Undeniably, the term ‘replaceable rules‘ is opaque. It reveals nothing about their nature or purpose. This situation is a little ironic given that the federal government introduced the rules to simplify the law applicable to Australian corporations. If you would like information on the replaceable rules, this article discusses what are replaceable rules, why the government introduced them and the purpose they serve.
Background to the Rules
Before July 1998, all Australian companies were legally required to have a ‘memorandum of association’ and ‘articles of association’. Both these documents had a long history given that they first emerged in the United Kingdom around 1844.
The memorandum typically provided biographical data on the company and might also have listed the company’s objectives. The articles were the rules that governed the internal operations of a company.
Previous legislations provided corporations with a ready-made version of both documents. However, they were rarely used because many companies each had a unique memorandum and articles.
In 1998, the Federal Government passed the Company Law Review Act 1998 (Cth) to simplify corporations law. One of the reforms in the Act abolished the need for memoranda and articles. Instead, it introduced a new scheme to regulate a company’s internal governance which was later adopted in the Corporations Act 2001 (Cth) (the Act). The replaceable rules are an integral part of this scheme.
What Are Replaceable Rules?
Replaceable rules provide companies with an alternative to a constitution which has to be regularly updated to keep up with regulatory developments. As they are in the Act itself, they are also easy to find and follow. The Act provides corporations with three methods of internal governance:
- Replaceable Rules; or
- A combination of both.
A simple explanation of the replaceable rules is that they tell a company how to operate internally. Section 141 of the Act lists these rules.
When Does a Company Use the Rules?
Most companies can choose to use the rules to guide their internal governance. However, a company with a single member and single director who is the same person cannot use the rules. Of course, not all companies do choose to use them. They may wish to draft a constitution.
However, in these instances, the rules can guide the drafting because they describe the kinds of rules and provide the essential standards that any constitution needs.
While the rules are available to all companies, typically proprietary companies choose to use them. Public companies are larger entities with the resources required to both draft a constitution and keep it current.
Why Use Replaceable Rules?
The greatest advantage of the rules is that a company who uses them is always up to date with developments and changes in regulation. If the government amends the rules, their organisation is automatically on top of, and can implement these developments. That saves the time and expense of modifying a constitution. As smaller businesses have fewer resources than larger ones, this is particularly beneficial.
The rules are also popular for small companies in the setting up phase because they are a relatively inexpensive means of acquiring rules for internal governance. Of course, they likely need a lawyer to explain the rules to them. Nonetheless, they do not have to pay for a precisely drafted constitution.
What Do the Rules Say?
There are approximately 39 replaceable rules in the Act. They concern issues such as how the company:
- Appoints and removes its directors;
- Remunerates directors;
- Transfers shares;
- Pays dividends;
- Pass directors resolutions;
- Conducts directors meetings; and
- Organises members meetings.
This list is not exhaustive. A comprehensive guide to the rules is freely available on the Australian Securities and Investment Commission (ASIC) website.
The replaceable rules govern how a company should operate at an internal level. As they are incorporated into the Act, they provide a cost-efficient means to stay compliant with the law. If you are forming a company and thinking of using the replaceable rules, it is a good idea to speak with a lawyer experienced in company law. They can explain the rules to you and help you decide if they are appropriate for you.
Contact LegalVision’s corporations lawyers to assist you. Questions? Call us on 1300 544 755.