Replace a Company Constitution on our law firm's website

Congratulations you are about to replace a Company Constitution on our law firm's website. You are building everything you need including:

* the Constitution
* Member Minutes
* law firm letter

ASIC requires nothing from you

Do not send a copy of the new Constitution to ASIC. There are no ASIC fees when you update company constitution.

Every Member signs the Member Minutes

As we have drafted the update, each shareholder signs to give their consent. If you can’t get every shareholder to sign please telephone us.

What is a Company Constitution?

The Constitution is a contract between the company, directors and shareholders (members). It is not mandatory to create a constitution. Your internal procedures are, instead, governed by government Replaceable Rules. However, no accountants, lawyers or financial advisers would advise your company to rely on these Replaceable Rules. This is because Replaceable Rules are not tailored to your specific needs. Relying on Replaceable Rules is dangerous.

Constitution vs Replaceable Rules

Your company must have a set of rules. The rules are either in:

* a Constitution – which you are about to build; or failing that
* Replacement Rules – set out in the Corporations Act

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:

1. a sole director, sole member company; or
2. a Self-Managed Super Fund corporate trustee (special purpose company)

However, both of these companies must have a Constitution.

Further, the Replaceable Rules are the bare minimum. There are additional powers that a company should have – our Constitution contains these additional powers and benefits.

Also, the 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 the shareholders. In contrast, constitutions can be amended at any time by the Members, just as you are about to do.

The 7 improvements

The Constitution you are building updates your company’s internal rules and procedures. It fully complies with changes to the Corporations Act. The 7 improvements are:

1. Technology

Technology has changed how a board can communicate with itself, employees and shareholders. When you replace a Company Constitution it is updated to reflect how changes in technology affect your business operations. Traditionally board decisions are mailed out in physical form to shareholders. However, email is a faster form of communication that is used by many businesses to correspond with shareholders. Your updated constitution takes into consideration how instantaneous communication affects your shareholders. Further, your constitution outlines how technology can be used in meetings.

2. Dividends

In 2010, the Australian government amended section 254 of the Corporations Act. This section governs how dividends are paid.

Before 2010 the Corporations Act stated that dividends could only be paid from company profits. However, after 2010 a company is not allowed to declare a dividend unless:

1. the company’s assets exceed its 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 an old constitution, you may not have been able to legally pay dividends. Insolvency specialists pursue this argument. They challenge all dividends that you have paid since 2010.

3. Email voting

Shareholders can cast a vote regarding a meeting. Do it either online or through personalised voting forms. Members do not need to attend the meeting and can appoint a proxy. Your new Constitution improves meeting efficiency.

4. Share buybacks

Share buybacks allow companies to buy back its shares from the shareholders. In Australia, there are 5 types of share buybacks. They are: equal access, on-market, employee share scheme, selective buy-back and minimum holding. Replace a Company Constitution and ensure the legality of the share buyback.

5. Preference shares

A company has the power to issue preference shares under Australian law. Your new Constitution ensures that the preference shares are clear.

6. Single Directors

The Corporations Act now permits sole director companies. You now only have to have one director for your company. Before this time, you had to have a minimum of 2 directors. This would often be a wife and husband.

Having two directors was a disaster for asset protection. Instead of one, both directors go bankrupt along with the insolvent company. Owe money to the ATO for PAYG or superannuation? Then all the directors are liable automatically for such unpaid debts. Better only a single director goes down with the sinking ship.

Asset protection at a basic level is having no assets in a risky person’s name. Instead, assets are in the safe person’s name. This is called the 'man of straw and the woman of substance'.

Your new Constitution allows you to have a single director.

7. Division 7A Loan Agreement

When you replace a Company Constitution you get a Division 7A Loan agreement. It works for each Member and for any new Member. Build one here.

Four  common faults in old Constitutions and Memo & Articles of Association

Australian companies created before 1 July 1998 had a 'Memo & Articles of Association'. Like old Constitutions, your Memo & Articles of Association still operates but not well. Like old Constitutions, faults with the Memo & Articles of Association include:

1. Mandatory AGM each year

requiring an Annual General Meeting (AGM). However, the law no longer requires an AGM for Pty Ltd companies. No one has AGMs anymore. But if you don’t then your company is non-compliant. This is for both taxation and insolvency laws. Your new Constitution ensures that you don’t have to have AGMs.Replace a Company Constitution

2. 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

requiring 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 requirement)
* 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)


For more legal advice telephone us. We are a law firm. We can help you answer the questions to replace a Company Constitution.

Adjunct Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, LLM, MBA, SJDupdate company constitution
Legal Consolidated Barristers and Solicitors
Australia wide law firm
39 Stirling Highway, Nedlands, WA 6009
Mobile: 0477 796 959
National: 1800 141 612
Email: brett@legalconsolidated.com