House of Representatives

Explanatory Memorandum

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

7. Chapter 2A: Registering a company

7.1 New Chapter 2A will replace current Part 2.1 and Division 1 of Part 2.2.

What companies can be registered

7.2 Companies registered as at 30 June 1997 are:

(a)

limited by shares

(i)

proprietary (1,009,132)

(ii)

public (7,367)

(b)

limited by guarantee (8,989)

(c)

limited both by shares and by guarantee (408)

(d)

no liability (986)

(e)

unlimited (602).

7.3 The Law will no longer allow registration of companies limited both by shares and by guarantee (Bill s 112). However, existing companies of this type will not be affected (Bill ss 1415 and 1416).

7.4 There are relatively few companies limited both by shares and by guarantee. Some aspects of the existing Law do not operate satisfactorily in relation to these companies (for example, the current class rights provisions). Further, companies limited by guarantee are only able to raise equity by converting into companies limited both by shares and by guarantee, because the Law currently does not enable them to convert directly into companies limited by shares.

7.5 The United Kingdom ceased to facilitate the incorporation of companies limited both by shares and by guarantee in 1981. Comparable overseas jurisdictions do not have this type of company.

7.6 The Bill will retain the capacity to register new unlimited companies. However, under the Bill, only unlimited companies with share capital will be able to be registered, as these companies are used by those States which allow the incorporation of legal firms.

7.7 As at present, a proprietary company will be required to have no more than 50 non-employee shareholders. Unless it is raising funds from its employees or its shareholders, a proprietary company will not be able to engage in fundraising which would require the issue of a prospectus under Part 7.12 of the Law (Bill s 113). If a proprietary company does not comply with the requirements in section 113, the ASC will have the power to direct the company to change to a public company (Bill s 165).

7.8 The provision dealing with outsize partnerships has been redrafted without changing its effect, except that the reference to bodies formed under letters patent has been deleted. It is no longer necessary to retain the possibility of relying on the prerogative power to form bodies corporate for purposes of gain because company registration is now a simple, administrative matter (Bill s 115).

7.9 The provision prohibiting registration of trade unions under the Corporations Law has also been redrafted without changing its effect (Bill s 116).

How a company is registered

7.10 The current rules for setting up a company are complicated because the necessary steps are separated in time and require the lodgment of several forms. The rules are framed in terms of the incorporation of a group of persons (subscribers to the memorandum) which has its basis in 19th century English company law. Under the new rules, setting up a company will be easier and will focus on the creation of a separate legal entity through registration.

7.11 New Part 2A.2 sets out the process for forming a company. The Law will provide that a company comes into existence as a body corporate at the beginning of the day on which it is registered (Bill s 119). The 1 member proprietary company was introduced by the First Corporate Law Simplification Act 1995 . The Bill extends to public companies the facility to have only 1 member (Bill s 114). If a company ceases to have any members, the ASC will be able to seek its winding up after giving the company at least 1 months notice.

7.12 Registration of a company will be simpler in that the lodgment of the prescribed application form will become the only step required (Bill s 117). Persons specified with their consent in the form as directors and secretaries will be appointed automatically on registration of the company and so no further notification to the ASC of their appointment will be necessary (Bill s 120(1)). Persons specified with their consent as members will automatically become members (Bill s 120(1)). For companies limited by shares, the shares specified in the application will be taken to be issued to the members (Bill s 120(2)). For companies limited by guarantee, the members will become liable as contributories on a winding up of the company under current Chapter 5 provisions. Notice of the issue of shares will not have to be lodged with the ASC, but details will need to be recorded in the register of members (current s 216B(1)).

7.13 The facility in current section 242 for directors and secretaries to change their residential address to an alternative address in the ASC records will be extended to allow the application form to specify an alternative address for a director or secretary (Bill Schedule 2 Item 94). The application will continue to require the date and place of birth of directors and secretaries for identification purposes.

7.14 As at present, the application will be required to specify the address of the companys proposed registered office. It will become the companys registered office on registration (Bill s 121). The application will also be required to disclose the address of the proposed principal place of business if it is to be different from the registered office (Bill s 117). This is to enable this important information about the company to be placed on the ASC database and thus be available to the public. If a public company is to have a constitution on registration, a copy will have to be lodged with the application (Bill s 120(3)). As at present, there will be no requirement for a proprietary company to lodge a copy of its constitution.

7.15 The Bill will allow expenses incurred before registration in promoting and setting up a company to be paid out of the companys assets (Bill s 122). Payment of expenses incurred after registration will be a matter for the company itself.

7.16 Historically, company seals have performed an important security function. However, over time the importance of this function has diminished. The Bill will remove the requirement for companies to have a seal. However, if a company adopts or retains a seal, it will have to show the companys name and ACN (Bill s 123). Companies will continue to be able to have duplicate seals. Companies will be able to execute documents (including deeds) without the application of a seal and outsiders will be able to make appropriate assumptions of regularity in relation to the execution of documents (Bill ss 127(1) and 129(5)).

7.17 When the ASC receives an application for registration, it may register the company, give it an ACN and issue a certificate of registration (Bill s 118). If a proposed company would, when registered, be in breach of another provision of the Law (for example, by having a disqualified director), the ASC may exercise its discretion to refuse registration. However, it is not envisaged that the ASC will ordinarily attempt to verify the information contained in applications or otherwise investigate whether the Law is being complied with before registering a company.

7.18 Certificates of registration have been retained (Bill s 118). A certificate issued under the Corporations Law of any jurisdiction will be conclusive evidence that the company was duly registered at the beginning of the day shown in the certificate. The fact that the company was brought into existence on a particular date will not therefore be subject to challenge (Bill Schedule 2 Item 155). The provision will cover certificates issued by the ASC in other circumstances (for example, a new certificate of registration issued when a company changes its name or type).

7.19 The ASC will be required to retain a record of certificates issued by it through the operation of current subsection 1274(2) (Bill s 118(2)).

7.20 The transitional provisions will ensure that a company registered under the Law before Bill Schedule 2 commences will continue to be registered as a company of that type after commencement (Bill s 1413). Other basic features of pre-existing companies will be preserved by sections 1417, 1418, 1419 and 1420 of the Bill. For example, the current name, registered office and opening hours of an existing company will not be affected by the commencement of the Bill.

Other bodies corporate

7.21 The provisions dealing with companies existing at the commencement of the Law have been redrafted without changing their effect. These provisions now appear at the beginning of the Chapter on transitional provisions at Part 11.1 (Bill ss 1362CA-1362CI).

7.22 The provisions now in Part 2.2 Divisions 3 and 5 dealing with registration of a body corporate that is not a company, recognised company or corporation sole have been re-enacted (Bill ss 601BA-601BS). The provisions have been brought into line with the new rules introduced by the Bill. For example, the registration requirements, as far as practicable, will reflect the new requirements for registration of a company (Bill ss 117 and 601BC). Where the law of the bodys place of origin does not require consent of the bodys members to the transfer, the application for registration must include evidence that at a meeting of the bodys members, 75% of members consented to the transfer either by voting in person or by proxy (Bill s 601BC(7)(e)).

7.23 The provisions dealing with the processes for changes of jurisdiction of incorporation of companies in current Part 2.2 Divisions 4 and 4A will be moved into the Corporations Regulations. However, the existing requirement for the consent of the federal Minister and the relevant Minister of the jurisdiction where the company is currently registered (other than the Australian Capital Territory) will be retained in the Law itself (Bill ss 1362A and 1362B).

7.24 The provisions dealing with registrable Australian bodies and foreign companies in current Part 4.1 Divisions 1 - 3 have been renumbered (Bill ss 601CA-601CY). The provisions dealing with names of registrable Australian bodies and foreign companies have been redrafted consistent with the new provisions dealing with company names (Bill ss 601DA-601DJ).