When incorporating a company in Australia, the Australian Corporations Act contains a section that allows companies to choose to adopt replaceable rules for their internal governance structure.

Now, we’ll tell you just what they are:

What are replaceable rules?

Section 141 of the Act consists of the replaceable rules that act as a basic guide to help company owners better manage their company.

There are a total of 39 replaceable rules in the Act encompassing issues concerning directors, conduct of board meetings, company secretary, and shares and dividends. It is important to note that some rules are specific to either a public or private company.

The main difference between a company constitution and replaceable rules is that with replaceable rules, minority shareholders are able to protect their interests against decisions that negatively impact them.

In-depth information can be found on the Australian Securities & Investments Commission website here.

When do replaceable rules apply?

Both public and private companies are able to apply replaceable rules. However, such rules cannot be applied to one-person companies where the sole director is also the sole shareholder.

Replaceable rules can be easily applied for all companies registered after 1st July 1998. However, for companies that registered before that, the replaceable rules are only applicable if:

The company had a constitution and it was repealed before 1st July 1998
*If it was not repealed, the additional replaceable rules can still be applied alongside the old Corporations Law
The company does not possess a constitution

How do replaceable rules work?

The replaceable rules applied to a company’s internal governance structure, serve as a contract between the company and each member/director/company secretary as well as between one company member and another company member.

A breach of the replaceable rules does not mean a breach of the Corporations Act. But, the shareholders of the company are required to comply with any replaceable rules implemented into the company’s internal governance structure. This is because the Court allows members to seek compensation or compliance to the replaceable rules, otherwise, the Court will seek other means of remedies outside of breach of Corporations Act.

Benefits of applying replaceable rules

Time & Cost Efficient: in the early stages of starting your business, funds and time might not be on your side. Therefore, applying the replaceable rules is an easy and basic framework that helps you establish the basics of a company in the short run.

Easy switch to a Company Constitution: in the event that your business decides to adopt a company constitution, it is a rather easy process and requires only a special resolution to be passed. There must be 28 days of notice for public companies and 21 days of notice for private companies.

Pitfalls of applying replaceable rules

Difficult to navigate: unlike the company constitution, replaceable rules are not published and thus, might be difficult for shareholders and members to locate for reference.
Lack of comprehension: replaceable rules are unable to cover as many issues concerning running a company as compared to a company constitution. A company constitution is best suited for the company individually as it is easily customisable to the needs of the company specifically.
In general, a company constitution is able to cover more in-depth and consistent rules and guidelines of the company and allows the company to have increased control over its share capital.

In a nutshell, replaceable rules are good to have in the short run, especially when you are first starting your business in Australia. However, it is good to constantly revise the need for replaceable rules in comparison to a company’s constitution over the long run.

This article does not constitute legal advice.

The opinions expressed in the column above represent the author’s own.

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