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Practical purpose of the rules

To achieve what the client wants and provide control
Avoid disputes with other people in the company
Give companies a standard set of rules to run the company
May not suit all companies depending on size nature of activity and desire to control
Can choose which rules suit your company (unless public company)


How does the company create the rulebook?

Adopt the rules in the Corporations Act s 141
Create own (constitution) (most common in practice)
A combination of the two


Who do the rules apply to?

S 140(1)
Contract between company, members, directors and between members


How does a company change the rules and why?

Procedure s136


What is in the rule book?

Choice of the Replaceable Rules (RR) or the constitution


When is Constitution adopted?

s 136(1)(a) (registration of company);
s 136(1)(b); (after registration if company passes a special resolution or ordered by court;
S 136(5) public company must lodge with ASIC a copy of special resolution changing the constitution


Where do the rules come from?

Company incorporated prior to 1 July 1998

Memorandum and Articles of Association
BUT may adopt a constitution and/or replaceable rules after that date;


Where do the rules come from?

Company incorporated after 1 July 1998

replaceable rules;
- specially designed constitution (by you as the professional); or

- combination of constitution & some replaceable rules.


Content of Internal Rules

Deal with the internal matters of the company

For example, section 141 covers:
Officers and employees (Appointment of MD, power of directors, remuneration etc.)
Inspect financial records
Directors meetings (When, where, and how)
Meetings of Members (AGM, EGM, Quorum)
Shares (Acquisition, transfer, death pre emption)


Example: Explanation of what a replaceable rule does

Review from slide 14 onwards


What types of companies must have a constitution?

Companies limited by guarantee;

ASX listed companies; and

No liability companies.


Why would companies not required to have constitutions have them anyway?

Companies may wish to issue different classes of shares;
Different voting rights;
Rights to different classes of shareholders;
Alter the replaceable rules.


One person proprietary companies

S 135 the replaceable rules do not apply
They also do not need a constitution
However, if other directors or members may be appointed some time in the future you should think about setting up a constitution

S 198E(1) business of company to be managed by the director and they have all the powers to issue shares borrow money etc.
Execute negotiable instrument s 198E(2)
Can appoint another director s 201F
Can be paid if company agrees by resolution s 202C
Note: once it ceases to be a one person company then the replaceable rules will apply (e.g. another director or shareholder is appointed)


Contents of Constitution

Professionals should always ask what their client wants in their rule book…and anticipate what they might want.

No prescribed requirements but note certain types of companies which require a constitution.

If different classes of shares issued, details of the rights attached.

Need to be able to anticipate practical/administrative issues in running a company where more than one person is involved.


Does the constitution have to state the objective of the company?

The ‘objects’ clause
Description of businesses that the company may operate;
Once compulsory but now optional (but note NL companies)

Purpose of an ‘objects’ clause
Shareholder and creditor protection
Doctrine of Ultra Vires


Key legal principle “indoor management rule”

2 key legal rules from the doctrine:

Ultra Vires
Constructive notice


Ultra Vires

See slide 23


The constructive notice rule

The “constructive notice” rule which provided that: a person dealing with a company was deemed to be aware of the objects of that company.
However, the rule operated to the extent that it resulted not simply in transactions being rendered wholly void and unenforceable by either the company or the party contracting with the company, but rendered them incapable of being ratified by unanimous vote of the company’s shareholders.


Rationale for the indoor management rule

Protect investors and creditors

Commercial reality and complexity of business


Section 125

Constitution may limit powers and set out objects

(1)  If a company has a constitution, it may contain an express restriction on, or a prohibition of, the company's exercise of any of its powers. The exercise of a power by the company is not invalid merely because it is contrary to an express restriction or prohibition in the company's constitution.
(2)  If a company has a constitution, it may set out the company's objects. An act of the company is not invalid merely because it is contrary to or beyond any objects in the company's constitution.


Section 130

Information available to the public from ASIC does not constitute constructive notice   

A person is not taken to have information about a company merely because the information is available to the public from ASIC.


Result of s125 and s130

Today objects clause does not serve any purpose.


Legal Effect of the Internal Rules

The internal rules are a statutory contract.


3 statutory contracts in s 140(1) between:

the company and each member (s 140(1)(a));
the company and each director and company secretary (s 140(1)(b));
a member and each other member (s 140(1)(c)).


Contract between company and each member

S 140(1)(a) states that the constitution and the RR are a contract between the company and the member
Therefore company can sue member to comply with the constitution


Contract between the company and its directors

Only those parts of the constitution or RR’s that are applicable to the directors/secretary are enforceable

For example:
Director’s contract of service
If removed not within the terms of the constitution, then can sue the company
But be beware that the director may have entered into a separate contract with the company


Contract between members

S 140(1)(c)
Only those parts of RRs or Constitution that are applicable to members as between members are enforceable as a contract.


Application of s 140(2)

Certain other changes are only binding on members if they agree in writing to be bound.

Unless a member of a company agrees in writing to be bound, they are not bound by a modification of the constitution made after the date on which they became a member so far as the modification:
(a) requires the member to take up additional shares; or
(b) increases the member's liability to contribute to the share capital of, or otherwise to pay money to, the company; or
(c) imposes or increases restrictions on the right to transfer the shares already held by the member…


Can we change the rules of the company?

Can RR’s be altered?

Company with RR’s may get rid of RR’s by adopting a constitution

Company with constitution may modify its constitution

Company with constitution can repeal its constitution and adopt RR’s


Process of changing the constitution

Slides 36-end