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Chapter 6 - Proprietary company registration
An application to register a proprietary company should include a copy
of its constitution
6.1
The Company Law Review Act 1988, which was enacted by Parliament in June 1998, redrafted provisions
of the Corporations Law dealing with the registration of companies.
6.2
Public companies, as before, are required to
lodge a copy of their constitution on registration and any modifications of
their constitution with the ASIC.[1] While there is no similar
requirement for proprietary companies, the Corporations Law grants:
- The power to the ASIC to direct a company to lodge a consolidated
copy of its constitution;[2]
and
- The right of a member to request the company to send them a copy
of the company’s constitution.[3]
6.3
This was the second matter which has been the
subject of complaint and/or concern expressed to the Government by the business
community. The PJSC heard considerable evidence on this matter and has set out
below the views put to it.
Arguments in favour of a requirement that proprietary companies lodge a
constitution
Ascertaining whether company
documents are validly executed
6.4
Mr John Wilkin of Corrs Chambers Westgarth
argued that the requirement to lodge constitutions with the ASIC will assist
those who deal with companies to determine whether the company is legally bound
as a result of those dealings. According to the Small Business Guide Paragraphs
1.7 and 1.8 in Part 1.5 of Schedule 1 of the Law, the powers of directors,
including the power to bind the company contractually, are subject to the
company’s constitution. The lodging of the constitution with the ASIC will
enable those dealing with companies to conduct appropriate searches to
ascertain who the directors are, the extent of their powers, and how the
company is to execute documents and contracts.
6.5
It was claimed that this is all the more
important given that legal cases have increased the uncertainty about when a
company will be bound by a document executed by it. The cases cited by Mr
Wilkin are: Brick & Pipe Industries v Occidental Life Nominees
[1992]2 VR 279; Northside Developments v Registrar General (1990)170 CLR
146; Storey v Advance Bank (1993)31 NSW LR 722; and Bank of New
Zealand v Fiberi (1993)14 ACSR 736.
6.6
Mr Wilkin pointed out some of the deficiencies
of the present provisions of the Law:
- Under section 128(1) a person is entitled to make assumptions
only "in relation to dealings with a company". This must be the
“company”, not an unauthorised director or officer;[4]
- If the Articles of Association are not complied with a
contractual document may be invalid – Brick & Pipe Industries v
Occidental Life Nominees (1990) 3 ACSR 649;[5]
- Even if a person can assume under section 129 that a document has
been duly executed by a company, it may be invalidated by searches the bank
must perform to determine the authority of the signatories – Bank of New
Zealand v Fiberi (1993) 14 ACSR 736;[6]
- Under the new section 128(4), a person cannot make an assumption
if he "suspected that the assumption was incorrect”. This is more onerous
than the previous test where either ‘actual knowledge’ was required or a
person’s relationship with the company was such that he "ought to have
known" that the matter was incorrect;[7]
- Unless the company's constitution is accessible, it is difficult
to see how a person could not ‘suspect’ that ‘the person’ was not entitled to
assume the document was correctly executed in accordance with the constitution.[8]
6.7
Mr Wilkin recommended that companies should
lodge their constitutions with the ASIC so persons dealing with them can
ascertain how they are required to execute documents. Further, to safeguard
against outdated records at the ASIC, a company should be bound by documents
executed in accordance with section 74 of the Property Law Act (Victoria)
because the company should appoint directors for whom it is liable.[9]
Need for certainty in dealing with
companies
6.8
The Accounting Bodies supported the proposal for
proprietary companies to lodge a constitution pointing to an inconsistency in
the Law that requires large proprietary companies to submit financial reports
but does not require a public record of their rules of conduct. It was argued
that fundamental information about a company should be placed on the public
record and accessible to all interested parties.[10] The Accounting Bodies stated
that there was “a need for certainty among persons who deal with a company
about the internal rules that apply to it.”[11]
6.9
Similarly, the Australian Law Reform Commission
(ALRC) noted that “something as fundamental as a body’s constituting instrument
should be filed.”[12]
However, the ALRC advised that formal lodgements should be kept to absolute
essentials to minimise cost and administrative burdens on corporations and the
ASIC.[13]
Costs of maintaining a database
6.10
Arnold Bloch Leibler gave qualified support for
the requirement submitting that any amendments to a company’s constitution
should also be lodged with the ASIC. Further, the ASIC would have to consider
the costs of establishing the database that would be available for public
inspection and the costs of ensuring that all constitutions are up to date. To
achieve the latter, all proprietary companies would have to re-lodge their
constitutions.[14]
6.11
The Corporate Network Ltd advised that the
provision of a repository service by the ASIC would not be a serious cost
issue:
The State CAC’s filed such documents for many years with a lower
staff to incorporations ratio than the ASIC appears to enjoy. Further, the
ASIC, since ceasing to file these documents, has never reduced its filing fees.
Effectively, the “service” is no longer provided, but is still being paid for.[15]
Prevention of problems caused by
the purported issue of shares in the absence of a constitution
6.12
The Corporate Network Ltd supported the proposed
lodgement of constitutions on the grounds that it will help prevent situations
where companies purport to issue particular classes of shares but lack the
constitutional capacity to do so. Corporate Network Ltd reported that many
parties are completing application for registration forms indicating that
particular classes of shares have been taken up by consenting members, but have
failed to set out the rights for such classes in a constitution or failed to
adopt a constitution. The PJSC was advised that about 50% of all new companies
registered since 1 July 1998 are flawed in this way.[16]
6.13
Uncertainty has prevailed as to how these cases
should be resolved. The ASIC's legal opinion to the Corporate Network Ltd is
that the company is registered but the shares never existed and could not have
been issued. Application could be made to the Supreme Court for rectification,
deregistration or to be wound-up. Recent judicial trends have seen applications
for rectification fail where proper procedure has not been followed. Further,
as deregistration relies on the consent of shareholders and such companies do
not have any valid shareholders, such an application would also fail. In the
view of the Corporate Network Ltd, the lodgement of constitutions with the ASIC
will avoid these problems and protect the public.[17]
Arguments against the requirement that proprietary companies should lodge a
copy of their constitution
6.14
The West Australia Joint Legislative Review
Committee of the Australian Society of Certified Practising Accountants, The
Institute of Chartered Accountants and the Chartered Institute of Company
Secretaries opposed the requirement for lodgment of constitutions on a number
of grounds, including that it would place an unnecessary burden on both the
ASIC and companies themselves. The Review Committee noted the following:
- There are over 1 million proprietary companies;
- Despite the changes introduced in the First Corporate Law
Simplification Act 1995, as at 30 June 1998 many companies still have a
'Table A' constitution. In time, those companies will amend their constitutions
in line with the simplification provisions. If those companies are required to
lodge a copy of their constitution with the ASIC, the management of this amount
of documentation will be costly to the ASIC;
- The public has full protection under sections 128-130 of the Law
and therefore do not need to know the contents of a constitution to secure
their interests when transacting with the company;
- Section 139 of the Company Law Review Act could be extended so
that outsiders (not only members) can obtain a copy from the company for a
prescribed fee;
- If the ASIC were to pre-vet the constitution then the requirement
might offer protection. However, the ASIC has no such role and lodgement of a
constitution might give members a false expectation that the document has
received the approval of the regulator.[18]
6.15
At its hearing on 16 August 1999, the PJSC was
advised that the Review Committee had changed its position. The Review
Committee now supported the inclusion of proprietary company constitutions,
adding that most companies “hopefully, will take up the replaceable rules.”[19]
Contrary to the objective of the
replaceable rules
6.16
The Australian Institute of Company Directors
(AICD) and Mr Peter Jooste QC were of the view that the requirement would run
counter to the ‘replaceable rules’ mechanism. Mr Jooste stated:
The object of the “replaceable rule” scheme ...is to save on costs
and to progress efficiency and uniformity in regard to companies that do not
opt to adopt different internal regulations. In my view, requiring a copy to be
lodged would detract from such efficiency and cost saving.[20]
6.17
The AICD contended that the requirement was
inconsistent with the aim of simplicity, efficiency and streamlining of the
process of setting up a company. Parties dealing with a proprietary company can
request a copy of its constitution.[21]
6.18
Other grounds for opposing the proposed
requirement were that:
- The requirement would cause unnecessary expense and traders can
make their own inquiries;[22]
- It is an unnecessary burden and cost for business, especially
small business;[23]
- A supplier can demand a copy of the company constitution as part
of an application for supplier credit.[24]
Proposed amendments to the
Replaceable Rules
6.19
As part of its consideration of the question
whether an application to register a proprietary company should include a copy
of its constitution, the PJSC examined a related proposed amendment. Part 2A.2
of the Corporations Law deals with registration of companies and section 117
therein with the application for registration.[25] Section 117(2)(k) requires a
company limited by shares or an unlimited company applying for registration to
state certain basic information about the shares which each member has agreed
to take up.
6.20
The proposed amendment, section 117(2)(ka),
would require further information to be stated in the application in relation
to such shares. The additional information that would be required under section
117(2)(ka) includes:
- a summary of the rights and conditions attaching
to the shares agreed to be taken up;
- the total number of persons who have consented
to be members and the information referred to in subparagraphs (k)(i) and
k(ii);
- a statement that, if a constitution has not been
adopted, the Replaceable Rules will apply and that they create a contract between
the members the terms of which may alter if the Replaceable Rules change after
the company is registered.
Duplication in requiring a
statement under item (iii)
6.21
Mr Laurie Factor, Senior Lecturer at the School
of Business Law, Curtin University, noted that item (iii) of the proposed
amendment, section 117(2)(ka), which requires a statement of the contractual
relationship and the application of the replaceable rules, was unnecessary:
This is a statement for those registering a company that they
acknowledge the contractual relationship, and that they understand that the
constitution will change from time to time and that they are bound by the new
terms...I just thought that was unnecessary duplication.[26]
Investor protection
6.22
The Corporate Network Ltd submitted that the
rationale for the proposed amendment was to provide an element of consumer
self-protection to counter the problem of persons not knowing with whom they
are dealing and/or not knowing the true rights attached to shares they have
been induced to apply for:
The intention was that it should not be possible for a person to
discover that another person they had no knowledge of was a co-shareholder in
their company, or that shares they applied for had different rights to what
they expected.[27]
6.23
In addition, the PJSC was advised that there are
other investor protection issues involved in the consideration of the proposed
amendment. The replaceable rules confer different rights to shares in a
proprietary company than to shares in a public company. In particular,
replaceable rules shares in a proprietary company carry discretionary rights to
dividends whereas replaceable rules in a public company carry equal rights to
dividends. The relevant provision reads:
254W (2) Shares
in proprietary companies
Subject to the terms on which shares in a proprietary company
are on issue, the directors may pay dividends as they see fit.
6.24
The Corporate Network Ltd advised that this
causes particular problems where a proprietary company changes status to a
public company (or vice versa). The rights attaching to shares automatically
change. Further, the rights attaching to shares also change where a sole
director/member company without a constitution issues a share to another
person. In those circumstances, a notice of conversion of shares would be
necessary.[28]
6.25
The Corporate Network Ltd submitted that the
conversion creates potential capital gains tax and notification problems. In
addition, the dividends rights provision can be used by a sole director to
“starve a spouse of income in a family/marital separation”. The latter
situation can arise where a typical family business, operating as a partnership
and giving both spouses an equal right to income, is converted to a company and
the company adopts the replaceable rules and only one spouse/member is a
director. Income will be distributed at the discretion of the sole director.
Where a marital breakdown occurs, the party in the position of sole director
will be able to “starve” the estranged partner of income during the property
settlement negotiations.[29]
6.26
The Corporate Network Limited submitted that the
warning to consumers should be made explicit. It recommended a substitute
provision in place of the proposed amendment and that this provision should
appear on the application for registration.
Conclusions
6.27
Registration confers certain rights and
entitlements on a company in conducting its business. The PJSC believes that
information about a company as fundamental as its internal rules, powers and
shareholding should be available to parties dealing with the company in the
commercial environment. As Mr Wilkin noted, the uncertainty about documents
executed by a company can affect the efficient conduct of its business.
6.28
The PJSC notes that the Company Law Review
Act 1998 has reduced significantly the process of company registration and
simplified the way a company conducts its affairs. The changes to the
Corporations Law have benefited all companies, notably newly registered
companies. However, if the statistic that at least 50% of all new companies
have purportedly issued shares of a particular class or classes without having
adopted a constitution is correct, then this presents an unsatisfactory risk
for the company and its members.
6.29
The PJSC concludes that a proprietary company
should file a copy of its constitution on registration with the ASIC. However,
a proprietary company on filing its constitution may elect to adopt the
replaceable rules in place of a constitution. Any subsequent modifications to
its constitution should also be filed with the ASIC. The PJSC also concludes
that proprietary companies should re-lodge their constitutions and that the
ASIC maintain a database for this purpose. The ASIC should also retain its
emergency power under section 138 to direct a company to lodge a consolidated
copy of its constitution with the ASIC.
6.30
The PJSC has considered the proposed amendment
inserting section 117(2)(ka) and is of the view that the dividend rights
provision in the replaceable rules has brought about an unintended consequence
where a partnership is converted to a proprietary company. As the PJSC noted
earlier, the replaceable rules confer different rights to shares in a
proprietary company than to shares in a public company. Where a partnership is
converted to a proprietary company the dividend distribution is at the
discretion of the directors of a proprietary company and, as a consequence, a
joint shareholder of the former partnership may not receive an equal
distribution of the dividends. To the extent that persons may not be aware of
the rights attached to shares in a proprietary company, in particular the
change in the distribution of dividends, the PJSC concludes that the proposed
amendment should be adopted. However, as Mr Laurie Factor advised the PJSC,
item (iii) of the proposed amendment is superfluous.
Recommendation
6.31
The PJSC recommends that the Corporations Law
should provide for:
- a proprietary company to lodge a copy of its
constitution on registration with the ASIC; and
- proposed amendment section 117(2)(ka), apart
from item (iii).
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