What are the Replaceable Rules and are they as good as having a unique constitution for a company?
A company can be governed by its own constitution or by the Replaceable Rules – standard rules set out in the Corporations Act, 2001. The Replaceable Rules are a good starting point for ensuring that a company is governed in accordance with Australian company law. However, amending the Rules or having a unique constitution drawn up for your company can provide more flexibility to directors and shareholders.
Section 141 of the Corporations Act sets out the provisions that apply as Replaceable Rules. These provisions are comprehensive and cover everything from how directors should behave if a matter is put to the vote in which he/she has a personal interest, through to powers of directors, directors meetings, meetings of members and provisions that relate to the company’s shares.
If a company has a sole member/director, it must have its own constitution and cannot use the Replaceable Rules. Public companies “Limited by Guarantee” must also be governed by their own constitution, likewise, “no Liability” public companies and special purpose companies.
Some corporate legal experts argue that it is better for a company to have its own constitution than to rely on the Replaceable Rules. For example, a constitution can be drafted to enable the company to issue several different classes of shares, dividend rights and rights to capital in the event that the company is wound up.
A constitution also gives company members and directors the opportunity to draft more comprehensive rules about matters such as the holding of meetings and voting rights, than are currently available in the Replaceable Rules.
A third, and perhaps more sensible option, is for a company to make the Replaceable Rules its starting point but selecting to amend some of the provisions set down in Section 141 to better suite its purposes. This amended version of the Replaceable Rules then becomes the company’s constitution.
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