When good governance is not enough

Posted by on 23/01/2017

Late last year, the Commonwealth Administrative Appeals Tribunal ruled that the school authority of Malek Fahd Islamic School in Sydney is not able to satisfy the requirements of the Australian Education Act 2013 or be able to do so in the foreseeable future. The act requires, among other obligations, that all school authorities operate not-for-profit, be financially viable, be a ‘fit and proper person’, and ensure that funding provided is used only for school education.

In effect, therefore, the Tribunal ruled that the board of Malek Fahd is not a ‘fit and proper’ person.

The only problem is that it was the previous board that by all accounts would be deemed not ‘fit and proper’, while the new board (originally set up as an interim board, but since confirmed as the board) is intent on remedying the governance failures instigated and maintained by the former board. Moreover, the actions being taken by the new board are all in the best interests of the school and are clearly aimed at ensuring that the school continues to operate, thus securing the educational future of the students. They show directors intent on acting with care and diligence, in good faith and for a proper purpose.

The purchase of the land for Malek Fahd was secured through a gift of millions of dollars from King Fahd of Saudi Arabia in the late 1980s. In what appears to be counter to the King’s intention, the Australian Federation of Islamic Councils (AFIC) purchased the land directly and rented it back to Malek Fahd. The buildings and improvements were paid for by the school. Multiple directors who served on the boards of both AFIC and Malek Fahd used funds to benefit AFIC at the expense of the school. When the inflated rent and management fees paid to AFIC by Malek Fahd became clear, government funding of the school was revoked on 2 March 2016.

From a governance perspective, there are very real questions as to whether the actions taken by the former directors in steering funds to benefit AFIC at the expense of the school constitute breaches of their statutory directors’ duties and their common law fiduciary duties. Those questions revolve around whether the directors acted with care and diligence (s 180); in good faith and avoiding conflicts of interest (s 181); and improperly used their position to gain advantage for themselves or AFIC (s 182). There is also a serious question as to whether AFIC has acted as a shadow director, which would mean it was also in breach of directors’ duties.

The only way in which these questions can be tested is if regulators take claims against the former relevant directors and AFIC for assistance in those breaches, or claim against AFIC as a shadow director.

Fit and proper responsible person

The Commonwealth Administrative Appeals Tribunal acknowledged the improved governance and management of the school under the new board of Malek Fahd, yet did not accept that it was a ‘fit and proper’ person.

What actions had the board taken to improve governance and management? The interim board, which was established in March 2016, comprised directors appointed with qualifications in governance and education. The interim board became the confirmed board in August 2016. No AFIC member remained on the board.

In a series of decisions aimed squarely at ensuring the continuance of the school and establishing sound governance frameworks, the board not only effected the resignation of the previous board of Malek Fahd but also amended the school’s constitution, lodging it with the Australian Securities and Investments Commission (ASIC). The board then set up banking accounts and banking arrangements for Malek Fahd that were separate from AFIC and appointed a qualified business manager for the school. This position had not previously existed. A new principal was also appointed.

The board went further, appointing independent auditors and amending all governance policies in accordance with the Board of Studies Teaching and Educational Standards NSW (BOSTES). Given that all members of the board are volunteers, the measures taken by the directors show how dedicated they are in undertaking their duties and meeting their objective of restoring the school’s financial and educational future.

Having set in train improvements, the board applied to the Commonwealth Administrative Appeals Tribunal to seek continuation of public funding of the school, confident that the measures being put in place were all aimed at fundamentally reshaping the governance framework of the school.

Further, in a compelling illustration of acting in the best interests of the school and making sure that AFIC does not continue to own the school campuses, Malek Fahd sued AFIC in September 2016 for the recovery of the land. This would ensure the school is in compliance with the express orders to this effect made by Justice Rares in July 2016.

Throughout the year, the students and staff at Malek Fahd lived with uncertainty as to the future of the school. It would have been understandable if some of them had decided that any effort was not worthwhile, given the circumstances. But intent on showing the educational standards of the school, students and staff alike strived to perform and the HSC results were testament to their hard work. Of the 113 HSC students, 45 achieved Australian Tertiary Admission Rank scores of 90-plus, with six students topping 98. These are the constituents who want Malek Fahd to succeed and who have faith in the direction being taken by the interim board.

It is difficult to argue that the actions taken by the board render it not a ‘fit and proper’ person. Moreover, their key stakeholders fully support the actions being taken and see them as being in the best interests of the school.

Does the Tribunal’s decision lead to good governance outcomes?

In December 2016, the school lost its appeal to maintain its government funding. In its judgment, the Tribunal acknowledged the considerable progress of the new board since March 2016 but noted that it was concerned that the school campuses continue to be owned by AFIC and Malek Fahd therefore continues to pay rent above what the Tribunal believes to be fair market value.

However, in a scenario that can be genuinely called ‘a catch-22’, the only way in which Malek Fahd can recover from AFIC the monies paid as rent and continue to sue AFIC for recovery of the land is if it continues to exist. The only reason that the board is taking these actions is to ensure the continuance of the school. The reshaping of the governance frameworks are all geared to one end only — making sure that the students can continue to attend Malek Fahd Islamic School. But if the school does not continue to receive funding, it folds.

Given these circumstances, it seems that the only party to benefit from this outcome is AFIC.

On all counts, this does not seem to be a fit and proper outcome.

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