat Leisure

                 2. Diluting shareholders rights is not a ground for attacking the validity of the change Peters v Heath

                    1. Only if it is so extravagant that no reasonable person would believe it was necessary for the company, it is invalid

              2. Examples:

                 1. Advancing the commercial interests of a company is not a proper purpose

                 2. Trying to obtain future tax benefit is not proper by to retain an existing one is proper Gambotto

                 3. Trying to retain a cooperative is proper Bundaberg Sugar

           2. Fair in all the circumstances (obiter)

              1. Procedural fairness test, the expropriation must be fair in all the circumstances

              2. Two elements:

                 1. The process of expropriation must be fair: company needs to disclose all the facts prompting the...