Local and foreign entities seeking to register a company in Australia are required by law to outline the set of rules and procedures they intend to adopt to govern their internal operations and decision-making, which can be any of the following:
- company constitution;
- replaceable rules; or
- a combination of the two.
A company constitution allows you to tailor your governance structure according to the specific needs of your business. Replaceable rules, on the other hand, are rules set out in the Corporations Act 2001 that will automatically apply to your company if you do not want to draft a constitution.
A company constitution provides more control and greater flexibility to directors and shareholders in circumstances where the replaceable rules do not provide any concrete guidance. But drafting a constitution can be expensive, and will require time and active participation of the company members. If you do not have the time or resources to draft your own constitution, you can use the replaceable rules to govern your internal affairs. Replaceable rules are simple and inexpensive.
Confused about which one to adopt for your new company in Australia? Read on to understand their key differences and how they can be advantageous to your business.
Key takeaways
- What is a company constitution in Australia?
- Advantages of a company constitution in Australia
- What are replaceable rules in Australia?
- Advantages of replaceable rules in Australia
- Company constitution vs. replaceable rules: Which one should you choose?
What is a company constitution in Australia?
A company constitution is a contract with a broad set of rules that guides company members in managing and operating a company. It is drafted to reflect the specific requirements/preferences of the members on how they want to manage the company — overriding the replaceable rules under the Corporations Act. Though more extensive in coverage than the replaceable rules, they must be within the legal bounds of accepted practice in Australia.
As a contract between the company and its members, a company constitution provides a comprehensive framework outlining the rights and obligations of directors, shareholders, and corporate officeholders as well as the following:
- company structure
- company objectives and purpose
- internal operations
- procedures for conducting directors’ and members’ meetings and board resolutions
- appointment or removal of directors
- appointment of a company secretary
- member disputes
- issuance and transfer of shares
- dividend rights for shares
- percentage votes and voting certificates
- inspection of company books
- procedures for amending the constitution
- succession planning
A company constitution can be adopted before or after business registration in Australia. However, it is advisable to adopt it prior to registering a company, as there is less paperwork involved. If you need professional guidance on the legalities involved with drafting a company constitution in Australia, you can reach out to us for assistance.
If the members decide to adopt a constitution after registration, or amend/replace an existing constitution, they must submit a special resolution and have at least 75% of approval from shareholders.
Advantages of a company constitution in Australia
Except for No Liability Public companies and Special Purpose companies, Australian companies are generally not required to adopt a constitution. But many entities choose to do so, owing to its many advantages, which include:
Clear, comprehensive framework. Since it can be modified to fit the needs of a company, a constitution is ideal for companies with unique requirements. As such, it is generally patterned to provide clear, specific guidance for resolving disputes and addressing issues that may not be outlined in detail in the replaceable rules.
Flexibility. A company constitution can be amended to align with changes to the company’s circumstances or evolving legislation. If certain rules or procedures are incompatible with the changes, the constitution can be amended to avoid conflict or confusion.
Better protection of shareholders’ interests. For companies with a complex ownership structure, a constitution is useful for creating detailed rules for the issuance and transfer of shares.
What are replaceable rules in Australia?
Replaceable rules are the default rules in the Corporations Act that shall apply to newly-formed companies in Australia without a drafted company constitution. These rules cover the following areas:
- conduct of directors’ and members’ meetings
- powers of directors
- rights of shareholders
- appointment or removal of directors
- appointment of a company secretary
- issuance and transfer of shares
- inspection of company books
In the absence of a company constitution, the replaceable rules shall automatically apply. If a company decides to adopt a constitution later on, it is required to draft one and explicitly state in the constitution that it will override the replaceable rules. If the company wants to have a combination of both constitution and replaceable rules, it must specify which replaceable rules it wants to override.
Replaceable rules can be adopted by both public companies and proprietary limited (Pty Ltd) companies, except Pty Ltd companies where the sole director also acts as the sole shareholder.
Advantages of replaceable rules in Australia
Generic in nature, replaceable rules are often utilised by newly-registered companies. The rules provide a structure for corporate governance that is simple enough to guide them during the early stages of their business. Replaceable rules have the following advantages:
Simple and straightforward. Since the replaceable rules are intended to apply by default, they are easy to operate under. Relying on a single document to provide guidance on the overall governance of a company is practical and reduces any chance of miscommunication among members.
Cost-effective. The cost of drafting a company constitution is generally expensive, especially if the company has a multitude of special requirements and a complicated ownership structure. Replaceable rules are readily available and can be easily accessed online so there’s no need to allocate money.
Changing legislation automatically updates the replaceable rules. When updates are made to the Corporations Act, the replaceable rules will be updated concurrently. A constitution, on the other hand, needs to be amended to remain up-to-date with new laws and regulations.
Company constitution vs. replaceable rules: Which one should you choose?
If you want more control and greater flexibility on how you want to manage your company, adopting a company constitution is a great choice. You can tailor your rules and procedures according to what your business needs, and amend the constitution if needed so your company can smoothly adapt to changing circumstances.
If you lack the time and resources to draft your own constitution, the replaceable rules will be a practical choice. New businesses not yet familiar with the legal requirements of operating a company in Australia can greatly benefit from their simple and straightforward governance framework.
If you need expert guidance on which one is more suitable for your company’s specific needs, you can reach out to us for assistance. Our consultants will help you make informed decisions to ensure you’re making the best choice for your new Australian company.
Frequently Asked Questions (FAQs)
A company constitution in Australia should outline rules and procedures on the following:
- company structure
- company objectives and purpose
- rights and obligations of directors, shareholders, and corporate officeholders
- procedures for conducting directors’ and members’ meetings
- appointment or removal of directors
- appointment of a company secretary
- member disputes
- issuance and transfer of shares
- dividend rights for shares
- percentage votes and voting certificates
- inspection of company books
- procedures for amending the constitution
Public companies and Proprietary (Private Limited) companies can adopt a company constitution, but are under no legal obligation to do so. They can adopt the replaceable rules if they want to. However, No Liability Public companies and Special Purpose companies are legally required to adopt a constitution.
If a newly-incorporated Australian company doesn’t specify that it has a company constitution, the replaceable rules will automatically apply. If a company decides to adopt a constitution later on, it is required to draft one and explicitly state in the constitution that it will override the replaceable rules. If the company wants to have a combination of both constitution and replaceable rules, it must specify which replaceable rules it wants to override.
The replaceable rules for companies in Australia cannot be applied to Pty Ltd companies where the sole director is also the sole shareholder. It also cannot be applied to companies registered before 1 July 1998.
Author Bio
Venus Angelli David is a Digital Copywriter with over 7 years of experience writing about business, recruitment, tech, and immigration for consulting firms in Australia, Singapore, the Philippines, and Indonesia. She loves coffee, cats, and yoga.