Why replaceable rules might be inappropriate for your company

When deciding on the internal governance requirements for your business, it can be hard to choose between implementing replaceable rules, a constitution, or even both. This blog post sets out why some companies may choose to stay clear of replaceable rules and rely solely on a constitution instead.

What is a replaceable rule?

Replaceable rules can be found in the Corporations Act. They are a basic set of rules for managing your company and are an alternative to a constitution. Essentially, if a company does not have a constitution in place, they are able to use and rely on the replaceable rules instead.

Why might the replaceable rules be inappropriate for many companies?

A lot of companies find that replaceable rules are inappropriate for their business needs and prefer to solely rely on a constitution instead.

But why?

There are several reasons why a constitution may be preferred:

  1. Generally, a constitutionis only amended when the company decides to make a change. Replaceable rules are subject to the Corporations Act and if a legislative amendment is made, the company must follow the new changes that have been made. Essentially, by having a constitution, companies are given a greater sense of control.  
  2. Replaceable rules do not address every aspect of corporate governance and consequently some companies feel the need to supplement their rules with a constitution. Therefore, most companies feel that it is redundant to have both in operation and feel that it is simpler to just have a constitution in place.
  3. Replaceable rules do not apply to a proprietary company if the sole director is also the sole shareholder. In this instance, the company may wish to have a constitution in place. Note, if this is the case, the constitution should indicate that not all of its provisions will operate whilst the company only has one director who is its only shareholder.
  4. A constitution allows you to have several classes of shares with differing voting rights and dividend rights. Replaceable rules do not provide this option.
  5. A constitution is more specific in terms of rules surrounding meetings and resolutions, whereas replaceable rules do not cover these areas.
  6. Replaceable rules cannot be used for special purpose companies e.g. superannuation trustee companies

Essentially, the replaceable rules are popular for small, new companies because it is a relatively inexpensive and simple option. However, a constitution provides its shareholders with a greater sense of flexibility and certainty. What is best for your company depends on the company’s needs. It is important that you consider the appropriateness of either option in relation to the operational requirements of your business.

If you are uncertain about the appropriateness of either a constitution or replaceable rules for your company, please feel free to call us on 03 9111 5660 or email jessica@sinclairmay.com.au to talk about your options.

This is general advice only. Liability limited by a scheme approved under Professional Standards Legislation. 

Published Oct 8, 2018

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