Australia: Company Law Review Act - Company Formation And Internal Management

Last Updated: 21 September 1998

By Mark Standen

Registration of a company

Section 114 now provides that a company needs to have at least one member. It is no longer necessary for public companies to have at least five shareholders.

In forming a company, it is no longer necessary for the initial shareholders to subscribe their names to a memorandum. Instead, a person now lodges an application containing the prescribed information (section 117) and including a copy of the constitution (if the company is to be a public company and to have a constitution on registration). The company comes into existence on the date of registration and anybody specified in the application (with consent) becomes a member, director or company secretary on the same day. It is not necessary to give further notification to the ASIC of their appointment.

The provisions dealing with registration of a body corporate that is not a company, recognised company or corporation sole have been streamlined to reflect the new registration requirements for a company and have been moved to form sections 601BA to 601BS.

The provisions of current sections 142 to 147A dealing with transfer of incorporation will now appear in the Corporations Regulations.

Company powers

Section 124 deals with the legal capacity and powers of a company, and is in similar terms to the old section 161. There are several differences:

(a) the introductory words now include 'and powers'. This probably makes very little substantive difference;

(b) the company is now said to have the legal capacity and powers of 'an individual' rather than 'the legal capacity of a natural person'. The replacement of the reference to a natural person with a reference to an individual does not appear to be significant;

(c) the list of the powers of a body corporate included in section 124(1) differs slightly from the old list and now expressly includes power to cancel shares in the company and to grant options over unissued shares in the company;

(d) section 124(1) provides that a company limited by guarantee does not have the power to issue shares. This reflects new section 112, which no longer allows the registration of companies limited both by shares and by guarantee; and

(e) the comfort statement in section 124(2) to the effect that a company's legal capacity is not affected by the fact that the company's interests are not, or would not be served, by doing something, differs from the old formulation in section 161(3), which referred to the company's best interests.

Section 125 provides that while a company's constitution may contain restrictions on the company's exercise of any of its powers, the exercise of a power in breach of those restrictions is not invalid. This reflects the current law, but such an exercise of power will no longer be an express contravention of the Law (i.e. there is no equivalent provision to the previous section 162(2)). Also, it will no longer be the case that an officer of a company who is involved in such a contravention will be guilty of a contravention (previous section 162(3)).

Section 162(7) previously provided that the fact of contravention of constitutional restrictions could only be asserted or relied on in listed types of applications and proceedings, including proceedings by the company or its officers against its present or former officers. This reflected the common law principle that a director who causes a company to act outside its powers is liable for any loss resulting from the breach. There is no longer any such provision. According to the explanatory statement:

(a) this will make it clear that the common law doctrine has no further application;
(b) this will remove the last vestiges of the doctrine of ultra vires; and
(c) acts which are contrary to restrictions on a company's exercise of its powers will now be treated in the same way as any other breach of a company's constitution.

Despite these changes, there may be little substantive difference for a director who causes a breach of such a restriction (fiduciary duties, breach of contract etc).

Execution of documents

Section 123 indicates that a company now has a discretion whether to have a common seal.

Section 127 deals with the execution of documents by a company:

(a) a company may execute a document without using a common seal if the document is signed by two directors, a director and secretary or a single director (in the case of a proprietary company with a sole director and secretary);

(b) a company with a common seal may execute a document if the affixing of the seal is witnessed by two directors, a director and secretary or a director (in the case of a proprietary company that has a sole director and secretary); and

(c) either of these methods may be used in the execution of a document as a deed as long as the document is expressed to be executed as a deed.

The section does not limit the ways in which a company may execute a document (including a deed).

Section 127 reflects the view that the traditional 'security' function of the common seal is no longer strong.

Table A (section 84) provided that the seal could only be used by the authority of the directors or of a duly authorised committee of directors. No such provision is included in the new replaceable rules. Presumably, the constitutions of many companies will continue to provide for the use of a common seal and require Board approval.

It may be that banks and other parties dealing with companies which have a common seal will continue to require that key documents be executed under seal. However, in large security transactions Banks often require a copy of Board minutes and supporting statutory declarations in any event.

Assumptions in dealing with companies

Sections 128 to 130 deal with the matters previously set out in sections 164 to 166 and list the various assumptions that a person may make in dealing with companies, such as:

(a) compliance with constitution and replaceable rules;
(b) due appointment and authority of company officers, as shown in ASIC public information;
(c) due appointment and authority of person held out as an officer or agent;
(d) proper performance of duties; and
(e) document duly executed if apparently signed in accordance with section 127.

The main difference from the current provisions is that a person is precluded from making one of the listed assumptions if at the time of the dealings they 'knew or suspected' that the assumption was incorrect. This is a stricter test than the old one, which requires that the person has actual knowledge or that the person's connection or relationship with the company is such that the person ought to know that the matter is not correct.

Bank of New Zealand v Fiberi Pty Ltd (1994) 12 ACLC 48 illustrates the difficulties of interpretation of the old wording of section 164(4), but indicated that the words 'ought to know' required consideration whether the person would reasonably be expected, in the particular circumstances, to know the true position about the matter assumed. Kirby J thought the exception would apply if there were facts which would put a reasonable person on inquiry about the relevant fact. According to the explanatory memorandum, the new objective test in section 128(4) makes it clear that the common law 'put on inquiry' test has no application. Some issues may arise, however, if a person acts unreasonably where there are plain grounds for suspicion.

Replaceable rules and constitution

The basic rule under section 134 is that a company's internal management may be governed by provisions of the law that apply to the company as replaceable rules, by a constitution or by a combination of both. The Law no longer talks about memoranda and articles of association.

The replaceable rules are now set out in section 141 and deal with a range of matters typically found in articles of association relating to the appointment powers and proceedings of directors, meetings of members, term of office of company secretaries, rights to inspection of books, dividend rights and transfer of shares. Table A has been repealed.

The list in some published copies of the new provisions may not be complete. In my copy, for example, section 224D is not listed in section 141.

Not all of the matters dealt with in the old Table A are addressed in the replaceable rules. In general, this is because many matters now appear in the law itself. For example:
  • power to issue shares -section 124 and Chapter 2H;
  • brokerage and commission -section 258C;
  • calls -section 254M (and terms of issue of partly paid shares);
  • alteration of capital -section 254H;
  • capitalisation of profits -section 254S.

Where, in general terms, a section of the Corporations Law includes the words 'replaceable rule', that rule applies to each company registered after 1 July 1998 and to any company that repeals its constitution after that date.

Where a section of the Corporations Law contains the words 'replaceable rule for proprietary companies and mandatory rule for public companies', that rule applies to new proprietary companies, to new companies that change to a proprietary company, to any proprietary company that repeals its constitution after 1 July 1998 and as an ordinary provision of the Law to any public company whenever registered.

At this stage, the only mandatory rule for public companies relates to the appointment of and voting by proxies (section 249X). This section provides that where a member appoints 2 proxies but does not specify the voting proportions, each may exercise half the votes.

The replaceable rules apply to all new companies to the extent they are not displaced or modified by the company's constitution.

The constitution may be modified or repealed by special resolution. A public company is required to lodge with ASIC a copy of a special resolution adopting, modifying or repealing its constitution within 14 days after it is passed.

Failure to comply with the replaceable rules is not a contravention of the Law (section 135(3)). However, the constitution and any replaceable rules that apply to the company have effect as a contract under section 140.

The replaceable rules will apply to companies as amended from time to time. This is a significant improvement from the operation of Table A.

The replaceable rule regime does not apply to a proprietary company while the same person is both its sole director and sole shareholder. Special provisions apply under section 224B.

Directors' meetings and resolutions

New Part 2G.1 deals with directors' meetings and contains sections 248A to 248G. Of those seven sections, five operate as replaceable rules and deal with the following issues:

(a) directors' resolutions may be passed without a meeting if all of the directors entitled to vote sign a document stating that they are in favour of the resolution;
(b) any director may call a directors' meeting by giving reasonable notice individually to every other director;
(c) the election by directors of a chairperson;
(d) a requirement that the quorum for a directors' meeting is two directors and that the quorum be present at all times during the meeting;
(e) directors' resolutions to be passed by a majority of the votes cast by directors entitled to vote, with the chair to have a casting vote.

Of particular practical importance is section 248D, which provides that a directors' meeting may be called or held using any technology consented to by all the directors. This may be a standing consent. If desired, the constitution could restrict the use of technology for this purpose.

This is a very broad provision -for example, with consent, a meeting of directors may be called by e-mail or voice-mail, and a meeting may be held using video and internet technology.

Registered offices

The basic requirement to have a registered office and to notify the ASIC of any change of address remains. However, there is a new power for the ASIC to change the address to the director's residential address if it becomes aware that the occupier of the premises of the registered office has not consented or has withdrawn its consent.

Under section 144(2), public companies must also display their name and the words 'Registered Office' prominently at their registered office. Under section 144(1), every company must display its name prominently at every place where it carries on business and that is open to the public. This is similar to the requirements in previous section 219(8) (but a little less prescriptive).

Section 219(8) required the name to be painted or affixed, conspicuous, easily legible, and on the outside.

Changes of company type

A company may change its type by passing a special resolution and lodging an application. The main changes are that:

(a) it is not possible to convert to a company limited both by shares and guarantee;
(b) a company limited by guarantee may convert to a company limited by shares (thus assisting in demutualisations). The new provisions provide a statutory method of expropriation of members' rights which does not attract the operation of the Gambotto principles.

For more information contact
Mark Standen
Minter Ellison
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Sydney  NSW  2000

Ph (61 2) 9210 4444
Fax (61 2) 9235 2711

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The information contained in this article has been prepared by the Minter Ellison Legal Group.Professional advice should be sought before applying the information to particular circumstances.

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