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As a proprietary company member, you should be aware of the relevant documents that handle internal management. Often, operative entities govern associations or clubs. However, members of clubs or associations rarely, if ever, have access to the entity’s governing documents. They may get a copy of the relevant charter or rules of membership. Still, it would be unusual to call for a copy of the company constitution before, for example, pledging your allegiance.

However, the courts have determined that governing documents bind members to their terms even if a member is unaware of them. This article explains the court’s decision in Bull v Australian Quarter Horse Association, a case about horse cloning, to highlight why you should not ignore your company constitution.

What is a Company Constitution?

A company constitution is a document outlining rules of a company’s internal management. It governs the relationship between company directors and the company shareholders and states the process for making decisions. If you do not follow these processes, any resulting decisions will be invalid and difficult to enforce.

For Australian companies, it is not a legal requirement to have company constitutions. Instead, companies can rely on the Replaceable Rules (a basic guide found in the Corporations Act), however a constitution is usually a better option. This is because you can tailor a constitution to what is practical for your own business. Thus, this is more flexible than relying on the rules set out in the Corporations Act.

As a business owner, shareholder, director or association member of a proprietary company, you must be familiar with the constitution to ensure you follow the correct processes.

Additionally, the constitution contains critical information, including:
  • requirements to pass resolutions;
  • share issuance processes;
  • roles and responsibilities of key members such as directors; and
  • what you can and cannot do (e.g. you can only raise capital through crowdsource funding if it is in your company’s constitution).
Everyone must review the company constitution to understand how it impacts their role. For example, if a director makes an unconstitutional decision, it is not a defence that they did not read the constitution. It is the responsibility of that director and any other relevant person to review the constitution.

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If you are a company director, complying with directors’ duties are core to adhering to corporate governance laws.
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Why is a Company Constitution Important?

The 2015 case of Bull v Australian Quarter Horse Association highlights the importance of knowing a company constitution. Mr Bull purchased a cloned horse, “Smart Little Lena-D”, from the USA in December 2010. In April 2011, Bull imported Smart Little Lena-D to Australia, and on 29 July 2011, he applied to register the horse with the Australian Quarter Horse Association (AQHA). AQHA was an incorporated company, to which Bull was already a member for 40 years. However, AQHA refused his application on 15 September 2011 since Smart Little Lena-D did not fulfil the registration requirements. Between December 2010 and April 2011, AQHA made several amendments to their regulations through resolutions passed during two board meetings. Some amendments included disallowing any cloned horse to be registered and requiring imported horses to be first registered in their country of origin. Therefore, according to these regulations Bull could not register Smart Little Lena-D.

What Was the Outcome?

Article 14.5 of AQHA’s constitution stated that the directors may make, vary or annul regulations at any time. Provided that such changes were in accordance with the company’s constitution, they would bind the members of AQHA.
If an amendment occurred through resolution, then it must be effective from when it was passed. Therefore, AQHA was not at fault for the delay in communicating any regulatory updatees.
Hence, even though Mr Bull was unaware of the regulatory updates, he could not dispute it.

Key Takeaways

Following the case above, it is essential to keep up with your company’s constitution and inform yourself of any changes. If you are an organisation member or shareholder, or even a director in a company, you should always make sure that you are aware of the terms of the company constitution and any of its regulations that may affect you. If you have any questions about your company constitution, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions

What is a company constitution?

A company constitution is a document which outlines the rules and regulations for how your company is managed internally.

What happens if I ignore a company constitution?

If you ignore your company constitution, you may be disadvantaged as you are unaware of new changes that could negatively affect you.


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