all the members (aka shareholders) of the company agree to the de-registration; and
the company is not carrying on business; and
the company's assets are worth less than $1,000; and
the company has paid all fees and penalties payable under this Act; and
the company has no outstanding liabilities; and
the company is not a party to any legal proceedings.

ASIC may ask the applicant for extra information.

And before de-registration, ASIC will give notice of the proposed de-registration.

Notice and publication

ASIC must give notice and publish the proposed de-registration.

When ASIC may de-register the company

When 2 months have passed since the publication of the notice, ASIC may deregister the company.

ASIC must give notice of the de-registration to: the application or the person nominated in the application to be given notice.

And, ASIC may refuse to de-register a company.

When ASIC may refuse to de-register a company

ASIC may refuse to deregister a company if it decides to order that the company be wound up under section 489EA of the Corporations Act 2001 (Cth).

ASIC initiated de-registration

Below are the cases where ASIC may initiate de-registration:

the response to a return of particulars given to the company is at least 6 months late; and
the company has not lodged any other documents under this Act in the last 18 months; and
ASIC has no reason to believe that the company is carrying on business.
unpaid review and levy fees or late penalties have not been paid in full at least 12 months after the due date for payment

Winding up

ASIC may decide to deregister a company if it is being would up and SSIC believes:

the liquidator is no longer acting
the company’s affairs have been fully would up and a return that the liquidator should have lodged is 6 months late
company’s affairs have been fully would up under part 5.4 and the company has no property or not enough property to cover the costs of obtaining a Court order for the company’s de-registration.

De-registration process

ASIC will give notice of the de-registration to:

the company; and
the company’s liquidator (if any); and
on ASIC’s database

ASIC does not have to give notice to a person if it does not have the necessary information about the person’s identity or address.

After 2 months have passed since publishing the notice, ASIC may deregister the company.

De-registration following amalgamation or winding up

ASIC must deregister a company if the Court orders the de-registration of the company under the Corporations Act, specifically:

reconstruction and amalgamation provisions: section 413(d)
release of liquidator: 481(5)(b)
de-registration after the end of administration return is lodged: 509(2).

The effect of de-registration

De-registration means that a company ceases to exist on de-registration. All property that the company held on trust (including with a liquidator) before de-registration vests in the Commonwealth. This also includes property property outside Australia’s jurisdiction.

Property rights

The Commonwealth or ASIC take only the same property rights that the company itself held and this includes any security or other interests or claims in that property as well.

Record keeping

The directors of the company must immediately before de-registration keep the company’s books for 3 years after the de-registration.

What the Commonwealth or ASIC does with the property

If the property vests in the Commonwealth, it may:

continue to act as trustee; or
apply to a court for the appointment of a new trustee

All property that vests in either the Commonwealth or ASIC remains subject to any liabilities such as a security interest in or claim on the property.

Commonwealth actions

If the Commonwealth continues to act as trustee for the property, it must:

in the case of money - credit the amount of the money to a special account (allowed by Public Governance, Performance and Accountability Act 2013); or
sell or dispose of the property and credit the same special account mentioned above.

ASIC actions

If property vests in ASIC, it may:

dispose or deal with the property as it sees it; and
apply any money it receives towards expenses and make authorised payments.

Commonwealth and ASIC’s power to fulfil outstanding obligations

The Commonwealth or ASIC may act on behalf of the company or its liquidator if the Commonwealth or ASIC is satisfied that the company or liquidator would be bound to do that act if the company still existed.

Claims against insurers of deregistered company

Importantly, a person may recover from the insurer of a company that is deregistered an amount that was payable to the company under the insurance contract:

The company had a liability to the person; and
The insurance contract covered that liability immediately before de-registration.

Reinstatement

ASIC may reinstate a company if its satisfied the company should not have been deregistered.

Also, ASIC may reinstate a company under the Supervisory Cost Recovery Levy Act 2017 if:

ASIC receives an application for the reinstatement of the company
the levy or any late payment has been paid in fully.

Court reinstatement

A court may make an order that ASIC reinstate the registration of a company if an application for reinstatement is made to the Court by a person aggrieved by the de-registration or a former liquidator of the company and the court is satisfied the registration should be reinstated.

Do you have questions or comments about de-registration? Be sure to leave them below.

Help me with de-registration of an Australian company

Company

Entering contracts before Australian company registration

Photo by Phil Desforges on Unsplash

Entering contracts before Australian company registration

Updated: 27 January 2021

Here's what you need to know about entering contracts on behalf of an Australian company before its registered.

First, are these agreements valid?

In a nutshell, yes, they are.

And, this means, if you enter into a contract on behalf of a company before it is registered, the company will be bound by the contract and entitled to its benefit.

But, beware, if you don’t register the company or the company or the contract is not officially consented to by its directors (or agents) then the person(s) that entered into the contract on behalf of the company will be liable to pay damages to each other party to the contract. This is per s. 131 Corporations Act 2001 (Cth) per below.

CORPORATIONS ACT 2001 - SECT 131

131 Contracts before registration

(1) [Pre-registration contract binding] If a person enters into, or purports to enter into, a contract on behalf of, or for the benefit of, a company before it is registered, the company becomes bound by the contract and entitled to its benefit if the company, or a company that is reasonably identifiable with it, is registered and ratifies the contract:

within the time agreed to by the parties to the contract; or

if there is no agreed time—within a reasonable time after the contract is entered into.

(2) [Liability for non-performance]

The person is liable to pay damages to each other party to the pre-registration contract if the company is not registered, or the company is registered but does not ratify the contract or enter into a substitute for it:

within the time agreed to by the parties to the contract; or

if there is no agreed time—within a reasonable time after the contract is entered into.

The amount that the person is liable to pay to a party is the amount the company would be liable to pay to the party if the company had ratified the contract and then did not perform it at all.

(3) [Recovering against pre-registration company] If proceedings are brought to recover damages under subsection (2) because the company is registered but does not ratify the pre-registration contract or enter into a substitute for it, the court may do anything that it considers appropriate in the circumstances, including ordering the company to do 1 or more of the following:

pay all or part of the damages that the person is liable to pay;
transfer property that the company received because of the contract to a party to the contract;
pay an amount to a party to the contract.

(4) [Non-performance of pre-registration contract] If the company ratifies the pre-registration contract but fails to perform all or part of it, the court may order the person to pay all or part of the damages that the company is ordered to pay.

While the person that entered into the contract can be released from liability, they won't be entitled to an indemnity.

This means, if a third party makes a claim, the person(s) that entered the contract on behalf of the pre-registered company may have to cover the loss and damage suffered by the other parties per section 132 of the Corporations Act 2001 (Cth).

So, the moral of the story is to register a company first before you enter into contracts on behalf of a company.

See section 132 below.

CORPORATIONS ACT 2001 - SECT 132

132 Person may be released from liability but is not entitled to indemnity

(1) [A party to contract may release company from liability] A party to the pre—registration contract may release the person from all or part of their liability under section 131 to the party by signing a release.

(2) [No indemnity against company] Despite any rule of law or equity, the person does not have any right of indemnity against the company in respect of the person's liability under this Part. This is so even if the person was acting, or purporting to act, as trustee for the company.

Do you have questions or comments about signing contracts on behalf of an Australian company? Be sure to leave them below.

Help me with a company registration question

Company

Which Australian companies need a constitution?

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Which Australian companies need a constitution?

Updated: 29 January 2021

Which companies need a constitution?

Private companies don't need to have a constitution. In fact, the only ones that do are:

no liability public companies; and
special purpose companies

Also, while a special purpose company does not need to submit their constitution to ASIC, they should keep it with their company records.

What is a constitution?

So what exactly is a constitution? It’s a contract, between:

the company and each shareholder
the company and each director
the company and the company secretary, and
a shareholder and each other shareholder.

When to setup and adopt a constitution

A company may draft and adopt a constitution before or after registration.

Constitution at company registration

If it is adopted before registration, each shareholder must agree in writing to the terms of the constitution.

Constitution post company registration

If a constitution is adopted after registration, the company must pass a special resolution to adopt the constitution.

Constitution changes

A company can change or repeal its constitution by passing a special resolution.

A special resolution needs at least 28 days notice for publicly listed companies and 21 days notice for other company types. For the resolution to pass, you’ll need at least 75% of the votes to be cast in favour.

Replaceable rules - an alternative

If you would like some internal rules to manage your company, your alternative to drafting a constitution is to use replaceable rules found in the Corporations Act 2001 (Cth).

You can learn more about replaceable rules here.

Do you have questions or comments about a constitution? Be sure to leave them below.

Help me with a constitution

Company

Multiple businesses under a company vs new company for a new business?

Photo by Alexander Pidgeon on Unsplash

Multiple businesses under a company vs new company for a new business?

Updated: 7 February 2021

Clients have many questions around business structure.

One of the popular ones is "should I setup another company for a new business?"

While many companies are setup with multiple businesses operating under their structure, below are some factors to consider before making the decision to bundle one or more businesses under a single company or setup a new company for a new business.

In a hurry? You can jump ahead below.

Table of Contents

A company is a legal entity (it can sue and be sued)

Risk management

Associated entity

Associated entity criteria

Costs

When to have multiple businesses under one company

Flexibility option

When to setup a new company for a new business

I am starting with shares because that ranks as a popular consideration for clients making structure decisions.

Shareholders are allocated shares in a company as a whole.

What does this mean?

It means that a shareholder will usually have a stake in the shareholdings of the whole company and not just one of the businesses under the company structure.

Do you want your shareholders to have a stake in all businesses operating under the existing company?

If not, your alternative is to setup a separate company for your new business.

A company is a legal entity (it can sue and be sued)

You may have heard that a company has its own legal personality.

Practically, this means a company can sue and be sued. So any businesses that are under that company are exposed to that same risk of being sued.

So, if you have a business that is riskier than others; you may want to keep that business separate to the others and launch it under a new company.

Why?

To reduce the legal risk exposure to the other business(es) under the existing company.

While you can't wipe away all risks and we'll discuss this under the topic "associated entity", it helps you manage most risks.

So, let's discuss risk management next.

Risk management

Shareholders want their investment in a company to have every chance of success.

For this reason, they may not be too accepting of a new business venture under the company structure that could risk their investment.

And there may be rules around the kind of business(es) that a company can operate in the shareholder agreement.

So, what if you do decide to setup a new company for your new business - are you in the clear?

Let's consider the associated entity concept next.

Associated entity

While setting up another company means you are creating another legal entity with its own separate brand-new legal identity, there can still be a link between your companies because of the "associated entity" concept as I will explain below.

In certain situations, courts will consider the relationship between two associated entities; that is, 2 companies that are associated per the meaning given in s. 50AAA of the Corporations Act 2001 (Cth).

For example, in the case of a redundancy, the Fair Work Commission will consider if it would have been possible for the principal entity to redeploy an employee in an associated entity: s. 389 Fair Work Act 2009 (Cth) genuine redundancy criteria.

So what exactly is an associated entity?

Associated entity criteria

Briefly, an entity is an associated entity if these criteria are met:

the associate and principal are related bodies corporate
the principal controls the associate
the associate controls the principal and the operations, resources or affairs of the principal are material to the associate
the associate has a qualifying investment in the principal, has significant influence over the principal and the interest is material to the associate
the principal has a qualifying investment in the associate, has significant influence over the principal and the interest is material to the principal, or
a third entity controls both the principal and the associate and the operations, resources or affairs of the principal and the associate are both material to the third entity.

And costs for setting up the new company? we'll discuss those next.

Costs

Yes, there are legal and accounting costs for setting up another company.

The cost of setting up multiple companies is one reason why many choose to have multiple businesses run under one company.

And because each company has its own legal personality (can sue and be sued) so will need its own legal agreements and own tax return.

This can get expensive.

To give you an idea, setting up a company can cost anywhere from $500 to $3,000 and ongoing ASIC annual renewal fees are currently ~$300 at the time of writing this article. There's also the annual company tax return preparation fee which can start from $2,000 + range depending on your business size.

When to have multiple businesses under one company

Below are some situations where you may choose to have multiple businesses under one company.

you are NOT seeking external investment;
you need to manage cash carefully and want to avoid paying for the extra legal and accounting work.
you are trying to manage costs and will later split out the business to a new company;
the businesses are similar and/or carry similar operational risks and your board and/or shareholders are comfortable with the new business being under the same company structure;

Flexibility option

If you do have multiple businesses under one company and decide to seek external investment, you can then speak to your lawyer and accountant about moving the business under a new company.

This brings us to the scenarios of when you will setup a new company.

When to setup a new company for a new business

You may choose to setup a new company for a new business in these cases:

you have external investors in your original company for an existing business but you don't want the investors to have a stake in your new business;
your current board and/or investors do not want you to undertake a new business under the existing company;
you do not have cash restrictions and can afford the cost of running a separate company for a new business e.g. setup, accounting and ongoing ASIC renewal fees.

Do you have questions or comments about setting up your business structure? Be sure to leave them below.

I need help with a structure question or help setting up a company

Company

Legal work for expanding a solo director company in Australia

Photo by Annie Spratt on Unsplash

Legal work for expanding a solo director company in Australia

Updated: 2 December 2019

Knowing the legal work involved for expanding your solo director company helps you manage legal risk.

I'll explain the legals you'll need to expand and why, in the order of mandatory to recommended to help you manage your resources.

In a hurry? Jump ahead.

Quick Navigation

Legal work for expanding a solo director company in Australia

Company structure changes (mandatory)

Shareholder Agreement (best practice)

Founders Agreement (best practice)

First, we’ll look at the ASIC company structure changes because this legal work is mandatory.

Company structure changes (mandatory)

Adding new directors

You'll need paperwork to adjust the company structure to add one or more directors to your company.

After that, you'll need to record the changes with ASIC within 28 days to avoid ASIC penalties.

While ASIC does not collect the paperwork when you make the change, you may be audited by ASIC so you should keep the paperwork somewhere safe.

And, aside from audits, if you do decide to sell your company, your buyer will want to see that you have good company records in place.

Below is a list of the paperwork you'll need to add an extra director.

Director consent - the new comers consent to be a director. You'll need this consent from each director that you appoint; and

Office holder register - details of all registered directors. You'll need to update the register to add the new director.

Below is the information that you'll need to collect to add the new director.

Allocating shares

Now, while it's not mandatory for directors to be shareholders, you may wish to incentivise your new director by allocating shares to them.

Below is the paperwork you'll need to allocate shares to a new shareholder.

Share certificate - a certificate for the shares that have been issued; and

Shareholder register - lists the details of all shareholders. You'll need to record the new shareholder details on this register.

Iv’e written about what to consider when allocating shares here.

And more specifically about allocating shares to directors here.

After adding directors and allocating shares, we can then take a look at the agreements you will need.

Shareholder Agreement (best practice)

The Shareholder Agreement sets out the rights and responsibilities of shareholders.

While not mandatory, its best practice to have a shareholder agreement

Why?

Because it sets out the rights and responsibilities of shareholders.

Also, you can deal with common situations like adding and removing shareholders, share transfers to other shareholders and disputes.

You can read about what goes into a shareholder agreement in this guide.

So, shareholder agreement = shareholder rights and responsibilities.

So, if your directors are also shareholders, do you need a founder’s agreement if you have a shareholder’s agreement?

Yes. Why?

While both agreements may overlap on certain topics, each has a distinct purpose and function.

Next, I'll discuss the founders agreement.

Founders Agreement (best practice)

The founders agreement sets out the rights and responsibilities of the founders.

And who are the founders?

They are the original (and also recently added) directors that are making business decisions and working on the business day-to-day.

The founder’s agreement covers duties, work location, financial contributions, remuneration, disputes and more.

Here’s a guide for how to use a founder’s agreement.

Also, the founders’ agreement is not to be confused with an employee agreement.

While founders are responsible for bringing the key business ideas to life and making decisions, employees are completing the leg work.

Also, unlike a founder an employee may have very specific job duties like graphic design, developer, sales person.

I’ve also covered the founder’s versus employment agreements here.

Hope this helps.

I wish you every success in all your ventures!

I need help with expanding my company

Company

Director delegations in Australia

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Director delegations in Australia

Updated: 7 December 2019

At some point, as a director, you may decide to delegate duties to someone else.

Now, directors are able to delegate duties because of section 198D of the Corporations Act 2001.

In fact, directors may delegate any of their powers to:

a committee of directors;
a director;
an employee of the company; or
any other person.

And they'll need to record those director delegations in the company minute book.

Section 251A of the Corporations Act has all the details of what should be kept in a company’s minute book, if you'd like to learn more. We won't go through those details in this article.

So, as a director, can you rely on information or advice from others?

Information or advice from others

Director's may have employees, a professional advisor or expert or another director giving them information and advice about the company.

So, can directors rely on that information or advice?

Yes.

And, the courts will assume it was reasonable for a director to rely on that information or advice, unless the contrary is proved.

The reliance has to have been made in good faith and the director cannot have carelessly accepted it on face value.

Rather, the director must have made an independent assessment of the information or advice using their knowledge of the company, structure and operations: section 189 Corporations Act 2001.

And the director won’t be responsible for the the actions of the delegate if these above conditions are met.

So, why does all of this matter?

Well, if as a director, you receive bad information or advice, you'll want to prove that your reliance was reasonable and that you should not be held responsible.

Final thoughts

Finally, be sure to complete your due diligence and delegate your director powers carefully.

And, always ask questions about your delegates competencies.

I wish you success in your ventures!

I need help with my company

Company

Does your Australian company need to hold directors meetings to pass resolutions?

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Does your Australian company need to hold directors meetings to pass resolutions?

Updated: 7 December 2019

You are likely juggling many important tasks as a business owner, so, you may be wondering if you can avoid some meetings like meetings to pass resolutions.

The Corporations Act 2001 (Cth) regulates companies in Australia, and we are going to cover what it says.

First, if you are both a sole director and sole shareholder, you need not worry about these meeting rules, because they don’t apply to you.

But ... it's worthwhile to read on in case you add more directors.

So let's start with replaceable rules.

Replaceable rules

First, many of the sections in the Corporations Act about how meetings are run are replaceable rules - this means, they aren't mandatory.

In fact, the Corporations Act states you may use replaceable rules, a constitution or both.

Also, your company constitution may either adopt, modify or override replaceable rules.

Useful tips

Here are some useful tips from the outset:

Check if you have a constitution that deals with meetings and resolutions. If you do, then check the meeting rules.

You may change your constitution if meetings are not practical, but make sure to follow the rules (usually in your constitution).

If you don’t have a constitution, you may start with replaceable rules and tweak those rules to work for you.

For your convenience, meeting rules from the Corporations Act are below.

So, if you don’t see ‘replaceable rule’ next to the legislation below, it’s not optional that is ‘replaceable’. It’s the law that applies regardless.

Resolutions and declarations without meetings

Section 248A Circulating resolutions of companies with more than 1 director (replaceable rule)

Directors of a company may pass a resolution without a directors’ meeting, if all the directors vote and sign a resolution in favour of it.

Also, directors may sign separate copies of a document, if the wording is identical.

And the resolution is passed when the last director signs.

248B Resolutions and declarations of 1 director proprietary companies (replaceable rule)

If you are a sole director, you may pass a resolution by recording and signing the record or declaration.

Directors meetings generally

Section 248C Corporations Act (replaceable rule)

A director may call a meeting by giving reasonable notice individually to every other director.

Section 248D Use of technology Corporations Act (not a replaceable rule)

Directors may use technology to call or consent to a meeting.

The consent may be standing, but if consent is withdrawn that director needs to do so within a reasonable period before the meeting.

There is no direction about what’s reasonable in the Corporations Act.

Section 248E Chairing directors meetings (replaceable rule)

The directors of your company may elect a director to chair the meetings and how long the chair will complete this task.

Also, the directors must elect a director present to chair a meeting or part of it, if:

A director has not already been chosen to chair the meeting; or
A previously chosen chair is not available or declines to act for the meeting or part of it.

Section 248F Quorum at directors’ meetings (replaceable rule)

Unless the directors agree otherwise, the quorum for a directors meeting is 2 directors and they must be present at all times during the meeting.

Section 248G Passing of directors’ resolutions (replaceable rule)

A resolution of the directors needs a majority of the votes. The chair has a casting vote if necessary in addition to any vote they have in their capacity as a director.

Now, this particular rule is not always popular so many startups opt for ‘the chair does not have a casting vote’.

And you may be wondering, what if there’s a tie? This is a common question.

You may agree ahead of time who will have the casting vote each director's meeting or resolution.

Key points

Finally, check the meeting rules in your constitution. Consider changing your meeting rules, careful to follow rules on this in your constitution to do this.

If you don't have a constitution, you may start with the replaceable rules in the Corporations Act.

I wish you every success!

I need help with a shareholder register

Company

Secretaries and private Australian companies

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Secretaries and private Australian companies

Updated: 7 December 2019

First, do you even need to have a company secretary?

Your private company is not required to have a secretary but, if it does have 1 or more secretaries, at least 1 of them must ordinarily reside in Australia (per section 204A of the Corporations Act).

Who can be a company secretary?

So who can be a company secretary? This is covered in section 204B of the Corporations Act.

And only a person who is at least 18 may be appointed as a secretary of a company.

Also, a person who is disqualified from managing corporations the Corporations Act may only be appointed as a secretary of a company if the appointment is made with permission granted by ASIC under section 206F or leave is granted by the Court under section 206G of the Corporations Act.

Consent to be a secretary

Now, you need to have a person’s signed consent before you appoint them as a company secretary.

Also, you need to keep that consent somewhere safe.

And, if you don’t do this, you are in breach of the Corporations Act.

How a secretary is appointed

It's the directors that appoint a secretary. And the company must notify ASIC of the appointment within 28 days.

Secretary actions if their appointment is invalid

Even if you get the appointment wrong, for example, if you did not comply with an existing constitution when you appointed a secretary, any of their actions are still valid.

And the types of actions we are talking about could be signing and sending out a notice of meeting of directors if the constitution authorises the secretary to do this or signing a document to be lodged with ASIC.

In fact, the secretary’s actions not only bind the company in its dealings with other people but also make the company liable to other people.

Secretary terms and conditions of employment

Now, directors can set terms and conditions of employment for secretaries (section 204F of the Corporations Act). And it’s worth noting that section 204F a replaceable rule.

Also, replaceable rules are not mandatory. You are able to have a different rule in a constitution (if you have one).

Disqualified secretary

If someone is disqualified from managing corporations under the Corporations Act, then this also means that they won’t be able to act as a secretary.

I need help with a company secretary query

When your Australian startup needs to prepare financial reports

Company

When your Australian company needs to prepare financial reports

Photo credit: Raw Pixel, Unsplash

When your Australian company needs to prepare financial reports

Updated: 7 December 2019

Per the Corporation Act’s small business guide, your startup’s accounting requirements depend on whether your company is classified as small or large.

Also, your company's classification can change from one financial year.

What is a small company?

So, 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

And a company that does not satisfy at least 2 of these tests is classified as large.

As most startup companies will be classified as small under these tests, we'll look at accounting requirements for small companies below.

Financial records to keep

Under the Corporations Act, a company must keep sufficient financial records to record and explain their transactions and financial position.

And your records allow true and fair financial statements to be prepared and audited.

Now, financial record here means some kind of systematic record of the company's financial transactions and not simply a collection of receipts, invoices, bank statements and cheque butts.

Preparing annual financial reports and directors' reports

The Corporations Act requires a small company to prepare an annual financial report if shareholders with at least 5% of the votes in the company direct it to do so, ASIC directs it to do so or it has one or more crowdsourced funding shareholders at any time during the financial year.

Below are the items included in the financial reports:

profit and loss statement; and
balance sheet; and
statement of cash flows; and
directors' report (about the company's operations, dividends paid or recommended, options issued etc.)

Unless the shareholders' direction specifies otherwise, the company must prepare the annual financial report in accordance with the applicable accounting standards.

Other reasons to prepare financial reports

Although the Corporations Act itself may not require your company to prepare a financial report, except in the circumstances mentioned, your company may need to prepare the annual financial reports for the purposes of other laws (for example, income tax laws).

Also, preparing financial reports is good business practice, so your company can monitor and better manage its financial position.

Large proprietary companies

Large proprietary companies must prepare annual financial reports and a directors' report, have the financial report audited and send both reports to shareholders. Also, they must also lodge the annual financial reports with ASIC unless exempted.

Key points

If you are a small company that meets 2 of the tests below then you don't need to prepare financial reports (but its good practice to prepare them):

Test (a): gross operating revenue less than $10 million; or

Test (b): gross assets of less than $5 million at the end of the year; or

Test (c) fewer than 50 employees at the end of the year.

And, if you are a large company, you need to prepare audited financial reports and a directors report and have both sent to shareholders.

I need help with a financial reporting question

Company

Directors duty to disclose a personal interest

Photo credit: Warren Wong, Unsplash

Directors duty to disclose a personal interest

Updated: 7 December 2019

Director’s have a duty to disclose a material personal interest.

Now, it’s important to know about this duty because a breach is a strict liability offence.

Also, strict liability means intent is not necessary. A breach is a breach.

Below, I will take you through what the duty to disclose means for directors in practical terms.

In a hurry? Jump ahead.

Quick Navigation

Disclosure

Material personal interest example

No disclosure

Disclosure contents

Effect of a director’s breach

Director may give other directors notice

Standing notice rules

Minutes

Dates of effect and expiry of standing notice

Effect of material increase in nature or extent of interest

Effect of a breach

Interaction of sections 191 and 192 with other laws

Voting and transactions

Section 194 replaceable rule

Disclosure

Director's have a duty to notify other directors of material personal interest when a conflict arises.

Now, this duty applies where the director of a company has a material personal interest in a matter that relates to the affairs of the company.

Material personal interest example

Bill is a director at Zippy Pty Ltd, Zippy is looking to source extra USB-C cables from a supplier.

The supplier happens to be Bill’s brother who runs Speedy USB-C Pty Ltd, a company that Bill holds 55% of the shares.

As bill stands to gain from the purchase so should disclose this material personal interest to the other directors.

No disclosure

Now, a director does not need to give notice of an interest if the interest arises because:

the director is a shareholder and the other shareholders have the same interest; or
the interest relates to the director's pay; or
relates to a company contract that is subject to approval by shareholders and will not impose any obligation on the company if there's no approval by the shareholders; or
arises only because the director is a guarantor or has given an indemnity or security for all or part of a loan to the company;
relates to directors insurance for the director's liability as long as the contract does not make the company or a related body corporate the insurer.
relates to any payment by the company or a related body corporate for an indemnity or any contract relating to such an indemnity; or
is in a contract for the benefit of, or on behalf of, a related body corporate and arises only because the director is a director of the related body corporate; or
the company is a private company and the other directors are aware of the nature and extent of the interest and its relation to the affairs of the company; or
all the following conditions are met:
- the director has already given notice of the nature and extent of the interest and it relates to the company;
- if a person who was not a director of the company at the time when the notice was given is appointed as a director of the company - the notice is given to that person;
- the nature or extent of the interest has not materially increased above that disclosed in the notice; or
- the director has given a standing notice of the nature and extent of the interest is still effective in relation to the interest.

Disclosure contents

A director's disclosure must give details of:

the nature and extent of the interest; and
the relation of the interest to the company; and
be given at a directors' meeting as soon as possible after the director becomes aware of their interest.

And the details must be recorded in the minutes of the meeting.

Effect of a director’s breach

A breach by a director does not affect the validity of any act, transaction or agreement. And, these rules won't apply to a single director of a private company.

Director may give other directors notice

A director of a company who has an interest in a matter may give the other directors standing notice of the nature and extent of the interest.

So, this means the notice may be given at any time and whether or not the matter relates to the affairs of the company at the time the notice is given.

Standing notice rules

The standing notice may be given to the other directors before the interest becomes a material personal interest.

And the notice must:

give details of the nature and extent of the interest; and
be given:
- at a directors' meeting (either verbally or in writing); or
- to the other directors individually in writing.
the standing notice is given under subparagraph (b)(ii) when it has been given to every director.
standing notice must be tabled at meeting if given to directors individually
if the standing notice is given to the other directors individually in writing, it must be tabled at the next directors' meeting after it is given.

Minutes

The director must ensure that the nature and extent of the interest disclosed in the standing notice is in the minutes of the meeting where the standing notice is given or tabled.

Dates of effect and expiry of standing notice

The standing notice:

takes effect as soon as it is given; and
stops having an effect if a person who was not a director of the company at the time when the notice was given is appointed as a director of the company.

Also, the notice may be given to the person by someone other than the director to whose interests it relates (for example, by the secretary).

Effect of material increase in nature or extent of interest

The standing notice ceases to have effect for a particular interest if the nature or extent of the interest materially increases above what's in the notice.

Effect of a breach

And it's important to note that a breach by a director does not affect the validity of any act, transaction, agreement, instrument, resolution or other thing.

Interaction of sections 191 and 192 with other laws

Now, section 191 of the Corporations Act 2001 deals with a director disclosing a material interest and section 192 has to do with giving a standing notice.

Also, sections 191 and 192 of the Corporations Act 2001 are in addition to, and wont reduce the effect of any law about:

any general law rule about conflicts of interest; and
any provision in a company's constitution (if any) that restricts a director from:
- having a material personal interest in a matter; or
- holding an office or possessing property; or
- involving duties or interests that conflict with their duties or interests as a director.

Voting and transactions

Section 194 of the Corporations Act has rules about directors of private companies voting and completing transactions when they have a material personal interest.

Importantly, section 194 is a replaceable rule. It's not mandatory. This means it can be replaced by a company's own internal rules in a constitution.

Section 194 replaceable rule

Below is the replaceable rule in section 194 of the Corporations Act.

If a director of a private company has a material personal interest in a matter that relates to the affairs of the company and:

(a) the director discloses the nature and extent of the interest and its relation to the affairs of the company at a meeting of the directors; or

(b) the interest is one that does not need to be disclosed; then:

(d) any transactions that relate to the interest may proceed; and

(e) the director may retain benefits under the transaction even though the director has the interest; and

(f) the company cannot avoid the transaction only because of the existence of the interest.

Finally, paragraphs (e) to (f) will only apply if disclosure is made before the transaction.

Help me with advice about a company

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A guide to Australian company de-registration

21 January 2020

Voluntary de-registration

Criteria for de-registration

Notice and publication

When ASIC may de-register the company

When ASIC may refuse to de-register a company

ASIC initiated de-registration

Winding up

De-registration process

De-registration following amalgamation or winding up

The effect of de-registration

Property rights

Record keeping

What the Commonwealth or ASIC does with the property

Commonwealth actions

ASIC actions

Commonwealth and ASIC’s power to fulfil outstanding obligations

Reinstatement

Court reinstatement

Entering contracts before Australian company registration

Updated: 27 January 2021

CORPORATIONS ACT 2001 - SECT 131

131 Contracts before registration

CORPORATIONS ACT 2001 - SECT 132

Which Australian companies need a constitution?

Updated: 29 January 2021

What is a constitution?

When to setup and adopt a constitution

Constitution at company registration

Constitution post company registration

Constitution changes

Replaceable rules - an alternative

Multiple businesses under a company vs new company for a new business?

Updated: 7 February 2021

Shares

A company is a legal entity (it can sue and be sued)

Risk management

Associated entity

Associated entity criteria

Costs

When to have multiple businesses under one company

Flexibility option

When to setup a new company for a new business

Legal work for expanding a solo director company in Australia

Company structure changes (mandatory)

Adding new directors

Allocating shares

Shareholder Agreement (best practice)

Founders Agreement (best practice)

Director delegations in Australia

Information or advice from others

Final thoughts

Does your Australian company need to hold directors meetings to pass resolutions?

Replaceable rules

Useful tips

Resolutions and declarations without meetings

Section 248A Circulating resolutions of companies with more than 1 director (replaceable rule)

248B Resolutions and declarations of 1 director proprietary companies (replaceable rule)

Directors meetings generally

Section 248C Corporations Act (replaceable rule)

Section 248D Use of technology Corporations Act (not a replaceable rule)

Section 248E Chairing directors meetings (replaceable rule)

Section 248F Quorum at directors’ meetings (replaceable rule)

Section 248G Passing of directors’ resolutions (replaceable rule)

Key points

Secretaries and private Australian companies

Who can be a company secretary?

Consent to be a secretary

How a secretary is appointed

Secretary actions if their appointment is invalid

Secretary terms and conditions of employment

Disqualified secretary

When your Australian company needs to prepare financial reports

What is a small company?

Financial records to keep

Preparing annual financial reports and directors' reports

Other reasons to prepare financial reports

Large proprietary companies

Key points