All is not ‘lost’ if a company’s constitution cannot be located. There are several methods to address the situation. The most appropriate method will depend on several factors including what evidence can be located.
Where to start looking
Naturally, exhaustive searches should be undertaken of current and prior advisers (including accountants, financial planners and lawyers), banks, other financial institutions and all relevant parties in respect of the relevant company.
If exhaustive searches have been undertaken, and yet still no constitution has been located, then a decision should be made on what is the best method to proceed. While there are other options, we outline three popular options below.
Generally, the Corporations Act 2001 (Cth) provides a mechanism for adopting or modifying a constitution by way of a special resolution of shareholders. For some companies, this may prove a simple and cost-effective method of adopting a new constitution but it does come with risks.
Simply adopting a new constitution via a special resolution may not be legally effective because a constitution can include additional requirements (or hurdles) that must be satisfied before it can be amended. Naturally, in the case of a lost constitution it is difficult to know what further requirements might exist. This gives rise to uncertainty and risks if challenged by an aggrieved person.
For example, some constitutions require the consent of a particular person (eg, the head of the family) before the constitution can be varied. Many shareholders’ agreements also impose additional criteria on amending a constitution such as requiring the written consent of each shareholder. Also, lenders often include negative pledges in their security documents that require the lender’s prior written consent before a variation to the company’s constitution is effective.
One way of minimising risk is by having all shareholders and any other key stakeholder such as each director agree — on a properly informed basis — to the adoption of the new constitution. If all shareholders and key stakeholders agree, then there is an argument that the new constitution is effective even if certain requirements in the constitution have not been satisfied. This is based on the ‘doctrine of unanimous assent’ developed in the United Kingdom. However, it is not entirely clear the extent that this doctrine applies in Australia.
Given there are conflicting views and some degree of risk, we recommend that legal advice be obtained to discuss the facts surrounding the lost constitution and who are the shareholders, in what capacity those shareholders act (ie, whether they own those shares beneficially, or as trustee of a trust), the other stakeholders and any potential aggrieved party and determine which method is most appropriate.
We can prepare confirmatory documents as another option. This service might be more appropriate where there is a lost constitution but there is sufficient evidence relating to the constitution, eg, you have a standard template constitution from the supplier who supplied the constitution at the relevant time and there is supporting evidence from the parties involved and the adviser confirming this to be the case.
We can prepare documents to confirm, among other things, that the directors, shareholders and any other relevant party or key stakeholder agree that they are bound by the confirmatory documents that includes a copy of the template constitution. Our lawyers prepare a range of documents, including relevant resolutions, to appropriately record the constitution being confirmed. We can advise on what other evidence should be gathered to best support the constitution.
A court can also order the company to amend its constitution if it finds the company’s constitution is lost or destroyed. For example, this might occur when the company’s previous constitution has been destroyed (eg, in a bushfire) and shareholders have been unable to agree on the terms of the new constitution.
A court will only exercise its power if it is satisfied that it is necessary to do so to protect the interests of the company’s shareholders, creditors and other stakeholders. Moreover, a court application can involve significant costs and time and may not always produce a successful outcome.
Timely action preferred
Resolving uncertainty now may cost money and time. However, moving forward without a constitution may prove substantially more costly and time consuming especially if any issue or dispute arises in the future. Moreover, any actions or transactions undertaken by a company without a constitution may be at risk of being challenged and places directors at significant risk especially if the company acts as a trustee of an SMSF or another type of trust. Naturally, if there is any likelihood whatsoever of a dispute, then legal advice should be obtained.
Is a constitution update also worthwhile?
In many cases we come across in practice we find that many constitutions are considerably out of date and lack the developments in the Corporations Act 2021 (Cth) and improvements found in an up to date constitution including successor directors. Thus, where documents confirm a constitution that is considerably out of date, a constitution update after the confirmatory documents are completed is also generally recommended. This results in the missing document being confirmed with appropriate and sufficient supporting evidence that ‘supplements’ the lost constitution. The constitution update then brings the constitution ‘right up to date’.
Before proceeding on the basis that a constitution is lost, exhaustive searches should be undertaken to locate the missing document. We outline three options above for dealing with a lost constitution with different methods depending on the circumstances. Naturally, we would be pleased to advise on which option is best suited to the facts and circumstances in your case. We can also prepare documents tailored to suits your needs and risk appetite. We can also brief a barrister to assist with a court application if this is needed.
Finally, we recommend that you engage a lawyer to handle these assignments as we have come across a number of non-qualified document suppliers of questionable quality.
- Constitution Update Service
- ‘The constitution requires two directors yet, there’s only one director — what do I do?’
- Why is it important to have a good company constitution?
- Recent judgement has important implications for SMSFs with incomplete deed histories
- Preserve the intended control of a company using successor directors
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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional. The above does not constitute financial product advice. Financial product advice can only be obtained from a licenced financial adviser under the Corporations Act 2000 (Cth).
Note: DBA Lawyers presents monthly online SMSF training. For more details or to register, visit www.dbanetwork.com.au or call 03 9092 9400. Daniel Butler is presenting an SMSF Online Update on 9 June 2023 and a recording is available shortly afterwards.
For more information regarding how DBA Lawyers can assist in your SMSF practice, visit www.dbalawyers.com.au.
24 May 2023