Management of Companies

Chapter 5

Chapter Summary

1 Introduction

Before the Company Law Review Act 1998 commenced on 1 July 1998, all companies had a memorandum of association and articles of association. The internal management of companies registered on or after this date is now governed by replaceable rules, by a constitution or by a combination of both: s 134.

1.1 Memorandum of association

Before 1 July 1998, ss 117(1) and (3) of the Corporations Law required the following to be included in the memorandum of association of each company:

· the company’s name

· if the company was limited by shares: the amount of share capital to be registered and the division of share capital into shares of a fixed amount, & a statement that the liability of the shareholders was limited

· if the company was limited by guarantee: statements that the liability of the members was limited & that each member undertook to contribute to the company’s property in the event of winding up, & details of the amount that each member guaranteed to contribute

· if the company was an unlimited company, a statement to that effect

· the full names, addresses and occupations of the subscribers to the memorandum

· if the company had share capital, the number of shares to be taken by each subscriber

· the address of the principal place of business and the registered office.

The memorandum could also state the objects of the company: s 117(2) - optional after 1 January 1984.

1.2 Articles of association

The concept of the articles was based on the deed of settlement company, where the deed set out the trustee’s obligations and therefore governed the company’s internal management.

Table A of the Corporations Law set out standard articles that could be adopted by companies limited by shares. Table B contained the standard articles for no-liability companies. Companies could adopt the standard articles, modify them or write their own rules.

1.3 Replaceable Rules

Any future amendment to the replaceable rules automatically applies to companies that have not replaced them. The replaceable rules do not apply to a proprietary company with one shareholder who is also the only director. Such a company does not need to adopt either the replaceable rules or a constitution: s 135(1).

Headings in the Corporations Act specify which sections are replaceable rules: s 135(1). The s 141 table sets out the provisions which are replaceable rules. The replaceable rules apply:

· to all companies registered on or after 1 July 1998 (subject to s 135(1)(b)): s 135(1)(a)(i)

· to any company registered before 1 July 1998 that repeals its memorandum and articles on or after 1 July 1998: s 135(1)(a)(ii)

Some replaceable rules apply mandatorily to public companies and as replaceable rules to proprietary companies to which the replaceable rules apply: section 135(1)(b).

2 The company constitution

Companies may use the replaceable rules, a constitution or a combination of both: s 134.

Section 136(1) provides that a company may adopt a constitution:

· on registration if each person specified in the application for registration agrees in writing to the terms of the constitution

· after registration, if a special resolution is passed adopting the constitution or a court order is made under s 233 requiring the company to adopt a constitution.

Where a public company adopts, modifies or repeals its constitution, the company must lodge a copy of the special resolution within 14 days of it being passed (s 136(5)) or adopted / modified (s 136(5)(a) and (b)). The penalty for contravention is five penalty units: s 1311, Sch 3 item 7. ASIC may also direct the company to lodge a consolidated copy of the constitution with ASIC: s 138.

Members can ask the company to provide them with a copy of the constitution if the request is in writing and the prescribed fee is paid: s 139.

2.1 What is the company constitution?

For a company registered before 1July 1998:

· the memorandum and articles of a company constitute its constitution if the company does not modify or repeal it by special resolution: s 136(2);

· if it repeals its constitution on or after 1 July 1998:

o and does not adopt a new constitution, the replaceable rules apply.

o and adopts a new constitution, the replaceable rules apply to the extent that they are not modified by the new constitution.

All of the replaceable rules apply to companies registered on or after 1 July 1998 unless the rules are replaced or modified by the company’s constitution (however, the mandatory rules applying

to public companies cannot, of course, be replaced or modified).

Companies registered on or after 1 July 1998 might also adopt a constitution to add to the replaceable rules.

2.2 Amendment of the constitution

Where the change to a constitution is the result of a special resolution, the adoption, modification or repeal takes effect on the date of the resolution if no later date is specified in the resolution: s 137(a).

Where the change is the result of a court order, the change takes effect on the date of the order if no date is specified in the order: s 137(b).

2.3 Failure to comply with constitution / replaceable rules

There is no contravention of the Corporations Act: section 135(3) hence no criminal or civil liability. Injunctions are also not available. Under s 140(1), however, the replaceable rules and the constitution have the effect of a contract between:

(a) the company and each member

(b) the company and each director

Section 140(2) provides that unless a member of a company agrees in writing to be bound, they are not bound by a change to the company’s constitution, made after they became a member, so far as the change:

(a) requires the member to take up additional shares; or

(b) increases the member’s liability to contribute to the company’s share capital or to otherwise pay money to the company; or

In DING V SYLVANIA WATERWAYS LTD [1999] NSWSC 58; (1999) 46 NSWLR 424; (1999) 150 FLR 239; (1999) 17 ACLC 531; (1999) 30 ACSR 301, the court held that a constitutional amendment to impose a levy on shareholders was valid against could be imposed on existing members who agreed to it, or to those who became members after article 103(1) was adopted. The levy did not apply to existing members who did not agree to be bound by it. Furthermore, s 516 did not make the article invalid.

3 THE BOARD OF DIRECTORS AND THE MEMBERS

3.1 Division of power

The division of authority between the board of directors and the members in general meeting results in a separation of company ownership and management.

The general principle is that the members may either change the management powers given to the board or may change the composition of the board. However, the members cannot interfere with any management decision made by the board, even if a board decision is contrary to the wishes of a majority of members: AUTOMATIC SELF-CLEANSING FILTER SYNDICATE COMPANY LTD V CUNINGHAME [1906] 2 CH 34. This principle is accepted as the position in Australia: NRMA V PARKER (1986) 6 NSWLR 517; (1986) 11 ACLR 1; (1986) 4 ACLC 609.

3.2 Role of the board

The chief executive officer is responsible to the board for day-to-day company management, but the board has responsibility for strategic direction and achievement of objectives. Unless fulfilling the role of managing director or being part of a committee, the function of an individual director is solely to act as part of the board. The primary role of the board is to monitor the day-to-day management performance of the chief executive officer and other senior management personnel. It is not possible for the board of directors of a large publicly listed company to get involved in day-to-day decisions of management.

4 DIRECTORS’ MEETINGS

4.1 Resolutions and declarations without meetings

It is a replaceable rule that directors may pass a resolution without formally holding a meeting, if all of the directors of the company entitled to vote on a particular resolution sign a document stating that they are in favour of the resolution: section 248A(1). Separate copies may be signed: s 248A(2). The resolution is passed when the last director signs: s 248A(3). The resolution must be recorded in the minute books: s 251A(1)(d).

In a single-director proprietary company, the director may pass the resolution by recording and signing it: s 248B(1). It must still be recorded in the minute books of the company: s 251A(1)(d).Under s 248B(2), the sole director of a proprietary company may make a declaration that conforms to the requirements of the Corporations Act if they record the declaration and sign it. Any such declaration must be recorded in the minute books of the company: s 251A(1)(e).

4.2 Calling meetings of directors

A director may call a directors’ meeting by giving reasonable notice individually to every other director to ensure each director has a reasonable opportunity to participate in the meeting: s 248C (replaceable rule). The notice to directors does not have to be in writing. An accidental omission to give notice does not automatically invalidate the meeting: s 1322(3).

Where a director has appointed an alternate director under s 201K(1), the company must give the alternate director reasonable notice of the meeting if requested to do so by the appointing director: s 201K(2) (replaceable rule).

In JENASHARE PTY LTD V LEMRIB PTY LTD (1993) 11 ACLC 768, a directors’meeting was invalid because the notice was inadequate. It was inadequate because:

· it failed to clearly & fully summarise the business of the meeting is convened to deal. The court noted that recipients must be able to decide whether it is worthwhile to attend the meeting; and

· it was not given within the seven days required by the articles, and it was delivered in a manner inconsistent with the articles (which provided for post / hand delivery, not for fax).

4.3 Procedure at directors’ meetings: technology & quorum

A directors’ meeting may be called or held using any technology consented to by all of the directors: s 248D (not a replaceable rule). The consent can be standing consent and can only be withdrawn by giving reasonable notice.

Section 248E(1) (replaceable rule) provides that the directors may elect a director to chair a directors’ meeting for a particular time period. If the directors do not elect a chairperson prior to a meeting, or if a person is elected but is unavailable or declines to act as chairperson, the directors must elect a director who is present at the meeting to be chairperson: s 248E(2) (replaceable rule).

The quorum of a directors’ meeting is two directors present at all times during the meeting: s 248F (replaceable rule). (note: irrelevant to single-director proprietary companies: s 248B(1)).

Under s 195(1) any director of a public company who has a material personal interest in a matter being discussed must not be present or vote on the matter unless the other directors and ASIC approve and the interest does not need to be disclosed under s 191. If a quorum cannot be formed due to s 195(1), one or more directors may call a general meeting of members to pass resolution to deal with the matter: s 195(4).

4.4 Passing of directors’ resolutions

A resolution must be passed by a majority of the votes cast by directors entitled to vote on the resolution: s 248G(1) (replaceable rule). If the votes for and against the resolution are equal, the chair of the meeting has a casting vote (in addition to any vote the chairperson may have as a director): s 248G(2) (replaceable rule). Section 195(1) may prevent the chair from voting at the meeting because of a personal interest. If so, it may be necessary to elect another chair.

5 DIRECTORS

5.1 Requirements for director

A proprietary company must have at least one director, with at least one director ordinarily residing in Australia: s 201A(1).

A public company must have at least three directors with at least two ordinarily residing in Australia: s 201A(2). It is an

offence not to comply with s 201A: ss 1311, 1312.

Section 9 defines a director as including:

· a person who is appointed to the position of director or alternate director regardless of the name of the position (de facto director); and

· unless the contrary intention appears, a person who is not validly appointed as a director if they act in the position of a director or the directors of a company are accustomed to act in accordance with the person’s instructions or wishes (shadow director).

The s 9 definition of a director includes ‘de facto’ directors and ‘shadow’ directors.

In CORPORATE AFFAIRS COMMISSION V DRYSDALE (1978) 141 CLR 236; (1978) 3 ACLR 760; (1978) 22 ALR 161, the High Court held that a “de facto” director was a director within the s 9 definition. Although the articles provided that he should have been re-elected at the next meeting, he was not; yet he continued to attend board meetings, vote and participate in management. He was held to be a director.