Replace a Company Constitution
Replace Company Constitution on law firm website
Congratulations you are about to replace a company constitution on our law firm’s website. Build everything you need including:
- law firm letter – confirms we authored the document
- member minutes
- new constitution
For the constitution update, ASIC requires nothing from you
Do not send a copy of the new constitution to ASIC. There are also no ASIC fees when you update the company constitution.
Company Constitution vs Replaceable Rules
Companies are governed by:
- a constitution (recommended), or
- replaceable rules
We often review a company incorporated on a non-law firm’s website. To ‘save time’ the non-law firm website adopts replacement rules for:
- a sole director, sole member company; or
- a Self-Managed Super Fund corporate trustee (special purpose company)
However, both must have a constitution.
Replaceable rules (from the Corporations Act 2001) provide a basic set of rules for your company. They are not good. Few accountants, lawyers or advisers recommend them.
Replaceable rules are less than the bare minimum. There are many additional powers that a company should have. These are only found in a constitution.
Replaceable rules change at the whim of the current government. While the changes may benefit ‘society’, they may not be in the best interests of shareholders. In contrast, shareholders amend constitutions anytime.
A new company directly with ASIC comes with no Constitution
Q: I have a new client. She went ahead and registered a new Company directly with ASIC. This is without talking to me first.
I asked her for all the Company details including a Constitution. She said she didn’t get a Constitution. I am surprised ASIC did not require a Constitution during the process of incorporating a Company.
Does ASIC provide her with a Constitution? Or do I build a Constitution at Legal Consolidated’s website?
A: The client is foolish:
- for setting up a company without speaking to her accountant and financial planner first
- dealing directly to ASIC. ASIC is a government regulator. Like the ATO and other government agencies, only approach government regulators through your accountant and adviser
- ASIC only provides Replaceable Rules
- ASIC and the Australian government want you to have these dangerous Replaceable Rules. This is so governments can ‘control‘ your company. The forever changing, Replaceable Rules may, for example, in the future require:
- that you treat employees a different way
- at least one Christian person as a director
- a higher standard over and above the requirements of the Modern Slavery Act 2018
- As governments change, Canberra, through the Replaceable Rules, may come up with all sorts of strange requirements. Do not let the government dictate its current fads onto your company. Build your new Company Constitution to escape government control. Keep autonomy with a Company Constitution. Merely build this new Company Constitution to escape the Replaceable Rules
Eight benefits when updating a Company Constitution with Legal Consolidated
The constitution you are building updates your company’s internal rules and procedures. It fully complies with the new changes to the Corporations Act. The eight benefits are:
1. No Technology in old Company Constitution
Technology changes how boards communicate with employees and shareholders. Traditionally board decisions are mailed out in physical form to shareholders. The update reflects technology changes. The new constitution outlines how technology is used in meetings. Members do not need to attend meetings and can appoint a proxy.
2. Dividends confusing in old Memo & Articles
In 2010, the Australian government amended section 254 of the Corporations Act. This section governs how dividends are paid.
Before 2010 dividends are only payable from company profits. Now a company can declare dividends if:
1. its assets exceed liabilities; and
2. the payment is fair and reasonable; and
3. the payment does not materially prejudice the company’s ability to pay its creditors.
Under old constitutions, you are not able to pay dividends. Insolvency specialists pursue this argument. They challenge all dividends paid since 2010.
3. Share buy-backs allowed in new company constitution
Share buy-backs allow companies to buy back its shares from shareholders. In Australia, there are five types: equal access, on-market, employee share scheme, selective buy-back and minimum holding. Replace a company constitution and ensure the legality of the buy-back.
4. Preference shares in a Constitution
The new constitution allows the company to issue preference shares under Australian law.
5. Single Director not allowed in old Memo & Articles
Before 1995, two directors are required. This was a disaster for asset protection. Both directors go bankrupt along with the insolvent company.
Asset protection is having no assets in a risky person’s name. Instead, assets are in the safe person’s name. For a couple, this is the ‘man of straw and the woman of substance’.
Owe money to the ATO for PAYG or superannuation? All directors are liable automatically for these ATO debts.
The Law Simplification Act 1995 (Cth) reduces the minimum number of directors from two to one.
Now, most companies have a single director. Only one person goes down if the company is insolvent.
The new constitution you are building allows you to have a single director.
6. Directors can’t resign if two directors are required
As stated above, only a single director is required. However, there are over 27,000 Memorandum of Articles of Association and 59,000 constitutions that still require two directors.
We review brand new company constitutions incorporated on non-law firm websites. Many still require the company to have two directors.
What if your rules say two directors – but one wants to resign? You lodge the correct form with ASIC to resign as a director. ASIC accepts the form. However, the resignation is void. This is against a company liquidator and a trustee in bankruptcy.
To rectify, update your company rules.
A company with insufficient officers breaches the Corporations Act 2001. You then suffer penalties and are prosecuted.
7. Division 7A Loan Agreement v’s Memo & Articles
Your new Legal Consolidated Constitution contains a Division 7A Loan Agreement. It is part of the constitution. It works for existing and future members. All shareholders are deemed to have the Div 7A Loan Deed.
8. Escape the company seal
A “company seal” is a stamp. You apply the stamp on legal documents ‘signed’ by the company. Many Constitutions require all deeds signed by the company to by “signed under seal”. But, the signing under seal rule is abolished. No seal is required under the Company Law Review Act 1988 (Cth).
If your rules require a seal then a deed signed without a seal is invalid. Our new update gets rid of the seal requirement. Other names for a “company seal” is a “corporate seal” and “common seal”.
Four faults in old Constitutions and Memo & Articles of Association
Australian companies created before 1 July 1998 has a ‘Memo & Articles of Association’. Like old Constitutions, your Memo & Articles of Association still operates. But not well. M&A faults include:
1. Mandatory Annual General Meetings each year
Many constitutions require AGM. If you fail to hold the AGM, your company is in breach. This is for both taxation and insolvency laws. The law no longer requires an AGM for Pty Ltd companies. Our new update gets rid of the requirement.
2. Memo & Articles only do as permitted
Stating a ‘list of objects’. This is the purpose of the company. E.g. ‘sell fishing tackle and retail’. What if your company now does something else, such as acting as a trustee of a doctor surgery? Then you break the law. Your company is acting ‘ultra vires’. It is acting outside its powers. Again, your company is non-compliant. Legal Consolidated’s Constitution allows you to do anything a human can do – and more.
3. Two directors go bankrupt, instead of one
Requiring two directors. As stated above, the laws have changed. You now only need one director. It is safer to only have one director in case the company goes insolvent.
4. Perform out of date and illegal actions
Old rules can fore you to perform illegal actions. Instead, update the company constitution to allow these correct powers:
- exercise corporate powers
- issue and allot shares
- not avoid liability (a very strange rule)
- transfer shares
- vote and proxies
- appoint directors and company secretary
- conduct general and director meetings
- sign bank documents, loans and mortgages (however this may be useful because banks often cannot enforce a loan made by a company that is still working under the old Constitution or M&A)
- no longer require a company seal
Q: Are company constitution, obtained by accountants. Statutory constitution?
A: Every Constitution is different. The accountant hopefully got the Company and the Constitution from a law firm. Look at the Company Constitution. It will have the name of the law firm that prepared the Constitution. If the Company Constitution is silent then it looks like you and the accountant have been duped. Update the Constitution ASAP.
You use the expression “Statutory constitution”. I think you mean “Replaceable Rules”. For the reasons set out above Replaceable Rules are bad. Escape the replacement rules by building the New Constitution.
Q: What is the difference between a constitution offered by Legal Consolidated and the constitution offered by an accountant?
A: Company Constitutions are deeds. Only lawyers can legally prepare deeds. You would not find an Australian accountant preparing a Deed. Instead, the accountant outsources preparing the Company Constitution to a law firm. Also see the above answer.
Q: Is the Constitution offered by Legal Consolidated based on the Corporations Act?
A: Sadly, unlike trusts, companies are highly regulated. We draft the Constitution under the laws of Australia. The Corporations Act fetters what we can do to protect the company, its directors and shareholders.
Build this new Company Constitution to replace:
- the government provided Replaceable Rules; or
- an old Constitution; or
- a Memorandum and Articles of Association
Telephone us for free advice on building your replacement Company Constitution.
See also:
Convert old company to an SMSF Trust – Special Purpose company