Explain the three ways in which the internal governance rules apply under the Corporations
Act. If you were advising a client who is thinking of incorporating a sole trader company, what
would be the most suitable way to deal with internal governance obligations?
Corporate governance is an essential system of rules and procedures by which a company is
managed. With the company’s best interests as the top priority, corporate governance influences
how the company is operated by defining relationships between its members, management and
directors (Graw, S., et al 2017, pp 531-563). A company’s corporate governance may be conducted
under the provisions of the Corporations Act 2001 (Cth) (“the Act”) through replaceable rules,
constitution, or a combination of both (s.134). Part 2B of the Act sets out the replaceable rules and
rules of constitution, including their effects on all types of companies.
The replaceable rules or constitution of a company act as a contract between the company and each
member; between the company and each director and company secretary; and between a member
and each other member. That is, each member agrees to abide by the constitution and rules as far
as they apply to their respective roles; and if they breach this contract, they are liable (ss. 140(1),
