General position

The general position is that a company's internal management may be governed by a specifically adopted written constitution or by what are known as the 'replaceable rules', or by a combination of both - section 134 of the Corporations Act 2001.

One person companies and replaceable rules

However, replaceable rules do not apply to one person companies*** - section 135(1) of the Corporations Act 2001. But this does not mean that a one person company needs to specifically adopt a written constitution. Instead, sections 201F and 198E of the Corporations Act 2001 automatically apply to a one person company and directly regulate important matters such as the appointment of additional directors, and their powers and duties.

***This makes sense when you consider that the replaceable rules are designed largely to regulate relations and disputes between, and divide powers between, directors and shareholders. That purpose falls away when the same person is the company's sole director and shareholder.

What are constitutions?

A constitution is a written document which a company may (but need not) choose to adopt governing, or partly governing, a company's internal management. More specifically, it may govern matters such as:

1. the appointment and powers of directors;
   
2. the regulation of directors' meetings;
   
3. the regulation of members' meetings;
   
4. any special rights attaching to special classes of shares; and
   
5. the transfer of shares.

If the company is to have any class of shares, other than ordinary shares, Incorporator recommends that the company adopt a written constitution setting out any special rights attaching to those shares.

(Ordinary shares are by far the most common type of share. They have no special rights attached to them. Shareholders of ordinary shares have the normal or ordinary rights as set out in various sections of the Corporations Act 2001 and various rights as developed by the courts over the last few hundred years.)

In the case of an issue of preference shares, section 254A(2) of the Corporations Act 2001 requires that the rights with respect to the following matters must either be set out in a constitution or be approved by a special resolution:

1. repayment of capital;
   
2. participation in surplus assets and profits;
   
3. cumulative and non-cumulative dividends;
   
4. voting; and
   
5. priority of payment of capital and dividends in relation to other shares or other classes of shares.

The replaceable rules are certain sections of the Corporations Act 2001 which automatically apply to govern a company's internal management (except for one person companies - sections 135(1) last sentence, 201F and 198E of the Corporations Act 2001), unless they have been wholly or partly replaced or modified by a specifically adopted written constitution - sections 135(1) and 135(2) of the Corporations Act 2001. The replaceable rules govern matters such as:

1. the appointment and powers of directors;
   
2. the regulation of directors' meetings;
   
3. the regulation of members' meetings;
   
4. any special rights attaching to special classes of shares; and
   
5. the transfer of shares.

(You can see the full content of the replaceable rules by clicking here. You can also see a mostly hyperlinked version of the Replaceable Rules by clicking here.)

Replaceable Rules Outlined
(This is a direct link to ASIC's very informative summary guide as to the content of the replaceable rules. This link is not to suggest that Incorporator has any association or affiliation with ASIC or any sponsorship from, or endorsement by, ASIC.)

What effect do constitutions and replaceable rules have?

A company's constitution, if any, and any replaceable rules that apply to the company, have the effect of a contract between:

1. the company and each of its members;
   
2. the company and each of its directors/secretaries; and
   
3. each of the company's members.

(section 140(1) of the Corporations Act 2001)

How is a constitution adopted from the outset?

If a constitution is required from inception of the company it can and will be adopted immediately upon the formation of the company, so long as each proposed member of the company has previously agreed in writing to its terms - section 136(1)(a) of the Corporations Act 2001.

How is a constitution subsequently adopted or modified?

A constitution may be adopted, or modified, subsequent to a company's formation if the company passes a special resolution to do so - sections 136(1)(b) and 136(2) of the Corporations Act 2001. (A 'special resolution' is a resolution made on at least 21 days notice to members and passed by at least 75% of eligible voters - sections 9 , 249H and 249L of the Corporations Act 2001.)

If it is desirable that a specific constitution be adopted then Incorporator recommends and prefers that a solicitor be consulted to tailor the constitution to the user's specific requirements, rather than Incorporator offering a range of generic constitutions for adoption. However, you can still use Incorporator, in conjunction, to assist you with all other aspects of the incorporation.

If a one person company specifically adopts a written constitution or modifies it, is the company required to lodge a copy of the constitution, or the modifications to it, with ASIC?

No.

A one person company is not required to lodge a copy of its proposed constitution with ASIC or any subsequent modifications to it.

If a one person company specifically adopts a written constitution, where must copies of it be kept?

A constitution, if adopted, must be kept with the company's records so that copies can be given to members on request - section 139 of the Corporations Act 2001.

Background to the changes in the law relating to memorandums and articles of association, constitutions and replaceable rules

Prior to major amendments to Australian company law (effective 1 July 1998), companies had to have a document detailing certain of the company's key characteristics, called a memorandum of association. Companies also had to have a document governing the company's internal management called articles of association. Also, all companies were previously obliged to ensure that the companies' office (then called 'the ASC' but now called 'ASIC') had records indicating the content of companies' memorandums and articles.

Since changes to Australian company law effective 1 July 1998, newly formed companies no longer have to have memorandums and articles of association. Instead, as previously mentioned, a one person company's internal management may be governed solely by sections 201F and 198E of the Corporations Act 2001 or by a constitution in conjunction with sections 201F and 198E - see section 134 and sections 201F and 198E of the Corporations Act 2001.

Why won't Incorporator produce memorandums and articles of association or constitutions?

Incorporator will not produce memorandums and articles of association because these documents have effectively been abolished for newly formed companies - Part 2B.4 of the Corporations Act 2001.

Incorporator will not produce constitutions for a number of reasons:

• First, because they are not mandatory for proprietary companies, such as a one person company (nor most types of public companies) - section 134 of the Corporations Act 2001. They are therefore not essential to Incorporator's core function of forming companies.
  
• Secondly, because the Corporations Act 2001 includes 201F and 198E which govern certain key issues of internal management of one person companies.
  
• Thirdly, because a (now) common type of company - a one person company - essentially has no other issues of internal management to be governed. This is reflected in section 135(1) of the Corporations Act 2001 which makes the replaceable rules inapplicable to such companies.
  
• Fourthly, because if it is desirable that a specific constitution be adopted then Incorporator recommends and prefers that a solicitor be consulted to tailor the constitution to the user's specific requirements, rather than Incorporator offering a range of generic constitutions for adoption.