Transcript CHAPTER 5 INTERNAL RULES At the end of this topic you should know: • what a company’s constitution may contain and its importance; • what.

CHAPTER 5
INTERNAL RULES
At the end of this topic you should know:
• what a company’s constitution may contain and its
importance;
• what replaceable rules are, where to find them and when
they apply;
• that under s 140(1), the constitution and any replaceable
rules have effect as; contract between the company, its
officers and members; and
• how the constitution and replaceable rules can be enforced
and altered.
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Sources of Internal Rules
The internal rules of a company can be comprised of:
• a constitution that the company has adopted (if one
has been adopted on or after registration);
• the replaceable rules in the Corporations Act; or
• a combination of both: s 114.
Factors which determine the source of the rules are:
• the type of company; and
• whether the company was registered before or after
1 July 1998.
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Replaceable Rules
These replaceable rules operate as a series of “default
provisions” – that is, the replaceable rule applies “in
default” of the members adopting a constitution that
provides for a different rule.
It is intended that the replaceable rules will be updated
from time to time by amending these sections of the
Corporations Act to reflect current “best practice”.
The table contained in s 141 cross-references the
relevant sections: see [5.50].
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Replaceable Rules
Certain types of companies must have their own
constitution: no liability companies; certain companies
limited by guarantee; and public companies listed on
the ASX.
The replaceable rules do not apply to a proprietary
company that has the same person as its sole director
and sole shareholder: s 135(1); may have constitution
but cannot exclude s 198E.
The constitution can itself be made up of a series of
special resolutions passed by members, rather than a
single document: s 136(2).
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Replaceable Rules
In some instances, the replaceable rules distinguish
between proprietary and public companies.
Some replaceable rules only apply to proprietary
companies:
• s 254D pre-emption rights;
• s 254W(2) dividend rights; and
• s 1072G additional discretion for directors to refuse
to register transfers of shares.
For public companies, some of the replaceable rules
are mandatory: s 249X, appointment of proxies.
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Constitution
In addition to those companies that must have their own
constitution, the following are examples of situations
where the constitution would generally be adopted:
• a company with different classes of shares with
different voting rights;
• an “incorporated partnership” where partners transfer
an existing business to a company in certain
circumstances;
• a foreign company; and
• a company that intends to or has issued partly paid
shares.
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Companies Registered Before 1 July 1998
Prior to 1 July 1998, a company’s internal rules
comprised two documents:
• a memorandum of association; and
• the articles of association.
Options for pre-1 July 1998 companies:
• repeal entire constitution;
• amend existing constitution; or
• take no action — ie status quo preserved.
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Effects of the Constitution and Replaceable
Rules
Under s 140(1) the constitution (if any) and any
replaceable rules that apply to the company are to
“have effect as a contract”.
This contract is between:
• members and the company;
• the company and each director and the company
secretary; and
• members and members.
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Effect of the Constitution and Replaceable
Rules
The statutory contract created by this section is
different from other contracts in that:
• the remedies are more limited (declaration or
injunction, not damages);
• it can be modified without consent of every party;
• it is a written contract but not signed; and
• there was no consideration given.
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Alterations of the Constitution and Replaceable
Rules
A company has power to alter its constitution by a
special resolution of its members: s 136(2).
A special resolution making any alteration to a
constitution comes into effect on the date the
resolution is passed or any later date specified in, or
determined according to, the resolution: s 137.
The replaceable rules can be displaced or modified by
the adoption of a constitution: s 135(2).
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Limits to Alteration of Internal Rules
There are statutory and general law limits on altering the
internal rules. In relation to the statutory limits, the
modification:
• cannot, unless a member gives written consent, require
that member to take up more shares, increase their liability
to the company, or impose restrictions on the right to
transfer their shares unless certain circumstances exist:
s 140(2);
• must comply with any further requirement in the
company’s constitution: s 136(3)-(4);
• cannot, in relation to special rights of members, be altered
except by the procedures in Pt 2F.2; and
• cannot be oppressive: Pt 2F.1.
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Limits to Alteration of Internal Rules
In relation to the general law limits, the modification:
• if it involves the removal of an important membership
right (such as voting rights or dividend rights), or means
that the shares of a member or any group of members
are to be acquired without that member’s consent, then
the tests of fairness in Gambotto’s case must be
satisfied;
• cannot provide that directors will take directions from
members if it forces directors not to consider the best
interests of the business: Capricornia Credit Union Ltd
v ASIC [2007].
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Objects Clauses and Limitations on Powers
Companies have the powers of an individual and also
the powers of a “body corporate”: s 124.
Companies with a constitution can state objects, or
limit their powers by stating an express
restriction/prohibition: s 125(1).
Types of companies that have such provisions in their
constitutions are: not-for-profit companies; joint
venture companies; no liability companies;
professional practice companies; and companies
registered prior to 1998 and have not altered their
memorandum.
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Abolition of General Law Doctrine of Ultra
Vires
Companies which act outside their capacity (ie their
objects or self-imposed restrictions on powers) are
said to have acted “ultra vires”.
Under the general law, any ultra vires acts are void.
However, the validity of any act of the company that is
ultra vires is preserved by ss 125-126.
An ultra vires act may be a relevant fact in other
actions under the Corporations Act eg breach of duty
by a director under Pt 2D.1; oppression under Pt 2F.1;
or winding up under s 461(1)(k).
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PowerPoint slides to accompany Corporations Law: In Principle, 8 th Edition. Ciro & Symes.
Ultra Vires
Does the constitution
contain:
 objects?
 restrictions on powers?
NO
Ultra vires
(in a strict sense)
not an issue
YES
NO
Is particular
act ultra vires?
—construction
YES
Consider ss 125126 validity of
concluded
contracts preserved
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Enforcement of the Constitution and Rules
A breach of a company’s constitution or a replaceable
rule is not a “contravention” of the Corporations Act:
s 135(3).
This means that a breach is not an “offence” so: there
is no criminal or civil liability under Corporations Act;
and it cannot be prevented by statutory injunction
power: s 1324.
However, under general law principles, there is little
doubt that the company can force members to comply
with its constitution: Hickman v Kent or Romney Marsh
Sheep-Breeders’ Association [1915].
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PowerPoint slides to accompany Corporations Law: In Principle, 8 th Edition. Ciro & Symes.
Consequences of a Breach of Objects Clause
or Limitation on Powers Clause
A breach of an objects clause or a restriction clause is not
of itself a contravention of the Corporations Act and will be
treated in the same way as any other breach of the
company’s constitution.
A statutory injunction is not available for a breach of the
internal rules unless the breach also constitutes a breach of
directors’ duties, oppression, or involves an action for
winding up.
If a member could show that a breach of the constitution
had caused them to suffer loss that was not a loss suffered
by the company, then it is possible that they can receive
damages: McLaughlin v Dungowan Manly Pty Ltd [2010].
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PowerPoint slides to accompany Corporations Law: In Principle, 8 th Edition. Ciro & Symes.