What are Replaceable Rules in the Corporations Act?

In Short

• Replaceable rules are a set of default governance provisions in the Corporations Act 2001 covering directors, meetings and shareholder rights.

• These rules automatically apply if a company has no constitution, unless expressly excluded or modified.

• Companies can adopt a constitution to tailor or replace these default rules to suit their needs.

Tips for Businesses
Check whether your company currently relies on replaceable rules or a constitution, and understand what governance issues they cover. Review key replaceable rules related to director powers, shareholder meetings and share transfers. If your business is growing or complex, consider whether a tailored constitution would offer clearer, more flexible governance.

Summary
This article explains how replaceable rules under Australian corporate law affect company governance for business owners. It guides companies on the default legal framework and options to adopt or modify rules, prepared by LegalVision’s business lawyers who specialise in advising clients on corporate governance.

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Table of Contents

• What Do the Replaceable Rules Cover?
• Nature and Purpose of Replaceable Rules
• When Do the Replaceable Rules Apply?
• Who is Covered By Replaceable Rules?
• How Do the Replaceable Rules Work?
• Why You Might Rely on Replaceable Rules
• Why You Might Exclude Replaceable Rules
• Key Takeaways
• Frequently Asked Questions

Every company needs a corporate governance structure that can help control risk and formalise decision-making. The replaceable rules in the Corporations Act (the Act) provide a useful and basic framework which can be fully adopted or modified to suit business needs. This article will explain how replaceable rules work and when they may be appropriate for your company.

What Do the Replaceable Rules Cover?

The Act lists 39 replaceable rules companies can adopt as part of their internal governance structure.

Some of the rules cover:

• the appointment, powers, removal and remuneration of directors of the company;
• the conduct of board meetings (including calling, conducting and passing resolutions);
• the conduct of members’ meetings and the rights of members;
• the right of members to inspect the company’s books;
• appointment of the company secretary;
• terms of shares and the right to dividends; and
• the process of transferring shares and the right of pre-emption.

Nature and Purpose of Replaceable Rules

The key features of the replaceable rules include:

• Statutory Basis: Being part of the Act, replaceable rules are legally binding and can be enforced like any other provision of the Act.
• Flexibility: Companies can choose to adopt, modify, or exclude replaceable rules to suit their needs to be tailored to the specific company;
• Automatic Application: Unless explicitly excluded or modified, replaceable rules apply automatically to companies registered after 1 July 1998 that do not have a constitution that expressly excludes the replaceable rules. 
• Cost-Effective: They provide a free, ready-made set of rules, saving companies the expense and time involved with drafting a bespoke constitution for the company; and

When Do the Replaceable Rules Apply?

The default position is that the replaceable rules apply unless otherwise provided for by the company’s constitution. A company’s initial governance framework can be structured by: 

• relying on replaceable rules only;
• adopting a constitution that excludes all replaceable rules in favour of the constitution’s rules; or
• adopting a constitution that excludes some replaceable rules and includes other replaceable rules.

A company’s constitution is a central governing document. It is common for companies to adopt a constitution on incorporation. However, if this does not occur, then the replaceable rules can be relied upon until a constitution that excludes the replaceable rules is adopted by the company.

Sometimes, the company’s constitution would exclude replaceable rules but not contain any provisions to cover the matters raised by the excluded rules. In that case, common law (or decisions made by judges) would apply.

Who is Covered By Replaceable Rules?

Although the rules apply to most companies, some replaceable rules are specific to a public or private company. For example, a public company cannot remove the right of a member to appoint a proxy for a meeting.

They do not apply to one-person companies where the sole director is also the sole shareholder. If the company is a ‘no liability’ public company or a ‘special purpose company’, it must have a constitution and cannot rely solely on replaceable rules.

Replaceable rules may not apply to companies registered before 1 July 1998. However, if the company:

• had a constitution and repealed the constitution after 1 July 1998, the replaceable rules will apply;
• had a constitution and had not repealed that constitution, the rules of the company’s constitution would apply. The old Corporations Law (which preceded the Corporations Act) may apply alongside the Constitution unless the Constitution has excluded or modified those rules; or
• was registered before 1 July 1998 and never had a constitution, the Corporations Law will apply.

How Do the Replaceable Rules Work?

Replaceable rules, the constitution of a company and/or the shareholders agreement of a company operate as a contract between:

•    the company and each member;
•    the company and each director and company secretary; and
•    a member and another member.

That means anyone in the above list who breaches any of the replaceable rules will be in breach of contract. Members can seek a court order requiring compliance with the replaceable rules or for compensation. As the obligations are contractual, those who breach replaceable rules are not prosecuted under the Act.

Why You Might Rely on Replaceable Rules

You may wish to rely on replaceable rules during the early stages of your business, especially if you do not have the funds or time to draft a company constitution. The replaceable rules provide a basic framework for corporate governance. They provide a simple, straightforward governance structure that benefits small to medium-sized companies.

As the replaceable rules are a part of the Act, they provide a clear legal basis for internal decision-making and management. When the Act is updated, the replaceable rules are automatically updated to ensure the companies remain compliant with the current law. However, most companies usually adopt a basic constitution.

A company can adopt a constitution or amend it at a later time by passing a special resolution. This process requires the company to give 28 days of notice for public companies or 21 days for private companies. The proposed change to the constitution should be done in good faith and in the best interests of all company members.

Why You Might Exclude Replaceable Rules

Relying on replaceable rules can be initially cost-effective, but the rules may be confusing and hard to find for members and shareholders. Many companies adopt a constitution to ensure everyone can access corporate governance rules in one document. 

Under the Corporations Act, a constitution can also:  

• allow the company to modify the discretion and power of the board to control the company’s affairs based on specific business needs;
• provide more comprehensive guidelines for management, which can be useful for large public companies;
• promote awareness for directors and shareholders as they may be less familiar with the replaceable rules when compared to a constitution which could otherwise lead to disputes;
• minimise any inconsistency between replaceable rules and any relevant provisions in the constitution;
• allow adequate coverage for certain special purpose companies (such as a superannuation trustee); and
• provide the company with increased control over its share capital, including:
  • the power to issue shares in different classes with different voting and dividend rights;
  • the power to issue partly paid shares and regulate calls on those shares; and
  • the ability to control the sale of shares so that they must first be offered to existing shareholders.

Therefore, a company constitution provides a tailored solution that reflects the business needs of the company as well as greater transparency for members and shareholders. 

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Key Takeaways

You can rely on replaceable rules for your internal governance, especially if you have just started your company. However, many companies will have constitutions that exclude all replaceable rules or include some alongside their own rules.

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