The company’s
internal rules
Corporate Law: Law principles and practice
A company must have internal rules
A company, like any organisation, must have rules for
how it operates (including rules relating to holding
meetings, management interaction and procedures for
passing resolutions).
Under s 134 of the Corporations Act 2001 (Cth), a
company can use:
•
•
•
a company constitution
The replaceable rules from the Corporations Act 2001
(Cth)
a combination of both.
Corporate Law: Law principles and practice
Internal management
The management and administration of a company require
rules relating to:
•
•
•
•
the appointment and removal of officers
procedures relating to directors
members’ meetings
members’ rights and obligations
Corporate Law: Law principles and practice
The replaceable rules
Replaceable rules are found in sections throughout the
Corporations Act 2001 (Cth).
Some replaceable rules are mandatory, but most are
optional.
There are some differences in the rules between
proprietary and public companies.
The rules can be displaced if a company adopts its own
rules or constitution (s 135(2)).
Corporate Law: Law principles and practice
The replaceable rules cont …
A proprietary company can restrict the transfer of shares. A
public company is not permitted to do this.
A public company is not permitted to displace the rule that a
member can appoint a proxy to attend a meeting on their
behalf.
Corporate Law: Law principles and practice
The replaceable rules cont …
The 39 replaceable rules are found in s 141 of the
Corporations Act 2001 (Cth) and refer to other sections
throughout the Act. A section indicates its replaceable
rules in bracket.
Corporate Law: Law principles and practice
1
Voting and completion of transactions--directors of proprietary companies
194
2
Powers of directors
198A
3
Negotiable instruments
198B
4
Managing director
198C
5
Company may appoint a director
201G
6
Directors may appoint other directors
201H
7
Appointment of managing directors
201J
8
Alternate directors
201K
9
Remuneration of directors
202A
10
Director may resign by giving written notice to company
203A
11
Removal by members--proprietary company
203C
12
Termination of appointment of managing director
203F
13
Terms and conditions of office for secretaries
204F
Inspection of books
14
Company or directors may allow member to inspect books
247D
Corporate Law: Law principles and practice
The replaceable rules cont …
Non-compliance with the replaceable rules is not of itself
a breach of the Act (Corporations Act 2001 (Cth) s
135(3)).
Breaches of the replaceable rules do not give rise to civil
or criminal liability, or entitlement to statutory injunctions
under the Act.
Corporate Law: Law principles and practice
The constitution
The company’s constitution (if any) is a document that
sets out rules governing all or some of the matters that
may be covered by the replaceable rules, resulting in the
latter being respectively displaced or modified.
The constitution may be adopted when:
•
•
•
a new company is formed (Corporations Act 2001
(Cth) s 136(1)(a))
a company without a constitution adopts one (s
136(1)(a))
a court order is made requiring the company to adopt
one (s 136(1)(b)).
Corporate Law: Law principles and practice
Adoption of a constitution
Before July 1998, companies were required to have a
constitution consisting of a memorandum of association
and articles of association. Some companies retain this as
a constitution.
Historically the memorandum was a superior document,
but under the Corporations Act 2001 (Cth) no distinction
is made between the two components, so there is only one
constitution.
Companies formed after July 1998 can choose a
constitution, replaceable rules, or both (s 134).
Corporate Law: Law principles and practice
Objects clause
Before 1984, every company was required to have an
objects clause in its constitution—this requirement has
been abolished.
A company can still choose to restrict the company’s
business engagements and activities (Corporations Act
2001 (Cth) s 125(1)). However, no action that violates the
company’s objects clause will be considered ‘ultra vires’
(beyond its powers).
There is no ‘constructive notice’ that a company will not
be bound by the actions of its officers. A contract contrary
to a company’s constitution will be binding (s 125(2)).
Corporate Law: Law principles and practice
Legal capacity
A company has features of both a natural person and a
legal person. A company is capable of engaging in any
business or activity, including entering contracts
(Corporations Act 2001 (Cth) s 124(1)).
A company has powers that are not applicable to natural
persons (s 124(2)), including the power to:
•
•
•
issue and cancel shares (except companies limited by
guarantee)
issue debentures
grant a floating charge over the company’s property.
Corporate Law: Law principles and practice
Legal capacity cont …
Some companies are required to have a constitution. For
example:
•
•
•
Guarantee companies must set out the amount
guaranteed.
No-liability company must state that they are for
mining purposes only.
Listed public companies must undertake to comply
with ASX rules.
Corporate Law: Law principles and practice
One-person companies
In one-person companies, the the shareholder is also the
director.
Replaceable rules do not apply. The company may, but is
not required to have a constitution (Corporations Act
2001 (Cth) s 135(1)).
The Corporations Act applies a number of basic rules:
•
•
the business of the company is to be managed by or
under the direction of the director (s 198E)
the director is to be paid any remuneration for being a
director that the company determines by resolution (s
202C).
Corporate Law: Law principles and practice
Legal effect of internal management rules
Under s 140(1) of the Corporations Act 2001 (Cth), the
constitution and replaceable rules that apply to a company
have effect as a contract between the following parties:
•
•
•
the company and each member (s 140(1)(a))
the company and each director and company secretary
(s 140(1)(b))
a member and each other member (s 140(1)(c).
Corporate Law: Law principles and practice
The constitution and/or the replaceable rules
The constitution and replaceable rules form a statutory
contract between the company, members and officers
(which includes directors).
The company can enforce rules against members.
Corporations Act 2001 (Cth) s 140(1)(a)
Hickman v Kent or Romney March Sheep-Breeders
Association [1915] 1 Ch 881
Corporate Law: Law principles and practice
Members’ rights to enforce the constitution
Members cannot enforce provisions in the constitution
that appear to confer rights on them in some capacity
other than as a member.
Eley v Positive Government Security Life Assurance Co
(1875) 1 EX D 20
Only members can enforce the company’s rules.
Forbes v NSW Trotting Club Ltd [1977] 2 NSWLR 515
Corporate Law: Law principles and practice
Limits on the right to alter the constitution
Restrictions exist under statute and common law when
changing a company constitution.
An ‘entrenching provision’ involves a restriction in the
constitution that elevates the required level of shareholder
support beyond that required for a special resolution (e.g.
requiring a greater majority than 75%, or requiring the
consent of a particular person (s 136(3)).
Corporate Law: Law principles and practice
Limits on the right to alter the constitution cont …
Another limitation is that a member is not bound by
certain changes to the constitution after becoming a
member unless these are agreed to in writing. Four such
modifications:
•
•
•
require the member to take up additional shares;
increase the member’s liability to contribute to the
share capital of the company or otherwise pay money
to the company
impose or increase a restriction on the right to transfer
shares already held by the member (s 140(2)).
Corporate Law: Law principles and practice
Alteration of class rights
If a company’s share capital is divided into different
classes of shares (such as ordinary and preference shares)
within the company’s constitution, the majority
shareholders cannot modify the constitution to cancel or
vary existing class rights without a special resolution of
both the company in general meeting and the holders of
the affected class (Corporations Act 2001 s 246B).
Members may still have the option of applying to the
court for a remedy under s 232 if the majority votes are
contrary to the interests of the members as a whole,
oppressive, unfairly prejudicial, or unfairly discriminatory
to members.
Corporate Law: Law principles and practice
Common law restrictions on changing the constitution
Where a change to the constitution involves expropriation,
the majority shareholder would need to prove that it was
both for a proper purpose and was fair in all the
circumstances.
Gambotto v WCP Ltd (1995) ACLC 342
Corporate Law: Law principles and practice
The company’s relations with outsiders
A company acts through its agents, since it is a fictional
legal being.
Agents include directors, officers, employees and other
official agents.
A company does not require a company seal
(Corporations Act 2001 (Cth) s 126(1)) to execute a
binding contract as long as the agent, employee or
authorised person acts with the authority of the company.
Corporate Law: Law principles and practice
The company’s relations with outsiders
Under s 126(1) of the Corporations Act 2001 (Cth) an
individual acting with the company's express or implied
authority can make, vary, ratify or discharge a contract on
behalf of the company.
Note that officers, managers and directors will have
powers conferred by the company constitution (or
replaceable rules).
Corporate Law: Law principles and practice
The doctrine of ultra vires
The doctrine of ultra vires has been abolished. This means
that:
•
•
•
no act of the company is invalid merely because it is
contrary to or beyond any restrictions or prohibitions
in the company's constitution (e.g. promises,
agreements or contracts that might be contrary to the
company constitution (Corporations Act 2001 (Cth) s
125(2)).
an outsider is now generally able to assume that any
person acting on behalf of the company has
appropriate authority and acts within the constitution
(s129).
the holding of a constitution by ASIC will not be
constructive notice (s130).
Corporate Law: Law principles and practice
Authority of company’s agents
A company will be bound by the acts of its agents just like
the acts of any other principal. Agency law applies to
companies. Agency law will bind the company by actual,
or apparent or ostensible authority.
Actual authority: express permission is given orally or in
writing in the appointment or authorisation of an agent.
Apparent or ostensible authority: permission is implied
from the position a party holds, or by something such as
the use of a letterhead.
Corporate Law: Law principles and practice
The doctrine of Estoppel
The doctrine of Estoppel applies:
•
•
•
to those who appear to have had the company or Board
of Directors grant them the authority to act, directly or
indirectly, as an agent;
where another relies on that principal’s representation; or
where the company allows an agent to act in a
particular position, allowing others to assume they
have authority.
Corporate Law: Law principles and practice
The indoor management rule
Common law determines that an outsider is entitled to
assume that a company’s internal procedures have been
adhered to (i.e. that a company complies with its own
rules).
Royal British v Bank v Turquand (1856) 119 ER 886
This is now enshrined in s 129 of the Corporations Act
2001 (Cth): an outsider is now generally able to assume
that any person acting on behalf of the company has
appropriate authority and acts within the constitution.
Corporate Law: Law principles and practice
Statutory assumptions about company procedures
A person who has dealings with a company can make
certain statutory assumptions about company procedures
and the people with whom they are dealing.
Note the following sections of the Corporations Act 2001
(Cth):
•
•
ss 205B, 345 and 347: a director or company secretary
who appears on company returns is properly appointed
and has the authority of a person in that position—and
properly carries out their duties.
s 124: a company has the legal capacity of a natural
person.
Corporate Law: Law principles and practice
Statutory assumptions about company procedures cont …
•
•
•
•
•
s125: abolishes the ultra vires rule even if the company
acts contrary to its constitution.
s 130: lodgement of documents, such as the company
constitution, does not amount to constructive notice to
the world at large
ss 123, 126 and 127: a company is bound by a contract
made on its behalf by a person acting as an agent.
s 130: a person acting with implied or actual authority
can make, vary or discharge a contract on behalf of the
company.
ss 128 and 129: an outsider can assume that a person
appointed (even if defective) and performing a
particular role in the company has the powers that
would ordinarily be conferred on that office.
Corporate Law: Law principles and practice
Statutory assumptions about company procedures cont …
•
s 128: outsiders who deal with companies can make
the assumptions set out in s 129, and the company
cannot deny any of these. An outsider is entitled to
make specific assumptions.
An individual can make more than one assumption when
dealing with a company.
Brick and Pipe Industries Ltd v Occidental Life Nominees
(1992) 10 ACLC
Corporate Law: Law principles and practice
Statutory assumptions about agency
Note the following sections of the Corporations Act 2001
(Cth):
•
•
s 129(1): a person who deals with the company can
assume that the company’s constitution and
replaceable rules have been complied with
s 129(2): outsiders can assume that a person who
appears from information supplied by the company, or
from ASIC, to be a director or a company secretary are
who they say they are. An outsider can assume the
officer has been properly appointed, and has the
authority to exercise the powers and perform the duties
customarily exercised, or performed, by a director or
company secretary of a similar company.
Corporate Law: Law principles and practice
Statutory assumptions about agency cont …
•
•
•
s 129(3): outsiders are entitled to assume that any
person presented as an officer or agent of the company
has been properly appointed and has authority to
exercise the powers and perform the duties
customarily exercised or performed by that kind of
officer or agent in a similar company.
s 129(4): outsiders are entitled to assume that officers
and agents of the company properly perform their
duties to the company.
s 129(5): when a company does not have a seal,
outsiders are entitled to assume that a document has
been properly executed (according to constitutional
procedures) if signed by the director(s) in accordance
with s 127.
Corporate Law: Law principles and practice
Statutory assumptions about agency cont …
•
•
s 129(6): when a company has a seal, outsiders are
entitled to assume that a document is properly
executed (signed and witnessed, and in compliance
with the company constitution) if the company’s
common seal appears to have been fixed to the
document, according to s 127(2), and the seal appears
to have been witnessed by two directors or the director
and company secretary, in accordance with s 127(2)
s 129(7): outsiders are entitled to assume that an
officer or agent of the company has authority to issue a
document or certified copy of a document on its behalf
and also can warrant the document is genuine or a true
copy.
Corporate Law: Law principles and practice
Statutory assumptions about agency cont …
Advance Bank Australia v Fleetwood Star Pty Ltd (1992)
10 ACLC 703
Brick and Pipe Industries Ltd v Occidental Life Nominees
(1992) 10 ACLC
Corporate Law: Law principles and practice
Exceptions to the rules of s 129
Under s 128(4), when an outsider knows or suspects that
an officer, director or employee lacks authority, the
outsider may not be able to rely on the assumptions of s
129 when, in fact, they were aware, or should have been
aware, that an agent or employee was acting without
authority.
Northside Developments Pty Ltd v Registrar-General
(1990) 170 CLR 146
Pyramid Building Society v Scorpion Hotels Pty Ltd
(1996) 14 ACLC 679
Corporate Law: Law principles and practice
Should the outsider have made further inquiries?
Bank of New Zealand v Fiberi Pty Ltd [1994] 12 ACLC
48
Lyford v Media Portfolio (1989) 7 ACLC 271
Corporate Law: Law principles and practice
Authority of the company director
Where a director is under a duty of disclosure to the
company, their knowledge is imputed to the company.
Hely-Hutchinson v Brayhead: [1968] 1 QB 549
Corporate Law: Law principles and practice
Authority of the company director cont …
Freeman and Lockyer v Buckhurst Park Properties [1964]
2 QB 480
For ostensible authority to arise from an agent with no
actual authority, there had to be the following conditions:
•
•
•
•
a representation that the agent had authority
a representation made by someone with actual
authority
an outsider had been induced by the representation to
enter into the contract
the contract agent was permitted by the company’s
constitution to enter into a contract.