Convert to a single director company – update your company Constitution

Convert to a single director company on our law firm’s website

You are about to convert to a single director company on our law firm’s website. You are building everything you need including:

• law firm letter
• Member Minutes
• the Constitution

ASIC requires nothing from you

Do not send a copy of the new Constitution to ASIC. There are no ASIC fees when you convert to a single director company. You are now allowed to have one of the directors resign.

Every Member signs the Member Minutes

As we have drafted the convert to a single director company, each shareholder signs to give their consent. If you can’t get every shareholder to sign please telephone us.

Does the update allow now allow a single director company?

Yes, this conversion to a single-director company update allows a two-director Pty Ltd to be converted to a sole Director/Secretary Pty Ltd. It is part of the change.

Any Capital Gains Tax or other taxes when you convert to a single director company?

Generally, there are no tax consequences when you merely upgrade the Constitution and change or reduce directors.

However, Legal Consolidated does not provide CGT, (stamp) duty and other tax advice on this Constitution update. Speak to your accountant as they know your individual circumstances.

My company has Governing Director shares. Is there any CGT when I convert to a single director?

Legal Consolidated does not provide tax advice on this document. You need to talk with your accountant who knows your individual circumstances.

This information is general in nature.

Power (but not necessarily ownership) is in the hands of the ‘voting’ shares. But not all shareholders are entitled to vote on their shares. A shareholder may have ‘non-voting’ shares.

The opposite is Governing Shares. Rather than ‘normal’ shares, a shareholder can have Governing shares. For example, Dad and Mum may own only one share. And their two children own 10,000 shares each. But the Mum and Dad single share has 100% of the voting power. (This one share often converts to a single vote share, upon their death. But that is another story.)

Different directors and other shareholders can own the shares. And the shares can have different rights. Check with your accounting, but generally, changing the directors does not change the shareholding or the rights of any shares. All you are changing are the directors. By doing just that, you are not usually changing the ownership of the company. Directors are not ‘owners’. They are just humans that look after the company.

There is, therefore, usually no Capital Gains Tax or other issues. The conversion from two or more directors to just one usually has no such taxation issues. You usually only get CGT issues if you change the ownership of shares. This convert to a single director company update does not do that. But, again, check with your accountant or your tax adviser that knows your individual circumstances.

After I update my Constitution how do I reduce the number of directors to one with ASIC?

Q: I have just converted a company to a ‘one director’ company. Will the ASIC records for the company be updated so that only one director is shown on the company records or does an appropriate ASIC form need to be lodged by me?

A: After you have updated your company constitution you log into ASIC and reduce the number of directors. This is free for you to do. You use the Corporate Key that ASIC posted to you when you first got the company.

What is a Company Constitution?

The Constitution is a contract between the company, directors and shareholders (members). It is not mandatory to create a constitution. Your internal procedures are, instead, governed by government Replaceable Rules. However, no accountants, lawyers or financial advisers would advise your company to rely on these Replaceable Rules. This is because Replaceable Rules are not tailored to your specific needs. Relying on Replaceable Rules is dangerous.

Constitution vs Replaceable Rules

Your company must have a set of rules. The rules are in either the:

• Constitution – which you are about to build; or failing that
• Replacement Rules – set out in the Corporations Act

We often review a company incorporated on a non-law firm’s website. To ‘save time’ the non-law firm website adopts Replacement Rules for:

1. a sole director, sole member company; or
2. a Self-Managed Super Fund corporate trustee (special purpose company)

However, both of these companies must have a Constitution.

Further, the Replaceable Rules are the bare minimum. There are additional powers that a company should have – our Constitution contains these additional powers and benefits.

Also, the Replaceable Rules change at the whim of the current government. While the changes may benefit ‘society’ they may not be in the best interests of the shareholders. In contrast, constitutions can be amended at any time by the Members, just as you are about to do.

Personal Guarantees a problem in an old Constitution

Trade creditors and banks often require company directors to all sign personal guarantees. You guarantee the company’s debt. If the company cannot pay then they come looking for you, the guarantor.

We had one situation where (by mistake) Mum and Dad were both directors of a company. The lender required both to sign personal guarantees for the companies’ new loan. Mum refused to sign. Instead, they amended the company constitution to allow a one-director company. Dad then applied as a single director to the same person at the same bank. The wife was no longer required to sign a guarantee. The company got the loan.

Think twice before allowing the ‘safe house’ spouse to sign guarantees. For asset protection see here.

The 7 Improvements when updating a Company Constitution

The Constitution you are building updates your company’s internal rules and procedures. It allows you to convert to a single-director company. It fully complies with changes to the Corporations Act. The 7 improvements are:

1. Using Technology from a new Constitution

Technology has changed how a board can communicate with itself, employees and shareholders. When you replace a Company Constitution it is updated to reflect how changes in technology affect your business operations. Traditionally board decisions are mailed out in physical form to shareholders. However, email is a faster form of communication that is used by many businesses to correspond with shareholders. Your conversion to a single director company update takes into consideration how instantaneous communication affects your shareholders. Further, your constitution outlines how technology can be used in meetings.

2. Dividends

In 2010, the Australian government amended section 254 of the Corporations Act. This section governs how dividends are paid.

Before 2010 the Corporations Act stated that dividends could only be paid from company profits. However, after 2010 a company is not allowed to declare a dividend unless:

1. the company’s assets exceed its liabilities; and
2. the payment is fair and reasonable; and
3. the payment does not materially prejudice the company’s ability to pay its creditors.

Under an old constitution, you may not have been able to legally pay dividends. Insolvency specialists pursue this argument. They challenge all dividends that you have paid since 2010.

3. Email voting

Shareholders can cast a vote regarding a meeting. Do it either online or through personalised voting forms. Members do not need to attend the meeting and can appoint a proxy. Your new Constitution improves meeting efficiency.

4. Share buybacks

Share buybacks allow companies to buy back their shares from the shareholders. In Australia, there are 5 types of share buybacks. They are:

• equal access
• on-market
• employee share scheme
• selective buy-back
• minimum holding.

Replace a Company Constitution and ensure the legality of the share buyback.

5. Preference shares

A company has the power to issue preference shares under Australian law. Your new Constitution ensures that the preference shares are clear.

6. Single Directors are allowed only in new Constitutions

The Corporations Act now permits sole director companies. You now only have to have one director for your company. Before this time, you had to have a minimum of 2 directors. This would often be a wife and husband.

Having two directors was a disaster for asset protection. Instead of one, both directors go bankrupt along with the insolvent company. Owe money to the ATO for PAYG or superannuation? Then all the directors are liable automatically for such unpaid debts. Better only a single director goes down with the sinking ship.

Asset protection at a basic level is having no assets in a risky person’s name. Instead, assets are in the safe person’s name. This is called the ‘man of straw and the woman of substance’.

Your new Constitution allows you to have a single director.

7. Division 7A Loan Agreement

When you replace a Company Constitution you get a Division 7A Loan Deed. It works for each Member and for any new Member. But for other ‘related persons’ that are not shareholders, they need their own Div7A Loan Deed.

Four common faults in old Constitutions and Memos & Articles of Association

Australian companies created before 1 July 1998 had a ‘Memo & Articles of Association’. Like old Constitutions, your Memo & Articles of Association still operates but not well. Like old Constitutions, faults with the Memo & Articles of Association include:

1. Mandatory AGM each year

Requiring an Annual General Meeting (AGM). However, the law no longer requires an AGM for Pty Ltd companies. No one has AGMs anymore. But failure to hold an AGM, if the old rules require it, renders your company non-compliant. This is for both taxation and insolvency laws. Your new Constitution ensures that you do not have to have AGMs.

2. Only do as permitted

Stating a ‘list of objects’. Old Constitutions state the purpose of the company. E.g. ‘sell fishing tackle and retail’.

What if your company now does something else, such as acting as a trustee of a doctor’s surgery? Then you break the law. Your company is acting ‘ultra vires’. It is acting outside its powers. Again, your company is non-compliant. Legal Consolidated’s Constitution allows you to do anything a human can do – and more.

3. Two directors go bankrupt, instead of one

Requiring two directors. As stated above, the laws have changed. You now only need one director. It is safer to only have one director in case the company goes insolvent. But your old rules require two directors.

4. Perform out-of-date and illegal actions

Requiring illegal actions. Instead, update the company constitution to allow these correct powers:

• exercise corporate powers
• issue and allot shares
• not avoid liability (a very strange requirement)
• transfer shares
• vote and proxies
• appoint directors and company secretary
• conduct general and director meetings
• sign bank documents, loans and mortgages (however this may be useful because banks often cannot enforce a loan made by a company that is still working under the old Constitution or M&A