House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

8. Chapter 2B: Basic features of a company

8.1 New Chapter 2B will replace current Part 2.3 and Part 4.2 (insofar as it deals with companies). The provisions in Part 4.2 which deal with other bodies corporate will be re-enacted in Part 5B.3.

Company powers and how they are exercised

8.2 New Part 2B.1 contains 3 important changes from the current provisions.

8.3 First, the provisions dealing with the powers and attributes of a company will be combined (Bill s 124). Companies will have all the powers of an individual and of a body corporate. The more important of these powers are listed in paragraphs 124(1)(a) to (h). The specific powers listed in current subsection 123(2) (power to hold land and sue) will be omitted as these are inherent in the powers of an individual. Similarly, the specific reference to perpetual succession will be abandoned as the Bill provides that a company will come into existence on registration and cease to exist on deregistration.

8.4 Secondly, although companies will still be able to restrict the exercise of their powers or set out their objects in a constitution, acts contrary to these restrictions or objects will no longer constitute contraventions of the Law (Bill s 125). However, acts contrary to these restrictions or objects will still be able to be asserted or relied on in other actions under the Law (for example, an action for dishonesty under current subsection 232(2), an action for oppression under current section 260 or a winding up action under current paragraph 461(k)).

8.5 Thirdly, current paragraph 162(7)(g) has been interpreted as preserving the common law doctrine that a director of a company who causes the company to act outside its powers is automatically liable to the company for any loss resulting from the breach. Repealing this provision will make it clear that the doctrine has no further application. This will complete the reforms commenced by the 1983 amendments to the Companies Code by removing the last vestiges of the doctrine of ultra vires. Acts which are contrary to restrictions on a companys exercise of its powers will now be treated in the same way as any other breach of a companys constitution.

8.6 Part 2B.1 also sets out a companys powers to execute a document (including a deed) or to appoint an agent to make contracts on behalf of the company. It will be clear that a company can exercise these powers without using a common seal, whether or not the company has a seal (Bill ss 126 and 127). Having a common seal will be optional for companies.

Assumptions people dealing with companies are entitled to make

8.7 New Part 2B.2 deals with assumptions that can be made about a company by a person dealing with the company and the effect of constructive notice (Bill ss 128, 129 and 130). A person will not be entitled to make an assumption if they knew or suspected that the assumption was incorrect (Bill s 128(4)). This objective test is stricter than the current law and makes it clear that the common law put on inquiry test has no application to the statutory provisions: see Bank of New Zealand v Fiberi Pty Ltd (1994)
12 ACLC 48 ,
14 ACSR 736 .

8.8 To facilitate the execution of deeds without the use of a seal, a person will be able to make assumptions regarding the execution of documents by company officers (Bill s 129(5)).

8.9 The assumptions contained in section 129 of the Bill will have cumulative operation (Bill s 129(8)). For example, when making an assumption that an officer of the company has properly performed their duties to the company (Bill s 129(4)), a person may rely on an assumption that the officer has been duly appointed and has authority to perform those duties (Bill 129(3)).

8.10 Subsections 129(2) and (3) of the Bill use the term a similar company as a plainer version of current subsection 164(3) which refers to a company carrying on a business of the kind carried on by the company.

Contracts before registration

8.11 New Part 2B.3 deals with pre-incorporation contracts. At common law, a company cannot ratify a contract entered into on its behalf before its registration. These provisions will allow a company to ratify a pre-registration contract.

8.12 The new provisions address the criticism that current section 183 does not cover contracts entered into for the benefit (as opposed to on behalf) of a company before its registration and that it does not allow parties to set the time for the ratification of the contract (Bill ss 131, 132 and 133). Contracts entered into in the name of a company to be registered will be covered by the expression on behalf of the company.

Replaceable rules and constitution

8.13 The Bill will insert in the Law a set of basic rules necessary for the internal management of companies. These rules will be called replaceable rules. The current set of rules in Table A will be repealed. As a result, many companies will no longer need a constitution. New companies will have a choice whether or not to adopt one (Bill s 134). For each company, the replaceable rules will be so much of those rules that apply to that particular company.

8.14 The replaceable rules will apply to all new companies to the extent that they are not displaced or modified by provisions in the companys constitution. This approach is consistent with the present operation of Table A. Under current subsection 175(2), the regulations in Table A apply to all companies limited by shares incorporated under the Law except insofar as they are displaced or modified by the companys articles.

8.15 The articles and memorandum of existing companies will be taken to be their constitution after commencement of the Bill (Bill s 1415). The replaceable rules will apply to existing companies as follows:

(a)

if they repeal their constitution and do not adopt a new constitution - the rules will apply

(b)

if they repeal their constitution and adopt a new constitution - the rules will apply to the extent that they are not displaced or modified by the new constitution.

8.16 The replaceable rules will not apply to existing companies where they merely amend their constitution. For example, if an existing company only repeals part of its constitution, the replaceable rules would not apply and the transitional provisions would ensure that so much of Table A not displaced by the constitution would continue to apply.

8.17 Companies may wish to adopt a constitution to supplement the replaceable rules. For example, a company wanting to issue partly paid shares may wish to adopt provisions dealing with calls and forfeiture. Similarly, a company may wish to adopt rules dealing with rotation of directors, appointment of associate directors or indemnity of company officers.

8.18 Some of the rules will apply to public companies as ordinary provisions of the Law, in that they will not be replaceable by the companys constitution. Headings to the replaceable rules will tell the reader whether a particular rule is replaceable for all companies or only for proprietary companies (Bill s 135). The rules will be replaceable for proprietary companies only while they are proprietary companies.

8.19 To ensure that breaches of these rules have the same effect as breaches of a company constitution, the Law will provide that both the constitution and the replaceable rules have the effect of a contract binding the company, its officers and members (Bill s 140). The provision is intended to have the same effect as current subsection 180(1), notwithstanding the absence of a reference to the contract being under seal. This reference is generally thought to be necessary to ensure that the statutory contract is enforceable in the absence of consideration. However, at common law a contract does not exist in the absence of consideration. In stating that the constitution and the replaceable rules have effect as a contract, it is intended that both of these will be enforceable.

8.20 An advantage of the replaceable rules will be that, unlike the provisions of Table A, they will apply to companies as amended from time to time. As a result, companies choosing not to replace them will not have to incur expenses in keeping their constitutions up to date with the Law.

8.21 Another advantage of the replaceable rules is that they will also be located in the relevant place in the Law, rather than in a schedule to the Law. For instance, the replaceable rules on meetings will be located with the statutory provisions on meetings. A table listing all the replaceable rules will be included in the Law to assist companies and their advisers on the extent to which they need to modify or adopt a constitution (Bill s 141).

8.22 A company with a single member who is also the sole director has no need for a formal set of rules governing its internal relationships, whether those rules are in the constitution or in the replaceable rules. A company of this kind needs rules which allow the company to conduct its business and which deals with contingencies such as the appointment of additional directors. The replaceable rules will therefore not apply to these companies (Bill s 135(1)). Rather, the Bill includes a provision containing several basic rules applying specifically to these companies, under which:

(a)

a director may appoint another director by recording their decision and signing the record

(b)

subject to the Law, the director can exercise all the powers of the company and is responsible for the management of the companys business

(c)

the director may execute negotiable instruments of the company

(d)

the company may determine the directors remuneration by resolution (Bill Schedule 2 Item 85).

8.23 If an additional director is appointed or an additional person takes up shares in a single member/single director company, the replaceable rules will apply, except to the extent that they are displaced by a constitution adopted by the company.

8.24 Companies will continue to have the power to entrench a provision in their constitution by providing additional requirements which must be satisfied before the provision can be amended or repealed, such as:

(a)

that the relevant special resolution be passed by a majority consisting of a greater number of members than is required to constitute the resolution as a special resolution, or

(b)

that the consent or approval of a particular person be obtained, or

(c)

that a particular condition be fulfilled (Bill s 136).

8.25 Companies will be able to adopt a constitution or repeal or modify their constitution by passing a special resolution (Bill s 136). It is intended that this power, however, be read as one which must be exercised for a proper purpose: Gambotto v WCP Ltd (1994-95)
182 CLR 432 . The special resolution will take effect on the date the resolution is passed or on a later date specified in the resolution (Bill s 137). The date could be a date calculated by reference to the occurrence of an event. Neither the requirement for a special resolution to amend a constitution nor other provisions in the Bill are intended to preclude a company from incorporating material into its constitution by reference on the basis that the material is as amended from time to time (independently of the constitution).

8.26 As at present, public companies will be required to lodge with the ASC a copy of their constitution and any modifications of their constitution (Bill s 136).

8.27 The ASCs power to request a consolidated copy of the constitution from a proprietary company limited by shares will be extended to cover all companies (Bill s 138). A member will be able to request the company to send them a copy of the companys constitution (Bill s 139).

Registered office and places of business

8.28 New Part 2B.5 will replace the provisions of current Part 3.1 dealing with registered offices.

8.29 Companies will continue to be required to have a registered office in Australia and to notify the ASC of any change of address of their registered office (Bill s 142).

8.30 Currently, only a company can notify the ASC of a change of address of its registered office. This has resulted in problems where a company ceases to use a particular office and fails to notify the ASC of its new office. This is especially a problem for some service providers, such as accountants, whose office is used as a registered office for client companies. Under the Bill, the ASC will be able to change the address of the companys registered office to the residential address of a director on the basis of an occupiers notification that the consent has been withdrawn or that consent was never given to the particular company. The ASC must give the director the opportunity to notify it of a new address for the registered office before making such a change (Bill s 143).

8.31 Companies will also be required to notify the ASC within 14 days after the company changes the address of its principal place of business (Bill s 146). The purpose of this provision is to ensure that accurate details of this address are available on the ASC database to facilitate service of legal documents on the company and access to any registers and documents kept at that address.

8.32 Public companies will continue to be under an obligation to have their registered office open to the public during the standard hours specified in the legislation or for other permitted hours of which the company has notified the ASC. The standard opening hours will be specific times, unlike the current section 218 which permits a range of times (Bill s 145). Thus, persons seeking to serve documents on the company or visit the registered office for other purposes will be able to rely on the information on the ASC database for the exact opening hours.

8.33 Proprietary companies will not be required to have their registered office open to the public. This relaxation of the existing requirement recognises that little use is made of the registered offices of the majority of proprietary companies in the manner envisaged in the Law. In order to facilitate access to registers or documents by persons entitled to inspect them, proprietary companies will be required to make them available for inspection within 7 days of a written request being received by the company (Bill Schedule 2 Item 157). Existing requirements to provide copies on request will not be affected (current s 1300).

8.34 The removal of the requirement for proprietary companies to have their registered offices open for certain hours will not affect the statutory or common law rules enabling service of documents on a company by leaving them at the registered office of the company.

8.35 Proprietary companies will also no longer be required to display their name and the words registered office outside their registered office. The requirement in relation to public companies will be modified so that they no longer need to display a sign outside their registered office. It will be sufficient if their name and the words registered office are visible at their registered office (Bill s 144). This will overcome the current difficulties with displaying signs outside multistorey buildings.

8.36 The rules about service of documents on companies have been moved to a redrafted section 109X (Bill Schedule 2 Item 55). As at present, it will be possible to serve documents (including legal process) on companies by posting them to the registered office. To simplify service on companies where there is a difficulty in sending documents to the companys registered office, the Bill will allow service on a company by personal service on 1 director of the company rather than 2 (Bill Schedule 2 Item 55). The change is consistent with the degree of responsibility which individual directors have in relation to the affairs of their company.

Company names

8.37 By separating the names rules for companies and those for other bodies, the Bill will make them easier to follow and the process of registering a name simpler and more logical (current ss 99A, 120, 219, 358, 361, 362 and 366 - 383C, Corporations Regulations 4.2.01 and Schedules 6, 6A and 7, Bill Part 2B.6 and Part 5B.3). The rules for determining whether names are identical will be moved from the Law into the Corporations Regulations (current s 362(2), Bill s 147(1)). This will make the rules easier to update and will allow all the rules to be located in the same place.

8.38 The Ministerial Council for Corporations has agreed in principle that the use of the singular or plural form, the indefinite article, and words Corporation, Corp, Incorporated and Inc should be disregarded for the purposes of the identical names test. It is envisaged that this change will be taken up in the Corporations Regulations.

8.39 As at present, companies will be able to select a name that is available or choose to have their ACN as their name (Bill s 148). Companies will also be able to continue to use certain abbreviations for words in their name (Bill s 149).

8.40 The new rules will only allow companies limited by guarantee that pursue charitable purposes to omit the word Limited from their name. Charitable is to be given its ordinary meaning. Existing companies with licences to omit the word Limited from their name will not be affected by this change (Bill ss 150 and 151). The ASC will be able to change a companys name to include the word limited if the company is no longer exempted from doing so under sections 150 or 151 (Bill s 159).

8.41 A person will be able to reserve a name for a company for a period of 2 months, although reservation of a name will not be mandatory. The person can extend the reservation period by a further 2 months. There can be multiple extensions of the reservation period (Bill s 152).

8.42 The requirement in current subsection 219(2) that a company set out its name on documents has been redrafted without changing its effect (Bill s 153(1)). Although the express requirement for a name to be legible has been removed, to satisfy the requirement to set out the name, the name would have to be legible.

8.43 To facilitate document design and introduce flexibility in relation to company names, the Bill will allow a company to set out its name and ACN at any place on the page of a public document on which its name first appears (Bill s 153). This contrasts with the requirements in current section 362 under which the ACN must be set out after the first occurrence of the company name.

8.44 The current exemption in section 383B from the requirement to have a companys ACN on receipts has been retained (Bill s 154). The current power of the ASC under section 383C to grant exemptions from the requirement to have a companys ACN on transport documents has been replaced with a provision enabling the regulations to grant exemptions (Bill s 155). This approach will result in the existing exemptions being more accessible.

8.45 The current prohibition against a person carrying on business under a name that includes the words Limited, No liability or Proprietary, unless allowed or required to do so by an Australian law, has been retained (current ss 369 - 370, Bill s 156). The exception in current section 370(2) for companies incorporated in Victoria before December 1896 (in particular, The Broken Hill Proprietary Company Limited) will be retained (Bill s 148(5)).

8.46 Companies will be able to change their name by passing a special resolution and lodging an application with the ASC (Bill s 157).

8.47 The ASC will be able to direct a company to change its name if the name should not have been registered or the company breaks a condition attached to the Ministers consent making the name available to the company. If the company does not comply with the direction, the ASC will be able to change the companys name to its ACN (Bill ss 158 and 159).

8.48 Where the ASC changes a companys name it must issue a new certificate of registration (Bill s 160). The change of name will not create a new legal entity or affect the companys existing property, rights or obligations (Bill s 161).

Changes of company type

8.49 To change company type, the company must pass a special resolution resolving to do so and lodge an application with the ASC (Bill ss 162 and 163). The ASC must give 1 months notice on its database and in the Commonwealth of Australia Gazette before registering the change. This requirement will provide a reasonable opportunity for interested persons to challenge the change (Bill s 164).

8.50 After the month has passed the ASC must amend the details of the companys registration to reflect the change of status, unless the decision has been challenged in the Administrative Appeals Tribunal (the AAT) or a court. Once the ASC does this, the AAT cannot review the change and a court cannot make an order reversing the change (Bill s 164(7)). A court could grant other remedies to a person aggrieved by a change of company type (such as damages). This will facilitate commercial certainty for companies changing type (for example, a mutual company converting to a company limited by shares).

8.51 The company may also have to change its name and its constitution as part of a conversion process. If the company does not have a constitution, the effect of the change of type may be that different replaceable rules apply to the company (especially when changing from a public to a proprietary company). If a company has a constitution that has a provision inconsistent with a mandatory rule of the Law, then the rule automatically prevails.

8.52 The current rules regarding change of status (current ss 167(7) and 172) allow members of a company and its debenture holders to challenge any conversion of the company in the courts. The right applies only where the challenge is undertaken by applicants representing at least 10% of members or debenture holders. In some cases this could involve seeking the agreement of a very large number of members, which would be a difficult task within the 21 days available for making the application. The Bill removes this cumbersome mechanism, thus leaving the right to challenge to the existing oppression remedy which is available to all members. Persons aggrieved by the ASCs decision, in particular creditors (including debenture holders), will be able to seek merits review of a decision of the ASC to effect a change of type in the AAT or seek court review under the Administrative Decisions (Judicial Review) Act 1977 .

8.53 At present, the Law does not enable companies limited by guarantee to convert into companies limited by shares. As a result, a company limited by guarantee can gain access to share capital only if it converts into a company limited both by shares and by guarantee. The Bill will allow companies limited by guarantee to convert directly into companies limited by shares (Bill ss 162 and 166).

8.54 The conversion mechanism involves the termination of the membership of the guarantor member and the extinguishing of their guarantee, coupled with the issue of shares to persons specified in the application for conversion. In order to allow for a range of post conversion corporate and ownership structures, these new shares may be issued to the existing members only, new members only or to existing and new members. The rights of existing members will be protected by the need for a special resolution and, if necessary, an oppression action. In addition, members will have to agree in writing to the issue of new shares prior to the application for change of type.

8.55 A company limited by guarantee changing to a company limited by shares will be able to issue shares in a holding company. Existing members will be taken to have agreed to become members provided the issue of shares is in accordance with the special resolution to change type, the shares are fully paid and the business, assets and liabilities of the issuing company are substantially the same as those of the company changing type (Bill s 167).

8.56 A change of a company limited by guarantee into a company limited by shares could disadvantage creditors in the liquidation of the company. Thus, for this change of type the ASC must be satisfied that the companys creditors are not likely to be materially prejudiced by the change before giving 1 months notice. The ASC will be able to require the company to notify its creditors in writing of the proposed change of type and invite them to make submissions to the ASC (Bill s 164(2)). This will also be the case for a company limited both by shares and by guarantee seeking to convert into a company limited by shares or a company limited by guarantee (Bill s 1416).

8.57 The change of status from a company limited by guarantee into a company limited by shares necessarily involves the extinguishment of the rights of the guarantor members as guarantor members. The rights extinguished include those of the members who did not support the special resolution required to effect the change of status and thus may be seen to involve an element of expropriation of vested rights (even though these may but need not be replaced by new rights arising from the issue of shares upon the change of status). An expropriation will occur by virtue of section 164 of the Bill upon the registration of the change of status.

8.58 The purpose of the change of status and any associated expropriation of rights does not affect the validity of the change or the expropriation. Accordingly, the principles set out in Gambotto v WCP Ltd (1994-95)
182 CLR 432 do not apply to this mechanism.

8.59 The Bill will enable, but not require, existing companies limited both by shares and guarantee to convert into either companies limited by shares or companies limited by guarantee (Bill s 1416).

8.60 The effect of a change of type will not create a new legal entity or affect the companys existing property, rights or obligations (Bill s 166).