If a company does not wish to have a constitution, they have the option of using replaceable rules. Replaceable Rules refers to a provision of the sections and subsections of the Corporations Act which are designated under section 135 of the Act as “replaceable rules”, and so are capable of being removed or customised by a company’s constitution.
Replaceable rules can be found in the Corporations Act and are a basic set of rules for managing a company. Every company needs a corporate structure that controls risk and official decision-making. The replaceable rules in the Corporations Act (‘The Act’) provides a basic and useful framework that can be tailored to suit a business’s needs.
Replaceable rules have outlined the rules set out in the Corporations Act and which section they are in. The content in each section applies as the replaceable rule. If a company wishes to remove or change a replaceable rule they must have a constitution that outlines the changes. Keep reading the Legal Kitz blog to find out more.
How do they work?
Replaceable rules, the shareholders agreement, or the constitution of a company operates as a contract between the company and each member, director and company secretary; and between a member with another member.
What Happens if I Don’t Have a Company Constitution?
If your business is registered after 1 July 1998 and it does not have a constitution, the replaceable rules automatically apply.
What Do the Replaceable Rules Cover?
The Corporations Act lists 39 replaceable rules and these rules are what companies can adopt as part of their internal governance structure. These rules cover areas such as:
- Appointment removal of directors of the company
- Removal of the directors
- Conduct of director board meetings
- Conduct of member’s meetings and member’s rights
- Rights of members to inspect company books
- Appointment of the company secretary
- Dealings with shares and the right to dividends
- Transferring of shares and the right of pre-emption
When Do the Replaceable Rules Apply?
Typically, if the Constitution does not modify or replace a replaceable rule, the replaceable rules will apply to the company. A company’s initial governance framework can be structured by:
- Relying on only replaceable rules
- Adopting a constitution that excludes all replaceable rules in favour of the constitution’s rules
- Adopting a constitution which excludes replaceable rules and includes other replaceable rules
Businesses can use a shareholders agreement to clarify rights of shareholders alongside their constitution. A company can pass resolutions that excludes replaceable rules, or exclude replaceable rules but not containing any provisions to cover matters raised by excluded rules. In this instance the common law or judge-made decisions would apply.
Who is Covered by Replaceable Rules?
Replaceable rules apply to both public and private companies. The difference between the two is that a public company offers its shares to the public and the stock exchange and a private company does not. Replaceable rules do not apply to a proprietary company if the same person is both the sole director and shareholder.
Some replaceable rules are specific to the company, whether they are public or private. As an example, a public company cannot remove the right of a member to appoint a proxy for a meeting.
When will the Replaceable Rules not apply?
Replaceable rules will not apply to businesses or companies that are registered before 1 July 1998.
However, if the company had a constitution and repealed the constitution after 1 July 1998, the replaceable rules will apply. If they had a constitution and had not repealed that constitution, the rules would also apply. The old Corporations law would apply as well as the constitution, unless they have changed or removed those rules. The Corporations Law will apply if they were registered before 1 July 1998.
The following Replaceable Rules are not displaced:
- Section Calling of meetings of members by a director 249C
- Notice to joint members 249K (2)
- Notice of adjourned meetings 249M
- Chairing meetings of members 249U
- Business at adjourned meetings 249W(2)
- Proxy date is valid even if a member dies
Why a Business Would Rely on Replaceable Rules
Replaceable rules are relied upon during the beginning stages of a business, particularly if businesses do not have the money or the time to draft a company constitution. The replaceable rules lay out a structure for corporate governance. However, companies often adopt a basic constitution.
Why a Business Would Exclude Replaceable Rules
It is cost effective to rely on replaceable rules initially, but it may be difficult for the members and shareholders to find the rules. There are many reasons as to why companies adopting a constitution can be more beneficial than relying on replaceable rules. It can be advantageous because:
- Everyone can see corporate governance rules in one document
- You can modify to the specific needs of the company
- It is more practical and simple to have corporate governance rules in one spot rather than referring to the Corporations Act
- The replaceable rules give unwanted power to shareholders such as the right to appoint a director or the right to take control of directors meetings
- The company is able to issue partly paid shares and regulate calls on shares
- It provides more thorough guidelines which are more suitable for larger businesses
- It allows the business to have several classes of shares with different rights relating to voting rights or dividends
Key Takeaways
Replaceable rules are rules that you can use for a company’s internal governance. The replaceable rules will apply in the absence of a company constitution. This will override the operation of the replaceable rules. A constitution provides more coverage as well as flexibility over a company’s internal affairs. It is also practical and simple having the rules in one document.
If you require further assistance with replaceable rules or company constitutions, Legal Kitz can direct you with your next step. Our Legal Kitz business specialists can assist with ensuring that your concerns are addressed, and can provide you with advice that is tailored to your situation. You can book a free 30-minute consultation via our website.