Commonwealth Numbered Acts

FIRST CORPORATE LAW SIMPLIFICATION ACT 1995 No. 115 of 1995 - SCHEDULE 3

                        SCHEDULE 3                        Section 4

New Parts 1.4 and 1.5
Part 1.4-Technical provisions about aids for readers
    111J    Small business guide

Part 1.5-Small business guide
    1    What incorporation means

    2    The company structure for small business

    3    Setting up a new company

    4    Continuing obligations after the company is set up

    5    Company directors and company secretaries

    6    Shares and shareholders

    7    Funding the company's operations

    8    Returns to shareholders

    9    Accounts and audit for small proprietary companies

   10    Disagreements within the company

   11    Companies in trouble

Part 1.4-Technical provisions about aids for readers 111J Small business guide

(1) The regulations may amend the small business guide in Part 1.5 if the
amendments are necessary to reflect the regulations or instruments issued by
the ASC under this Law.

(2) The small business guide is divided into sections (numbered 1, 2, 3 . . .)
and the sections are divided into paragraphs (numbered 1.1, 1.2, 1.3 . . .).
For example, a reference in the guide to 3.1 is a reference to paragraph 3.1
of the guide.
Part 1.5-Small business guide
This guide summarises the main rules in the Corporations Law that apply to
proprietary companies limited by shares-the most common type of company used
by small business. The guide gives a general overview of the Corporations Law
as it applies to those companies and directs readers to the operative
provisions in the Law.
The notes in square brackets at the end of paragraphs in the guide indicate
the main provisions of the Corporations Law, the regulations made under the
Law, and Australian Securities Commission Practice Notes that are relevant to
the information in the paragraphs.
Other Commonwealth, State and Territory laws also impose obligations on
proprietary companies and their operators. 1 What incorporation means 1.1
separate legal entity that has its own powers
As far as the law is concerned, a company has a separate legal existence that
is distinct from that of its owners, managers, operators, employees and
agents. A company has its own property, its own rights and its own
obligations. A company's money and other assets belong to the company and must
be used for the company's purposes.
A company has the powers of an individual, including the powers to:
- own and dispose of property and other assets
- enter into contracts
- sue and be sued.
Once a company is incorporated, its separate legal status, property, rights
and liabilities continue until the ASC (Australian Securities Commission)
cancels the company's registration.
(sections 123, 161, 162, 574) 1.2 limited liability of shareholders
Shareholders of a company are not liable (in their capacity as shareholders)
for the company's debts. As shareholders, their only obligation is to pay the
company any amount unpaid on their shares if they are called upon to do so.
However, particularly if a shareholder is also a director, this limitation may
be affected by other laws and the commercial practices discussed in 1.3 and
1.4.
(sections 124, 516, regulation 12 of Table A Schedule 1) 1.3 director's
liability for company's debts
A director of a company may be liable for debts incurred by the company at a
time when the company itself is unable to pay those debts as they fall due. A
director of a company may be liable to compensate the company for any losses
the company suffers from a breach of certain of the director's duties to the
company (see 5.3).
In addition to having liability for the company's debts or to pay compensation
to the company, a director may also be subject to a civil penalty.
If a company holds property on trust, a director of the company may be liable
in some circumstances for liabilities incurred by the company.
(sections 232, 233, 318, 588G, 588J, 588M, 1317HA, 1317HD) 1.4 director's
liability as guarantor/security over personal assets
As a matter of commercial practice, a bank, trade creditor or anyone else
providing finance or credit to a company may ask a director of the company:
- for a personal guarantee of the company's liabilities; and
- for some form of security over their house or personal assets to secure the
performance by the company of its obligations.
The director of a company may, for example, be asked by a bank to give a
mortgage over their house to secure the company's repayment of a loan. If the
company does not repay the loan as agreed with the bank, the director may lose
the house. 1.5 continuous existence
A company continues to exist even if one or more of its shareholders or
directors sells their shares, dies or leaves the company. If a company has
only one shareholder who is also the only director of the company and that
person dies, their personal representative is able to ensure that the company
continues to operate.
(sections 123, 224A) 1.6 how a company acts
A company does not have a physical existence. It must act through other
people.
The directors of a company are responsible for managing the company's
business. The company's articles of association (see 3.2) usually provide
details of how meetings of directors are to be called and conducted. Directors
must keep a written record (minutes) of their meetings.
A company's articles may also allow individual directors, the company
secretary, company employees or agents to enter into contracts that bind the
company.
In some circumstances, a company will be bound by something done by another
person (see 1.7).
The shareholders of a company own the company, but the company has a separate
legal existence and the company's assets belong to the company.
Shareholders can make decisions about the company by passing a resolution,
usually at a meeting. The 2 main types of resolutions are ordinary resolutions
and special resolutions. Special resolutions usually involve the more
important questions that affect the company as a whole or the rights of some
or all of its shareholders.
Shareholders may pass an ordinary resolution at a meeting or without holding a
meeting if all shareholders sign a minute (a written record) setting out the
terms of the resolution.
If a meeting is held, an ordinary resolution must be passed by a majority of
the shareholders who vote at the meeting in person or by proxy (if proxies are
allowed). A special resolution must be passed by at least 75% of the
shareholders who are entitled to vote on the resolution and who vote at the
meeting in person or by proxy (if proxies are allowed).
(sections 250, 253, 255, 255A, 258, regulations 66, 69, 70, 73, 75, 77 of
Table A Schedule 1) 1.7 what others can assume about the company
Anyone who does any business with the company is entitled to assume that the
company has a legal right to conduct that business unless the person knows, or
ought to know, otherwise. For example, an outsider dealing with the company is
entitled to assume:
- that a person who is shown in a notice lodged with the ASC as being the
director or company secretary of a company has been properly appointed and is
authorised to act for the company; and
- that a person who is held out by the company to be a director, company
secretary or agent of the company has been properly appointed and is
authorised to act for the company.
(section 164) 2 The company structure for small business 2.1 proprietary
company for small business
Generally, a proprietary company limited by shares is the most suitable
company for use by small business. Such a proprietary company must have at
least one shareholder but no more than 50 shareholders (not counting employee
shareholders).
(sections 114, 116) 3 Setting up a new company
The operators of small businesses can either buy "shelf" companies or set up
new companies themselves. 3.1 "shelf" companies
The operator of a small business may find it more convenient to buy a "shelf"
company (a company that has already been incorporated but has not traded) from
businesses which set up companies for this purpose or from some legal or
accounting firms. 3.2 incorporation and registration
To set up a new company, the operator must apply to the ASC for registration
of the company.
A proprietary company limited by shares must have at least one initial
shareholder. That person (or if there are 2 or more initial shareholders-all
of them) must comply with a number of formalities before the company is
registered as an Australian company. The formalities include preparing a
memorandum of association and preparing or adopting articles of association.
To obtain registration, the initial shareholders must lodge an application
form (Form 201) with the ASC.
The company is registered when the ASC registers the application.
memorandum The memorandum sets out:
- the name of the company; and
- the names and addresses of the initial shareholders; and
- the amount of the company's share capital; and
- a statement that the share capital is divided into shares of a fixed amount;
and
- a statement that the liability of shareholders is limited.
articles
The articles govern the relationships between the company, its shareholders
and its directors. For example, they deal with the transfer of shares, the
appointment of directors and procedures at meetings.
Instead of preparing articles, the operator may adopt the standard articles
set out in Table A of Schedule 1 to the Corporations Law.
A shareholder of a company can ask the company for a copy of articles prepared
by the company.
(sections 117, 118, 120, 123, 175, 176, 180, 181, Table A Schedule 1) 3.3 ACN,
name and common seal
When a company is registered, the ASC allocates to it a unique 9 digit number
called the Australian Company Number (ACN). (For use of the ACN see 4.1).
A new company must have a name that is different from the name of a company
that is already registered. A proprietary company limited by shares must have
the words "Proprietary Limited" as part of its name. Those words can be
abbreviated to "Pty. Ltd.".
A proprietary company may adopt its ACN and the words "Proprietary Limited"
(or "Pty. Ltd.") as its name.
A company has a common seal. It shows the company's name and its ACN and is
equivalent to the company's signature. It is used on important company
documents such as share certificates and mortgages. Its use must be witnessed
by:
- a director of the company and its company secretary; or
- 2 directors of the company; or
- if the company has only one director who is also the only company
secretary-that person.
(sections 99A, 123, 219, 240, Division 1 of Part 4.2) 3.4 contracts entered
into before the company is incorporated
If someone enters a contract on behalf of a company before it is incorporated,
the company can ratify the contract within a reasonable period after the
company is formed. If the company does not ratify the contract, the person who
entered the contract may be personally liable to carry it out.
(section 183) 3.5 issuing shares
After the company is set up, it may issue other shares. The company's
memorandum sets out a limit on the number of shares that may be issued.
(section 117, regulation 2 of Table A Schedule 1) 3.6 who appoints the first
directors?
The initial shareholders usually appoint the company's first director or
directors.
A director must consent in writing to holding the position of director. See
5.1 and 5.2 for the removal of directors and the appointment of later
directors.
(sections 221, 222A, regulations 57, 58, 59 of Table A Schedule 1) 3.7 who
appoints the first company secretary?
The directors appoint the first company secretary. A company secretary must
consent in writing to holding the position of company secretary.
The same person may be both a director of the company and the company
secretary.
See 5.4 for the removal of secretaries and the appointment of later
secretaries.
(sections 222A, 240) 3.8 registered office
A company must have a registered office in Australia and must inform the ASC
of the location of the office. A post office box cannot be the registered
office of a company. The purpose of the registered office is to have a place
where official forms and notices can be sent to the company.
If the company does not occupy the premises where its registered office is
located, the occupier of the premises must agree in writing to having the
company's registered office located there.
The company's name and the words "Registered Office" must be shown outside the
office.
A company can notify the ASC of the opening hours of its registered office.
The company can choose any 3 or more hours between 9a.m. and 5p.m. each
business day as the opening hours of its registered office. If the company
does not notify the ASC of the opening hours of its registered office, the
office must be open for at least 5 hours between 10a.m. and 4p.m. each
business day.
(sections 100, 217, 219, Form 203) 3.9 registers kept by the company
A company must keep registers, including a register of shareholders and a
register of charges. A company must keep its registers at:
- the company's registered office; or
- an office at the company's principal place of business; or
- an office where the work in maintaining the register is done (the office
need not be an office of the company); or
- another office approved by the ASC.
A register may be kept either in a bound or looseleaf book or on computer.
If a register is kept on computer, its contents must be capable of being
printed out in hard copy.
(sections 216E, 1302, 1306)
register of shareholders
A company must keep in its register of shareholders such information as:
- the names and addresses of its shareholders; and
- details of shares held by individual shareholders.
(sections 216A, 216B)
register of charges
A company must keep a register of charges if the company gives a bank, trade
creditor or anybody else a charge over company assets.
(section 271) 4 Continuing obligations after the company is set up
The Corporations Law and other laws impose obligations on companies themselves
and on their directors and company secretaries. Some of the more important
obligations imposed under the Corporations Law are discussed below. 4.1 use of
company name, ACN and common seal
The name of a company must be shown outside all the company's business
premises (including its registered office) that are open to the public.
The company's name and its ACN must appear on its seal, some of its public
documents, its cheques and on all documents lodged with the ASC.
(section 219, Australian Securities Commission Practice Note 47) 4.2 annual
return
A company must lodge with the ASC an annual return which contains such
information as:
- names and addresses of each director and company secretary; and
- issued shares; and
- details of its shareholders; and
- address of its registered office.
For convenience, the ASC may send a partially completed annual return to each
company for the company to check, amend if necessary, verify and send back to
the ASC. However, a company must lodge an annual return with the ASC even if
the ASC does not send a partially completed annual return to the company.
(section 335, regulations 3.8.01, 3.8.02, Form 316) 4.3 annual fee
A company must pay an annual fee to the ASC on lodgment of the annual return.
(Corporations (Fees) Regulations) 4.4 notification to ASC of changes
The company must notify the ASC if certain basic changes to the company occur.
The table sets out these notification requirements.
If ...
the company must notify the ASC of the change...
            using Form No. ...     see...
1. a company allots shares
within 1 month after the change
            207                    section 187
2. a company changes the location of a register
within 7 days after the location is changed
            909                    section 216E

section 1302 3. a company changes the address of its registered office
within 7 days after the change
            203                    section 218
4. a company changes the opening hours of its registered office
(if the company has notified the ASC of the opening hours)
within 7 days after the change
            203                    section 218
5. a company changes its directors or company secretary
within 1 month after the change
            304                    section 242
6. there is a change in the name or address of the company's
directors or secretary
within 1 month after the change
            304                    section 242
7. a company creates certain kinds of charges
within 45 days after the charge is created
            309                    section 263
5 Company directors and company secretaries 5.1 who can be a director
Only an individual who is at least 18 years old can be a director. If a
proprietary company has only one director, they must ordinarily reside in
Australia. If a proprietary company has more than one director, at least one
of the directors must ordinarily reside in Australia. A director must consent
in writing to holding the position of director.
The company must keep the consent and must notify the ASC of the appointment.
In some circumstances, the Corporations Law imposes the duties and obligations
of a director on a person who, although not formally appointed as a director
of a company, nevertheless acts as a director or gives instructions to the
formally appointed directors as to how they should act.
The Court or the ASC may prohibit a person from being a director or from
otherwise being involved in the management of a company if, for example, the
person has breached the Corporations Law.
A person needs the Court's permission to be a director if the person has been
convicted of certain offences or is, in some circumstances, unable to pay
their debts as they fall due.
Generally, a director may resign by giving written notice of the resignation
to the company. The company must notify the ASC of a director's resignation. A
director who resigns may also notify the ASC of the resignation.
The articles may also deal with the process of changing directors.
(sections 60, 221, 222A, 224, 228, 229, 230, 242, 242C, 599, 600) 5.2
appointment of new directors
A company's articles usually allow existing directors of a company to appoint
a new director if a casual vacancy occurs. Shareholders in general meeting may
also have the power to appoint new directors.
(section 242, regulations 60, 61 of Table A Schedule 1) 5.3 duties and
liabilities of directors
In managing the business of a company (see 1.6), each of its directors is
subject to a wide range of duties under the Corporations Law and other laws.
Some of the more important duties are:
- to act in good faith
- to act in the best interests of the company
- to avoid conflicts between the interests of the company and the directors'
interests
- to act honestly
- to exercise care and diligence
- to prevent the company trading while it is unable to pay its debts
- if the company is being wound up-to report to the liquidator on the affairs
of the company
- if the company is being wound up-to help the liquidator (by, for example,
giving to the liquidator any records of the company that the director has).
A director who fails to perform their duties:
- may be guilty of a criminal offence with a penalty of $200,000 or
imprisonment for up to 5 years, or both; and
- may contravene a civil penalty provision (and the Court may order the person
to pay to the Commonwealth an amount of up to $200,000); and
- may be personally liable to compensate the company or others for any loss or
damage they suffer; and
- may be prohibited from managing a company. A director's obligations may
continue even after the company has been dissolved.
(sections 232, 475, 530A, 574, 588G, 596, 1317HA, 1317HB, 1317HD) 5.4 company
secretaries
A company must have a company secretary. The directors appoint the company
secretary. A company secretary must be at least 18 years old. If a company has
only one company secretary, they must ordinarily reside in Australia. If a
company has more than one company secretary, at least one of them must
ordinarily reside in Australia.
A company secretary must consent in writing to holding the position of company
secretary. The company must keep the consent and must notify the ASC of the
appointment. The same person may be both a director of a company and the
company secretary.
Generally, a company secretary may resign by giving written notice of the
resignation to the company. The company must notify the ASC of a company
secretary's resignation. A company secretary who resigns may also notify the
ASC of the resignation.
The company secretary is an officer of the company and, in that capacity, may
be subject to the requirements imposed by the Corporations Law on company
officers. The company secretary also has specific responsibilities under the
Corporations Law, including responsibility for ensuring that:
- the company notifies the ASC about changes to the identities, names and
addresses of the company's directors and company secretaries
- the company keeps its registered office open during its opening hours
- the company lodges its annual return.
A company secretary's obligations may continue even after the company has been
dissolved. (sections 83, 217, 222A, 240, 242, 242C, 335, 574) 6 Shares and
shareholders
A proprietary company must have a share capital and at least one shareholder.
6.1 becoming a shareholder and ceasing to be a shareholder A person may become
a shareholder of a company in several ways, including the following:
- the person being an initial shareholder of the company
- the company allotting shares to the person
- the person buying shares in the company from an existing shareholder and the
company registering the transfer.
(sections 117, 124, 184)
Some of the ways in which a person ceases to be a shareholder are:
- the person sells all of their shares in the company and the company
registers the transfer of the shares
- the company buys back all the person's shares
- the ASC cancels the company's registration.
(sections 206I, 574, regulation 19 of Table A Schedule 1) 6.2 classes of
shares
A proprietary company must have at least one share. It may have different
classes of shares. Usually the articles set out the rights that attach to each
class of shares. Those rights distinguish the classes of shares from each
other.
(sections 116, 118, regulation 2 of Table A Schedule 1) 6.3 meetings of
shareholders
Directors have the power to convene (call) meetings of all shareholders or
meetings of only those shareholders who hold a particular class of shares.
Shareholders who hold at least 5% of the issued share capital of a company
have the power to convene a meeting themselves or to require the directors to
convene a meeting.
Meetings may be held regularly or to resolve specific questions about the
management or business of the company.
The Corporations Law and the company's articles set out rules about meetings
including minimum notice periods and who can attend and vote.
A company must keep a written record of each meeting. The record usually
includes information such as where and when the meeting was held and the
results of any voting.
(sections 246, 247, 253, 258, regulations 40 to 56 of Table A Schedule 1) 6.4
voting rights
Different rights to vote at meetings of shareholders may attach to different
classes of shares. The entitlement to vote is usually set out in the company's
articles.
(regulation 2 of Table A Schedule 1) 6.5 buying and selling shares
A shareholder may sell their shares but only if the sale would not breach the
company's articles. A company's articles may give the company's directors the
discretion to refuse to register the transfer of the shares between the seller
and the buyer.
(regulations 19 to 21 of Table A Schedule 1) 7 Funding the company's
operations
The initial shareholders may fund the company's operations by lending money to
the company or by taking up other shares in the company. Except if it is
raising funds from its own employees or shareholders, a company must not
engage in any fundraising activity that would require the company to lodge a
prospectus with the ASC (for example, advertising in a newspaper inviting
people to invest in a company). The company may also borrow money from banks
and other financial organisations.
Anyone who has lent money, or provided credit, to the company may ask for a
mortgage or charge over the company's assets to secure the performance by the
company of its obligations.
(sections 116, 161, regulation 66 of Table A Schedule 1) 8 Returns to
shareholders
Shareholders can take money out of the company in a number of ways but only if
the company complies with its articles, the Corporations Law and all other
relevant laws. A director of a company that pays out money causing the company
to be unable to pay its debts as they fall due may be liable:
- to pay compensation; and
- for criminal and civil penalties.
(sections 588G, 1317HA, 1317HB, 1317HD) 8.1 dividends
Dividends are payments to shareholders out of the company's after tax profits.
The directors of the company decide whether the payment of dividends is
appropriate.
(section 201, regulation 86 of Table A Schedule 1) 8.2 buy-back of shares
A company can buy back shares from shareholders.
(Division 4B of Part 2.4) 8.3 distribution of surplus assets on winding up
If a company is wound up and there are any assets left over after all the
company's debts have been paid, the surplus is distributed to shareholders in
accordance with the company's articles.
(section 563A, regulation 97 of Table A Schedule 1) 9 Accounts and audit for
small proprietary companies 9.1 the small/large distinction
The accounting requirements imposed on a proprietary company under the
Corporations Law depend on whether the company is classified as small or
large. A company's classification can change from one financial year to
another as its circumstances change.
A company is classified as small for a financial year if it satisfies at least
2 of the following tests:
- gross operating revenue of less than $10 million for the year
- gross assets of less than $5 million at the end of the year
- fewer than 50 employees at the end of the year.
A company that does not satisfy at least 2 of these tests is classified as
large.
(section 45A)
As the great majority of proprietary companies are small under these tests,
the discussion below deals mainly with the accounting requirements for small
proprietary companies. If a company becomes large, the accounting requirements
imposed on it are more extensive.
(section 315) 9.2 accounting records
Under the Corporations Law, all proprietary companies must keep sufficient
accounting records to allow annual accounts to be prepared and audited.
"Accounting record" here means some kind of systematic record of the company's
financial transactions-not merely a collection of receipts, invoices, bank
statements and cheque butts. Accounting records may be kept on computer.
(sections 283, 283A, 283B, 283C, 289) 9.3 preparing accounts etc.
The Corporations Law does not require a small proprietary company to prepare
formal accounts (an annual profit and loss account and a balance sheet) or
have them audited unless the company is asked to do so by:
- shareholders holding at least 5% of the voting shares in the company; or
- the ASC.
Unless the shareholders' request specifies otherwise, the company must prepare
its accounts in accordance with the applicable accounting standards.
Although the Corporations Law itself may not require a small proprietary
company to prepare accounts except in the circumstances mentioned, the company
may need to prepare the accounts for the purposes of other laws (for example,
income tax laws). Moreover, good business practice may also make it advisable
for the company to prepare the accounts so that it can monitor and better
manage its financial position.
(sections 283A, 283C, 289, 292 to 294, 317, 317B) 10 Disagreements within the
company 10.1 special problems faced by minority shareholders
There are remedies available to a shareholder of a company if:
- the affairs of the company are being conducted in a way that is unfair to
that shareholder or to other shareholders of the company; or
- the affairs of the company are being conducted in a way that is against the
interests of the company as a whole.
A Court may, for example, order the winding up of a company or the appointment
of a receiver.
(sections 260, 461) 10.2 buy-back of shares
A company may buy back the shares of a shareholder who wants to sever their
relationship with the company.
(Division 4B of Part 2.4) 10.3 selling shares
A shareholder in a proprietary company who wants to sever their relationship
with the company may decide to sell their shares. However, the shareholder may
not be able to sell their shares readily-particularly if they want to sell
their shares to someone who is not an existing shareholder. Some of the
difficulties they may face in that case are:
- restrictions in the company's articles on transferring shares; and
- the restrictions in the Law on offering shares to the public. 11 Companies
in trouble 11.1 voluntary administration
If a company experiences financial problems, the directors may appoint an
administrator to take over the operations of the company to see if the
company's creditors and the company can work out a solution to the company's
problems.
If the company's creditors and the company cannot agree, the company will be
wound up (see 11.3).
(Part 5.3A) 11.2 receivers
A receiver, or receiver and manager, may be appointed by order of a Court or
under an agreement with a secured creditor to take over some or all of the
assets of a company. Generally this would occur if the company is in financial
difficulty. A receiver may be appointed, for example, because an amount owed
to a secured creditor is overdue.
(Part 5.2) 11.3 winding up and distribution
A company may be wound up by order of a Court, or voluntarily if the
shareholders of the company pass a special resolution to do so.
A liquidator is appointed:
- when a Court orders a company to be wound up; or
- the shareholders of a company pass a resolution to wind up a company.
(Part 5.2, section 495) 11.4 liquidators A liquidator is appointed to
administer the winding up of a company. A liquidator's main functions are:
- to take possession of the company's assets; and
- to determine debts owed by the company and pay the company's creditors; and
- to distribute to shareholders any assets of the company left over after
paying creditors (any distribution to shareholders is made according to the
rights attaching to their shares); and
- finally, to dissolve the company.
(Parts 5.4B, 5.5) 11.5 order of payment of debts
Generally, creditors who hold security over company assets are paid first.
(Division 6 of Part 5.6) 11.6 cancellation of registration
If a company has ceased trading or has been wound up, it remains on the
register until the ASC cancels the company's registration.
(sections 573, 574)