Constitution or Replaceable Rules - which one to use?
After Corporate Law Review Act 1998, Companies formed after 1st July 1998 can have a single set of rules known as 'Constitution' in place of earlier applicable "Memorandum and Articles of Association".
If Proprietary companies (except special purpose companies), do not adopt a Constitution, they will be automatically governed by Replaceable rules as outlined in the Corporations Act 2001.
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The Constitution for most companies is drawn up prior to the registration of the company. The Constitution has the effect of a contract between:
- the company and each member;
- the company and each director;
- the company and the company secretary;
- a member and each other member.
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A company adopts a Constitution either:
- on registration, if each person specified in the registration application as a person who consents to become a member, agrees in writing to the terms of a constitution before the application is lodged; or;
- after registration, if the company passes a special resolution adopting a constitution.
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A company may modify or repeal its constitution, or a provision of its constitution, by passing a special resolution A special resolution requires at least 21 days notice (28 days for public listed companies) and the agreement of a 75% majority of votes cast (refer s9, 136, 137, 140, 249H and 249L).
A 'special purpose companies' must be governed by a constitution that wants to obtain the reduced annual review fee under item 103 of the Corporations (Review Fees) Regulations 2003.
A company may take advantage of the replaceable rules in the Act to govern its internal management - it does not need to have a written constitution of its own. This means that companies choosing to be governed by the replaceable rules will not incur the expense of keeping their constitutions up to date with the law. A table of replaceable rules can be found in the Corporations Act, s141.
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A company must provide an up-to-date copy of the Constitution (s139) to any member who requests it within 7 days Replaceable rules do not apply to proprietary companies where the one person is the sole director and sole member.
Constitution Vs Replaceable rules: Which one is better?
Using a Constitution has many advantages over being governed by a set of replaceable rules, including:-
1. With replaceable rules you can have only one class of shares, while with a constitution you can have several classes of shares (ours have 14 classes) with different voting rights, dividend rights and right to capital upon winding up etc. which can be useful in achieving objectives like income splitting, dividend streaming and selective control.
2. A constitution can contain comprehensive provisions regarding calling and holding of meetings, whereas these provisions are not available in replaceable rules.
Our Constitution has the following provisions:
a. Requisition of a meeting by members.
b. Holding of a meeting at more than one place with technological media.
c. Passing of a members' resolution without holding a physical meeting, by way of circular resolution;
3. A Constitution can contain comprehensively drafted detailed guidelines on day to day management of the company as compared to very brief provisions in replaceable rules.
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4. Replaceable rules provide ability to appoint any person as director to make up a quorum for a director's meeting even if the total number of directors of the company is not present to make up a quorum for that meeting. This rule can be detrimental to company's interest and absent directors, hence not included in our constitution.
5. Constitution, as against replaceable rules provides a comprehensive, published and self contained set of rules which are easily accessible and conveyable to outsiders like banks etc.
6. Replaceable rules are not applicable to proprietary companies with same one person as sole director and member. These companies are governed by Section 198E, 201F and 202C of the Corporation Act 2001 which contain a very limited set of provisions. Hence, in our opinion, one person companies must use a constitution.
7. Replaceable rules are not applicable to Special purpose companies like Superannuation Trustee Company for which adoption of a constitution is necessary.
How to upgrade to a Constitution from Replaceable rules - Cost $70 (incl. GST)
You can now order from our website, a Constitution for your client's companies which are already registered with ASIC. This new module "Company Documents", you can receive instant email of full set of company documents including:
1. Minutes & Consents
- Consent to act as Director, Secretary & Public Officer
- Consent of Occupier to use the office as Registered Office
- Application for Shares by shareholders
- Minutes to adopt a new constitution
- Share Certificates for each class of shares for each shareholder with issue price details
- Company Share and transfer register for members with each class and issue price details
2. Constitution of the company;
3. Execution page of Constitution where all directors sign;
4. Instructions Sheet on what to do next. E.g. How to register the company with ATO and open company bank account etc.
Click here to order now
We can also print and express courier to you all the documents for an additional fee of $55 (incl. GST) in a "Deluxe Soft Leather Feel" folder with all documents marked with "Sign Here" stickers with two bound copies of Constitution and an additional copy in the folder.
