The company’s internal rules Corporate Law: Law principles and practice A company must have internal rules A company, like any organisation, must have rules for how it operates (including rules relating to holding meetings, management interaction and procedures for passing resolutions). Under s 134 of the Corporations Act 2001 (Cth), a company can use: • • • a company constitution The replaceable rules from the Corporations Act 2001 (Cth) a combination of both. Corporate Law: Law principles and practice Internal management The management and administration of a company require rules relating to: • • • • the appointment and removal of officers procedures relating to directors members’ meetings members’ rights and obligations Corporate Law: Law principles and practice The replaceable rules Replaceable rules are found in sections throughout the Corporations Act 2001 (Cth). Some replaceable rules are mandatory, but most are optional. There are some differences in the rules between proprietary and public companies. The rules can be displaced if a company adopts its own rules or constitution (s 135(2)). Corporate Law: Law principles and practice The replaceable rules cont … A proprietary company can restrict the transfer of shares. A public company is not permitted to do this. A public company is not permitted to displace the rule that a member can appoint a proxy to attend a meeting on their behalf. Corporate Law: Law principles and practice The replaceable rules cont … The 39 replaceable rules are found in s 141 of the Corporations Act 2001 (Cth) and refer to other sections throughout the Act. A section indicates its replaceable rules in bracket. Corporate Law: Law principles and practice 1 Voting and completion of transactions--directors of proprietary companies 194 2 Powers of directors 198A 3 Negotiable instruments 198B 4 Managing director 198C 5 Company may appoint a director 201G 6 Directors may appoint other directors 201H 7 Appointment of managing directors 201J 8 Alternate directors 201K 9 Remuneration of directors 202A 10 Director may resign by giving written notice to company 203A 11 Removal by members--proprietary company 203C 12 Termination of appointment of managing director 203F 13 Terms and conditions of office for secretaries 204F Inspection of books 14 Company or directors may allow member to inspect books 247D Corporate Law: Law principles and practice The replaceable rules cont … Non-compliance with the replaceable rules is not of itself a breach of the Act (Corporations Act 2001 (Cth) s 135(3)). Breaches of the replaceable rules do not give rise to civil or criminal liability, or entitlement to statutory injunctions under the Act. Corporate Law: Law principles and practice The constitution The company’s constitution (if any) is a document that sets out rules governing all or some of the matters that may be covered by the replaceable rules, resulting in the latter being respectively displaced or modified. The constitution may be adopted when: • • • a new company is formed (Corporations Act 2001 (Cth) s 136(1)(a)) a company without a constitution adopts one (s 136(1)(a)) a court order is made requiring the company to adopt one (s 136(1)(b)). Corporate Law: Law principles and practice Adoption of a constitution Before July 1998, companies were required to have a constitution consisting of a memorandum of association and articles of association. Some companies retain this as a constitution. Historically the memorandum was a superior document, but under the Corporations Act 2001 (Cth) no distinction is made between the two components, so there is only one constitution. Companies formed after July 1998 can choose a constitution, replaceable rules, or both (s 134). Corporate Law: Law principles and practice Objects clause Before 1984, every company was required to have an objects clause in its constitution—this requirement has been abolished. A company can still choose to restrict the company’s business engagements and activities (Corporations Act 2001 (Cth) s 125(1)). However, no action that violates the company’s objects clause will be considered ‘ultra vires’ (beyond its powers). There is no ‘constructive notice’ that a company will not be bound by the actions of its officers. A contract contrary to a company’s constitution will be binding (s 125(2)). Corporate Law: Law principles and practice Legal capacity A company has features of both a natural person and a legal person. A company is capable of engaging in any business or activity, including entering contracts (Corporations Act 2001 (Cth) s 124(1)). A company has powers that are not applicable to natural persons (s 124(2)), including the power to: • • • issue and cancel shares (except companies limited by guarantee) issue debentures grant a floating charge over the company’s property. Corporate Law: Law principles and practice Legal capacity cont … Some companies are required to have a constitution. For example: • • • Guarantee companies must set out the amount guaranteed. No-liability company must state that they are for mining purposes only. Listed public companies must undertake to comply with ASX rules. Corporate Law: Law principles and practice One-person companies In one-person companies, the the shareholder is also the director. Replaceable rules do not apply. The company may, but is not required to have a constitution (Corporations Act 2001 (Cth) s 135(1)). The Corporations Act applies a number of basic rules: • • the business of the company is to be managed by or under the direction of the director (s 198E) the director is to be paid any remuneration for being a director that the company determines by resolution (s 202C). Corporate Law: Law principles and practice Legal effect of internal management rules Under s 140(1) of the Corporations Act 2001 (Cth), the constitution and replaceable rules that apply to a company have effect as a contract between the following parties: • • • the company and each member (s 140(1)(a)) the company and each director and company secretary (s 140(1)(b)) a member and each other member (s 140(1)(c). Corporate Law: Law principles and practice The constitution and/or the replaceable rules The constitution and replaceable rules form a statutory contract between the company, members and officers (which includes directors). The company can enforce rules against members. Corporations Act 2001 (Cth) s 140(1)(a) Hickman v Kent or Romney March Sheep-Breeders Association  1 Ch 881 Corporate Law: Law principles and practice Members’ rights to enforce the constitution Members cannot enforce provisions in the constitution that appear to confer rights on them in some capacity other than as a member. Eley v Positive Government Security Life Assurance Co (1875) 1 EX D 20 Only members can enforce the company’s rules. Forbes v NSW Trotting Club Ltd  2 NSWLR 515 Corporate Law: Law principles and practice Limits on the right to alter the constitution Restrictions exist under statute and common law when changing a company constitution. An ‘entrenching provision’ involves a restriction in the constitution that elevates the required level of shareholder support beyond that required for a special resolution (e.g. requiring a greater majority than 75%, or requiring the consent of a particular person (s 136(3)). Corporate Law: Law principles and practice Limits on the right to alter the constitution cont … Another limitation is that a member is not bound by certain changes to the constitution after becoming a member unless these are agreed to in writing. Four such modifications: • • • require the member to take up additional shares; increase the member’s liability to contribute to the share capital of the company or otherwise pay money to the company impose or increase a restriction on the right to transfer shares already held by the member (s 140(2)). Corporate Law: Law principles and practice Alteration of class rights If a company’s share capital is divided into different classes of shares (such as ordinary and preference shares) within the company’s constitution, the majority shareholders cannot modify the constitution to cancel or vary existing class rights without a special resolution of both the company in general meeting and the holders of the affected class (Corporations Act 2001 s 246B). Members may still have the option of applying to the court for a remedy under s 232 if the majority votes are contrary to the interests of the members as a whole, oppressive, unfairly prejudicial, or unfairly discriminatory to members. Corporate Law: Law principles and practice Common law restrictions on changing the constitution Where a change to the constitution involves expropriation, the majority shareholder would need to prove that it was both for a proper purpose and was fair in all the circumstances. Gambotto v WCP Ltd (1995) ACLC 342 Corporate Law: Law principles and practice The company’s relations with outsiders A company acts through its agents, since it is a fictional legal being. Agents include directors, officers, employees and other official agents. A company does not require a company seal (Corporations Act 2001 (Cth) s 126(1)) to execute a binding contract as long as the agent, employee or authorised person acts with the authority of the company. Corporate Law: Law principles and practice The company’s relations with outsiders Under s 126(1) of the Corporations Act 2001 (Cth) an individual acting with the company's express or implied authority can make, vary, ratify or discharge a contract on behalf of the company. Note that officers, managers and directors will have powers conferred by the company constitution (or replaceable rules). Corporate Law: Law principles and practice The doctrine of ultra vires The doctrine of ultra vires has been abolished. This means that: • • • no act of the company is invalid merely because it is contrary to or beyond any restrictions or prohibitions in the company's constitution (e.g. promises, agreements or contracts that might be contrary to the company constitution (Corporations Act 2001 (Cth) s 125(2)). an outsider is now generally able to assume that any person acting on behalf of the company has appropriate authority and acts within the constitution (s129). the holding of a constitution by ASIC will not be constructive notice (s130). Corporate Law: Law principles and practice Authority of company’s agents A company will be bound by the acts of its agents just like the acts of any other principal. Agency law applies to companies. Agency law will bind the company by actual, or apparent or ostensible authority. Actual authority: express permission is given orally or in writing in the appointment or authorisation of an agent. Apparent or ostensible authority: permission is implied from the position a party holds, or by something such as the use of a letterhead. Corporate Law: Law principles and practice The doctrine of Estoppel The doctrine of Estoppel applies: • • • to those who appear to have had the company or Board of Directors grant them the authority to act, directly or indirectly, as an agent; where another relies on that principal’s representation; or where the company allows an agent to act in a particular position, allowing others to assume they have authority. Corporate Law: Law principles and practice The indoor management rule Common law determines that an outsider is entitled to assume that a company’s internal procedures have been adhered to (i.e. that a company complies with its own rules). Royal British v Bank v Turquand (1856) 119 ER 886 This is now enshrined in s 129 of the Corporations Act 2001 (Cth): an outsider is now generally able to assume that any person acting on behalf of the company has appropriate authority and acts within the constitution. Corporate Law: Law principles and practice Statutory assumptions about company procedures A person who has dealings with a company can make certain statutory assumptions about company procedures and the people with whom they are dealing. Note the following sections of the Corporations Act 2001 (Cth): • • ss 205B, 345 and 347: a director or company secretary who appears on company returns is properly appointed and has the authority of a person in that position—and properly carries out their duties. s 124: a company has the legal capacity of a natural person. Corporate Law: Law principles and practice Statutory assumptions about company procedures cont … • • • • • s125: abolishes the ultra vires rule even if the company acts contrary to its constitution. s 130: lodgement of documents, such as the company constitution, does not amount to constructive notice to the world at large ss 123, 126 and 127: a company is bound by a contract made on its behalf by a person acting as an agent. s 130: a person acting with implied or actual authority can make, vary or discharge a contract on behalf of the company. ss 128 and 129: an outsider can assume that a person appointed (even if defective) and performing a particular role in the company has the powers that would ordinarily be conferred on that office. Corporate Law: Law principles and practice Statutory assumptions about company procedures cont … • s 128: outsiders who deal with companies can make the assumptions set out in s 129, and the company cannot deny any of these. An outsider is entitled to make specific assumptions. An individual can make more than one assumption when dealing with a company. Brick and Pipe Industries Ltd v Occidental Life Nominees (1992) 10 ACLC Corporate Law: Law principles and practice Statutory assumptions about agency Note the following sections of the Corporations Act 2001 (Cth): • • s 129(1): a person who deals with the company can assume that the company’s constitution and replaceable rules have been complied with s 129(2): outsiders can assume that a person who appears from information supplied by the company, or from ASIC, to be a director or a company secretary are who they say they are. An outsider can assume the officer has been properly appointed, and has the authority to exercise the powers and perform the duties customarily exercised, or performed, by a director or company secretary of a similar company. Corporate Law: Law principles and practice Statutory assumptions about agency cont … • • • s 129(3): outsiders are entitled to assume that any person presented as an officer or agent of the company has been properly appointed and has authority to exercise the powers and perform the duties customarily exercised or performed by that kind of officer or agent in a similar company. s 129(4): outsiders are entitled to assume that officers and agents of the company properly perform their duties to the company. s 129(5): when a company does not have a seal, outsiders are entitled to assume that a document has been properly executed (according to constitutional procedures) if signed by the director(s) in accordance with s 127. Corporate Law: Law principles and practice Statutory assumptions about agency cont … • • s 129(6): when a company has a seal, outsiders are entitled to assume that a document is properly executed (signed and witnessed, and in compliance with the company constitution) if the company’s common seal appears to have been fixed to the document, according to s 127(2), and the seal appears to have been witnessed by two directors or the director and company secretary, in accordance with s 127(2) s 129(7): outsiders are entitled to assume that an officer or agent of the company has authority to issue a document or certified copy of a document on its behalf and also can warrant the document is genuine or a true copy. Corporate Law: Law principles and practice Statutory assumptions about agency cont … Advance Bank Australia v Fleetwood Star Pty Ltd (1992) 10 ACLC 703 Brick and Pipe Industries Ltd v Occidental Life Nominees (1992) 10 ACLC Corporate Law: Law principles and practice Exceptions to the rules of s 129 Under s 128(4), when an outsider knows or suspects that an officer, director or employee lacks authority, the outsider may not be able to rely on the assumptions of s 129 when, in fact, they were aware, or should have been aware, that an agent or employee was acting without authority. Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146 Pyramid Building Society v Scorpion Hotels Pty Ltd (1996) 14 ACLC 679 Corporate Law: Law principles and practice Should the outsider have made further inquiries? Bank of New Zealand v Fiberi Pty Ltd  12 ACLC 48 Lyford v Media Portfolio (1989) 7 ACLC 271 Corporate Law: Law principles and practice Authority of the company director Where a director is under a duty of disclosure to the company, their knowledge is imputed to the company. Hely-Hutchinson v Brayhead:  1 QB 549 Corporate Law: Law principles and practice Authority of the company director cont … Freeman and Lockyer v Buckhurst Park Properties  2 QB 480 For ostensible authority to arise from an agent with no actual authority, there had to be the following conditions: • • • • a representation that the agent had authority a representation made by someone with actual authority an outsider had been induced by the representation to enter into the contract the contract agent was permitted by the company’s constitution to enter into a contract.