Malek Fahd Islamic School Limited and Minister for Education and Training
[2016] AATA 1087
•23 December 2016
Malek Fahd Islamic School Limited and Minister for Education and Training [2016] AATA 1087 (23 December 2016)
Division
GENERAL DIVISION
File Number(s)
2016/1753
Re
Malek Fahd Islamic School Limited
APPLICANT
And
Minister for Education and Training
RESPONDENT
DECISION
Tribunal Deputy President Bernard J McCabe
Date 23 December 2016 Place Sydney The decision under review is affirmed.
.......................[sgd]................................
Deputy President Bernard J McCabe
CATCHWORDS
EDUCATION FUNDING – approved authority – where approval revoked – whether requirements for commonwealth funding under the act satisfied – whether not for profit – whether fit and proper person – where commonwealth financial assistance used for inappropriate expenditure – uncommercial transactions – where efforts to rectify made – where continued non-compliance with the act inevitable – decision under review affirmed.
LEGISLATION
Australian Education Act 2013 (Cth) ss 3, 75, 77, 78, 81, 130
Australian Education Regulation 2013 (Cth) regs 26, 28, 29, 30
Education Act 1990 (NSW) sch 3REASONS FOR DECISION
Deputy President Bernard J McCabe
23 December 2016
Commonwealth financial assistance for schools is made available pursuant to the Australian Education Act 2013. Funding is channelled through the relevant state or territory. Money is ultimately paid to approved authorities that conduct schools. In the public schooling system, the approved authority is the relevant state or territory. In a private school, the approved authority is the body corporate which conducts the school. A body corporate must satisfy the requirements of the Act if it is to become and remain an approved authority.
The Malek Fahd Islamic School (‘MFISL’) is – or has been – an approved authority under the Act. It operates a private school across several campuses in Sydney. On 8 February 2016, a delegate of the Commonwealth Minister for Education and Training revoked the approval of MFISL. The delegate was satisfied MFISL did not satisfy the requirements in ss 75 and 78 of the Act. Those requirements are directed towards ensuring the approved authority conducts the school on a not-for-profit basis, deals with financial assistance it receives in accordance with the law, and is a ‘fit and proper person’.
MFISL acknowledges there were problems in its governance and accountability arrangements in the past. MFISL says it has addressed those issues. It has a new board, new managers and new processes. It says it is now able to meet most if not all of the requirements imposed by the Act, or will be able to do so within a reasonable time frame. It has asked the Tribunal to reconsider the decision to cancel the school’s approval under the Act.
The decision under review has been stayed while the Tribunal goes about its work. If the revocation decision stands, MFISL will no longer be eligible to receive financial assistance from the commonwealth. That means the school it operates may be forced to close.
The Minister acknowledges substantial improvements have been made at MFISL. There is some dispute over whether the new arrangements have gone far enough, or are as effective as MFISL says. But the Minister says MFISL remains saddled with bad deals struck by previous managers in any event. Those deals prevent MFISL from complying with the Act regardless of the recent improvements.
The evidence suggests MFISL is a good school which provides quality education. It appears to enjoy support in the community. It has the loyalty of its students and staff. But the reviewable decision is not directly concerned with the quality of the education provided by the school. The requirements in ss 75 and 78 of the Act are concerned with accountability. The Act implicitly assumes that even a good school will not remain good for very long if the financial assistance provided by the Commonwealth is not managed by the approved authority as intended. MFISL is accepting public monies, and those monies must be managed and applied in accordance with the Act.
I am not satisfied MFISL is able to satisfy the requirements in the Act, or that it will be able to do so within the foreseeable future. The decision under review must therefore be affirmed. I explain my reasons below.
THE HISTORY OF MFISL AND ITS RELATIONSHIPS
The establishment and funding of MFISL
MFISL was incorporated in 1989. It is a company limited by guarantee. The company’s constitution says the company was established with the object of providing ‘for general, liberal, scientific, cultural, artistic, religious education…’ (see exhibit two [ST221] at cl 4.2(b)). (The constitution identifies additional objectives, and it has been amended on a number of occasions, but this particular objective has remained constant.)
MFISL established a co-educational school which now operates over three campuses in Sydney’s west in: Greenacre, Hoxton Park and Beaumont Hills. It currently enrols over 2500 students in classes ranging from Kindergarten to year 12. It also employs a large number of staff.
Between 2012 and 2015, MFISL received in excess of $76 million in financial assistance from the Commonwealth. In 2016, it had received nearly $13 million by the time of the hearing. (The Minister estimated in late 2015 that MFISL would be paid around $19 million in four instalments in 2016: transcript at p 5. It is likely a similar amount would be paid in 2017 if MFISL were to remain an approved authority.) MFISL had other income, to be sure: it received money from the state of New South Wales and it also received tuition income paid by parents. But the Commonwealth was the largest source of funding to MFISL. The Minister estimated financial assistance from the Commonwealth accounted for about two-thirds of MFISL’s income in 2014-2015.
MFISL’s links to the Australian Federation of Islamic Councils, Inc
The Australian Federation of Islamic Councils Inc (‘AFIC’), a community group, was instrumental in the incorporation of MFISL. Prior to March 2016, AFIC appointed directors to the board of MFISL. The chairman and deputy chairman of the board of MFISL were nominees of AFIC. Key officers of MFISL were also subject to approval by AFIC. MFISL’s constitution included a requirement that it obtain approval from AFIC before leasing, transferring, mortgaging or disposing of MFISL’s property. After amendments in 2009, the company’s constitution also required AFIC’s written approval of any board resolution:[1]
·Approving the annual budget or changes to the budget;
·Proposing a capital works program;
·Authorising borrowings;
·Approving asset purchases or disposals where the asset was valued in excess of $50,000; and,
·Authorising the company to enter into any contract of more than two years’ duration or where the total value involved exceeded $50,000.
[1] See cl 12 of MFISL’s constitution reproduced in exhibit 1 at pp 90-91 (T10).
MFISL was, in effect, a creature of AFIC and that entity’s office-holders prior to March 2016. MFISL was under their control. The potential for a conflict of interest in those circumstances seems obvious enough. The school was a big business. Millions of dollars flowed through its accounts. MFISL was vulnerable if insiders preferred their own interests of the interests of AFIC. MFISL now suggests that is exactly what occurred. It alleges AFIC and some of the officeholders failed in their various duties to MFISL.
New management was installed at MFISL in March 2016. The new regime says it has removed the conflicted officers and cut constitutional links with AFIC. It has instituted new procedures. It has brought in external consultants who have advised on how it might regularise its internal arrangements and external dealings. Importantly, MFISL has also commenced proceedings in the Supreme Court of New South Wales against AFIC seeking repayment of funds, damages and the release from a number of other obligations. Those proceedings were commenced after the date of the reviewable decision. I will have more to say about the proceedings in due course.
While there is a long history of problematic dealings, the evidence in these proceedings focused on the period following 1 January 2014 when the current legislation came into force. Evidence of dealings before that date is only relevant for present purposes to the extent those dealings continued to have an effect after 1 January 2014. I will return to the detail of those dealings shortly. But first I will explain the operation of the approval regime in the legislation.
THE APPROVAL REGIME
The basic requirements for approval are set out in s 75 of the Act. They remain relevant to the analysis because s 81(1) says the Minister may vary or revoke an existing approval if he is satisfied ‘the approved authority does not comply, is not complying, or has not complied, with section 75, 77 or 78’. The first substantive requirement in s 75 is easily satisfied in this case: MFISL is a body corporate. It also appears to be financially viable, and it has the permission under the laws of New South Wales to operate. But there are two further substantive requirements which raise issues, namely:
·The not for profit requirement in sub-section (3), which requires that the person must ‘not conduct for profit any school in relation to which the application is made’. In forming a view on this question, the decision-maker must have regard to the opinion of the state minister,[2] any matter prescribed in the Australian Education Regulations 2013,[3] and ‘any other matters the Minister considers relevant’;[4] and
·The fit and proper person requirement in sub-section (5), which requires that the person is ‘fit and proper to be an approved authority’. In forming a view on this question, the decision-maker must consider whether the authority ‘has complied, or is complying, with laws…relating to the provision of school education’,[5] and any other matter the Minister considers relevant.[6]
[2] Australian Education Act 2013 (Cth) s 75(6)(a).
[3] Australian Education Act 2013 (Cth) s 130(2)(b).
[4] Australian Education Act 2013 (Cth) s 75(6)(d).
[5] Australian Education Act 2013 (Cth) s 75(6)(c).
[6] Australian Education Act 2013 (Cth) s 75(6)(d); see also Australian Education Regulation 2013 (Cth) regs 28-30.
I will discuss the not for profit requirement and the fit and proper person requirement below. Before I do that, however, I should also mention the operation of s 78. Section 78 sets out a number of requirements that approved authorities must satisfy if they are to receive ongoing funding. Sub-section (2)(a) requires that the approved authority ‘deals, in accordance with the regulations, with financial assistance that is payable’ under the Act. (The financial assistance in question here is provided under Division 2 or 5 of Part 3 of the Act.) Sub-section (2)(b) requires that the authority adopt monitoring arrangements mandated under the regulations to ensure compliance. Sub-section (3) provides the authority must ‘distribute all financial assistance received in accordance with Division 2 or 5 of Part 3, or from a State or Territory, in accordance with a needs-based funding arrangement that complies with any requirements prescribed by the regulations’. (There is also a requirement to comply with any implementation plans, but that does not concern us here.)
The reference to a ‘needs-based funding arrangement’ is important. The expression is found in s 3, which sets out the objects of the Act. The use of that expression underlines the requirement in s 75 that the approved authority not be operated on a ‘for profit’ basis. Which brings me back to s 75(3).
The not for profit requirement
The expression ‘not for profit’ is not defined in the Act. The expression is commonly used in relation to companies and other associations operated for charitable, scientific, educational, religious or community purposes. But to say an organisation is ‘not for profit’ says little enough about the way the business of that organisation is run. While many of these organisations merely aim to avoid insolvency or generate a modest surplus, some ‘not for profit’ organisations run businesses that generate substantial profits. The key quality of a ‘not for profit’ entity in the law of corporations and associations is that the entity does not distribute profits to its members in the form of dividends. The expression ‘not for profit’ is, in that sense, a misnomer. But the expression may have a broader meaning in the present context.
There is no suggestion MFISL has ever formally declared and paid a dividend to its membership. Its constitution would not permit it to do so. But that is not the end of the story, even if the expression ‘not for profit’ has the same limited meaning it has when used in other contexts. The Minister says, in effect, that MFISL has paid – and continues to pay, or is liable to pay on an ongoing basis – what tax lawyers would call ‘deemed dividends’.
When considering whether an entity ‘does not conduct for profit’ a school, the decision-maker must also consider the matters referred to in ss 75(6) and 130. The first of those matters is the opinion of the state minister. The state minister’s view can be gleaned from a declaration incorporated into s 33 of sch 3 of the Education Act 1990 (NSW). The state minister declared that MFISL at Greenacre was operated for profit from 1 January 2010 through 31 July 2012.
The declaration has never been revoked. While the period covered by the declaration predates the period in question in these proceedings, there is no evidence that the state minister has changed his or her view. I should add I am not persuaded it would make any difference to the outcome of the case if the state minister now expressed a different view given all the circumstances.
The next step is to have regard to the Regulations. Regulation 26 sets out a number of matters that must be taken into account when the decision-maker is considering whether the approved authority under the Act is conducting a school ‘for profit’. I do not understand there to be any dispute that the company has been recognised as having ‘not for profit’ status under the taxation laws (see reg 26(a)). MFISL’s constitution also refers to its not for profit status: see, for example, exhibit two [ST221] at cl 4.1(a); see also reg 26(d).
The requirements in sub-sections (b) and (c) of reg 26 are more of a problem. Sub-section (b) requires the decision-maker to undertake a two-part enquiry. In the first part, he or she must consider whether the approved entity has financial policies and practices in place. The decision-maker must also have regard to the quality of those policies and practices.
There was criticism of the policies and practices in place in MFISL before the change of management in March 2016. Many of the problems were identified in an audit report prepared by McGrath Nicol, a firm of accountants, in 2011: exhibit two [ST214]. A further audit report was commissioned from Deloitte in 2015 which identified a range of shortcomings, including the payment of above-market rent on properties owned by AFIC (exhibit one at pp 62ff and 693ff) and contracts for services that were paid for but never provided (exhibit one at pp 63-65).[7] MFISL’s own report in 2016, prepared by Grant Thornton, confirmed there were significant issues: exhibit one at pp 926-981. There is little doubt that financial assistance provided by the Commonwealth was being diverted from educational purposes into private hands while this state of affairs persisted. The applicant accepts that is so: indeed, its belief that others enriched themselves at its expense provides the basis for its proceedings in the Supreme Court.
[7] See also pp 120-130 (T12 – AFIC services agreement); 244-350 (T15 – Casifarm services agreement); 468-472 (T18 – AFIC termination of service agreement); 473-564 (T19-20 – Agrim Garana service and contract invoices); 771-780 (T31 – accountant service contract); and 805 (T33 – Letter from ASIC re liability for accounting services).
The reports make for worrying reading. But MFISL says new financial policies have now been implemented and new practices have been adopted under the guidance of the revamped board and consultants. They have moved to end (or at least suspend) many of the insider deals, and they have commenced legal action against AFIC to retrieve the situation.
A number of current policies were reproduced in the witness statement of Miriam Silva, the chair of MFISL: exhibit six. Mr Geoff Dornan, another new director, discussed MFISL’s progress towards devising and implementing a wide range of policies and practices in his statement (exhibit nine). He pointed out there were 22 policies touching on financial matters prepared by KPMG at the direction of the previous board but they were only now being implemented. He said MFISL had also appointed a compliance officer and was in the process of seeking a new principal and a business manager. He also said procurement policies had been revamped. Both of the witnesses spoke of the qualities of the new directors and the new personnel.
Questions remain over the adequacy and quality of those policies and practices. The Minister questions whether enough has been done. The Minister accepts the new board members are individuals of integrity who are genuinely committed to the welfare of students, educational purposes more generally, and the need to comply with the legislation – although the Minister remains concerned that the new board members may not be up to the task, which may be less of a reflection on the directors than it is on the scale of the challenge they face. For now it is enough to note MFISL has made substantial progress towards compliance with the requirement to adopt appropriate financial policies and practices. I also accept the evidence of Ms Silva and Mr Dornan that the new management of MFISL is working diligently to make the organisation compliant with the legislation.
Sub-section (c) in reg 26 requires careful attention. The Minister suggests this provision is an insuperable obstacle to the applicant’s case. The provision requires that the decision-maker consider:
whether money derived from or relating to a school in relation to which the person has applied to be the approved authority, block grant authority or non-government representative body:
(i) has been applied for the purposes of the school or for the purposes of the functions of the authority or body; or
(ii) has been distributed (whether directly or indirectly) to an owner of the authority or body, or any other person;
The reference in the second limb to direct or indirect distributions of money clearly picks up the concept of the deemed dividend. But the first limb of the enquiry expands the concept still further and requires an evaluation of transactions and their purpose. On that approach, an entity might be said to be conducted for profit if it spends money on improper or extraneous purposes, or if it engages in uncommercial transactions in relation to proper purposes. In each case, it will be necessary to examine the purposes of expenditure and determine whether the expenditure was appropriate for a school, or whether the expenditure was really intended to generate benefits for someone else that are inconsistent with the needs-based funding regime contemplated in the Act. The scale of the expenditure on extraneous purposes might also be relevant; a few small uncommercial transactions are unlikely to change the character of the enterprise, whereas larger transactions or a pattern of uncommercial transactions are more of an issue.
I note reg 29(2) sets out a non-exhaustive list of what would be considered to be expenditures ‘for the purpose of providing school education’. The list refers to:
(a)salaries and other expenses relating to staff at the school, including expenses related to the professional development of the staff;
(b)developing materials related to the school's curriculum;
(c)general operating expenses of the school;
(d)maintaining the school's land and buildings;
(e)purchasing capital equipment for the school;
(f)for a school whose capacity to contribute percentage is 0%--purchasing land and buildings;
(g)in any case--administrative costs associated with the authority's compliance with the Act and this regulation.
While sub-reg 29(1) refers to s 78, the list in reg 29(2) provides a convenient reference point for the assessment required under reg 26.
I have already mentioned that MFISL and the Minister agree the company has, in the past, entered into inappropriate relationships with insiders and others that led to the diversion of MFISL resources. That concession, which I accept, is enough to trigger the discretion to revoke or vary the approval of the approved authority under s 81 of the Act because the approved authority has not complied with s 75 in the past (that is, relevantly, after 1 January 2014). But the Minister says the applicant remains non-compliant, and cannot become compliant in the foreseeable future.
The Minister’s argument relies in particular on a series of property transactions between MFISL and AFIC that were entered into some time ago, and which continue to have effect – albeit that MFISL is now challenging those transactions in the Supreme Court proceedings. I will describe the transactions below. In doing so I will rely in particular on the allegations contained in MFISL’s statement of claim in the Supreme Court proceedings. That description is, as I understand it, uncontentious as between the parties.
The story begins with the Greenacre property. MFISL originally leased the Greenacre premises from AFIC in 1990. MFISL made substantial improvements to the campus at its own expense under the terms of that lease. In its statement of claim in the Supreme Court proceedings, MFISL says it spent $11m on buildings to be used in the primary and high school operations before the lease concluded in 2000. MFISL also alleges it paid rent in excess of the agreed amount under the original lease. MFISL had the option to renew the lease on the same relatively favourable terms but did not do so. Instead, MFISL agreed to a new arrangement in 2000 which involved the payment of much higher rent. MFISL says the increase in rent was intended to provide the cash AFIC needed to facilitate the purchase of another property in Condell Park. The Condell Park property was said to be acquired for the purpose of building another campus. AFIC purchased that property for $7.1m in 2000. MFISL agreed to advance an unsecured, interest-free loan to AFIC in the amount of $1.42m to pay for the deposit and GST on the property. The loan was not properly documented and there was no time fixed for repayment. MFISL also agreed to guarantee a separate loan to AFIC in the amount of $6.39m.
The Condell Park property was sold in 2003 for $10.35m. The property was never used as a campus. AFIC did not share the proceeds of the sale which MFISL had effectively funded. It did not reduce the rent on the Greenacre property or repay the $1.42m loan.
AFIC then purchased the campus in Hoxton Park in 2008. Once again, it turned to MFISL to fund the purchase. MFISL agreed in March 2008 to increase the yearly amount of rent it was paying on the Greenacre property to $1.3m to provide the means to fund the purchase. It also agreed to pay 5 years rent on the Greenacre property in advance to AFIC.
The parties agree the rent being paid on the Greenacre property was substantially in excess of the market rent payable during that period. MFISL also lost the use of the funds it paid to AFIC in advance. But it got worse. MFISL agreed to pay $500,000 in yearly rent on the Hoxton Park property without a proper valuation being presented, and without (at least initially) a formal lease. In October 2008, MFISL agreed to pay five years of rent on Hoxton Park in advance.
Subsequently, in May 2009, AFIC and MFISL agreed to a new lease on the Greenacre property. The commencement of the lease was backdated to 1 January 2008 and it was expressed to be for a term of 25 years with an option for a second term of 25 years. The yearly rent was set at $1.3m but was subject to CPI increases and market reviews. It is unclear how that initial rental figure was calculated: MFISL now says it was excessive. But in June 2009, AFIC obtained a valuation that suggested the market rent was much higher. The valuation estimated the correct rent was $1.5m from November 2004. MFISL agreed in June 2009 that it would pay the higher amount effective from 1 January 2004, and made a back-payment to AFIC of around $2.8m in July 2009. A variation in the lease on the property was executed in August 2009. MFISL says the rent exceeds the true market value; it is certainly not justified with reference to the unimproved value of the property.
MFISL also entered into a lease with respect to the Hoxton Park property in May 2009. The lease was for a term of 25 years with a yearly rental of $500,000 (subject to CPI increases and annual reviews). The term was backdated to 1 January 2008, even though the property was not formally acquired by AFIC until 16 June 2008. MFISL now says there was no valuation offered to justify the rent. MFISL subsequently expended $9.8m on improving the Hoxton Park property between 2008 and 2015.
AFIC entered into a further arrangement with MFISL to fund the acquisition of the Beaumont Hills campus in December 2010. The purchase price was $9.2m. MFISL agreed to pay annual rent of $920,000, and to pay AFIC in a lump sum 10 years in advance. That money was paid in January 2011. MFISL has subsequently expended around $4.4m on improvements to the property.
In addition to the property transactions, AFIC also charged MFISL for services. MFISL paid $2.2m in April 2010 in respect of services that AFIC claimed to have provided since 1989. AFIC and MFISL subsequently entered into a service agreement in January 2011 which required MFISL to pay AFIC a significant amount in respect of a range of services it provided. MFISL says the agreement was terminated a year later and AFIC was supposed to refund the monies it had been paid. MFISL says it has not received a refund.
If I accept the applicant’s account of these transactions in the statement of claim – and I have no reason to reject it, given that it appears to be consistent with the various reports from external consultants that were included in the evidence – there is little doubt that MFISL was making distributions to AFIC over a long period. It is also clear the distributions continued during the period relevant to my review. Those distributions were indirect, in that they were provided to AFIC in the form of inflated rents that were paid in advance and in respect of services allegedly provided by AFIC. The expenditures that improved the value of AFIC properties also amounted to an indirect distribution of MFISL funds; the payments in respect of services supposedly provided by AFIC can be characterised in the same way.
It also seems likely that MFISL funds were applied otherwise than for the purposes of the school, and not in connection with the function of the approved authority. While schools commonly pay rent on properties they use for educational purposes, the payment of inflated rents or advance payments without any proper basis is not acceptable. Advancing uncommercial loans to a parent entity is also impermissible. The funds expended in these transactions were not applied for MFISL. They were applied for the benefit of AFIC, or someone else.
In all the circumstances, I am satisfied MFISL was conducting a school ‘for profit’ within the meaning of that expression in s 75(3). The fact profits were being distributed to or applied for the benefit of AFIC weighs heavily in favour of that conclusion. The acknowledged shortcomings in the financial policies and practices that were evident at the time also point to that conclusion. The opinion of the state minister points to that conclusion as well notwithstanding MFISL’s ‘not for profit’ status under the law and the limitations in its constitution.
MFISL commenced proceedings in the Supreme Court of New South Wales on 19 September 2016. It says those proceedings are a game changer, at least insofar as the Minister’s decision is concerned. MFISL has sought:
·A declaration that AFIC held an interest in the Condell Park property on trust for MFISL, a declaration that the net sale proceeds are held on trust and a declaration that the net proceeds of the sale and interest are payable to MFISL;
·Judgment in respect of the $1.4m loan and equitable damages for the breach of duty that resulted in the loan advance;
·A declaration that AFIC holds an interest in the Hoxton Park property on trust for MFISL, and rescission of the lease to MFISL;
·Damages for the breach of fiduciary duty that led to the excessive rent and the advance payment of rent in respect of the Greenacre property;
·A declaration that the advance payment of rent in respect of the Hoxton Park property is held in trust for MFISL, and orders requiring that the amount (together with equitable damages) be paid to MFISL;
·A declaration that the back-payment of rent on the Greenacre property in 2009 is trust property that should be repaid together with interest and equitable damages;
·A declaration that the 2010 payment to AFIC in respect of services provided was held on trust, and orders that the amount be repaid together with interest and equitable compensation; and
·A declaration that the Beaumont Hills property is held on trust for MFISL, rescission of the lease and orders that the advance payment of rent be refunded along with equitable compensation for the breach of fiduciary obligation.
In the meantime, MFISL says it has stopped making any payments to AFIC with respect to its commitments. It acknowledges its liabilities under the various commitments continue to accrue in an accounting sense unless and until they are effectively set aside by the Court. MFISL also accepts there is a degree of uncertainty over the outcome, even if one accepts it has a strong case, and that it will take some time to conclude the proceedings in any event. But I was told the commencement of the proceedings makes for a conclusive break from the past.
MFISL says that even if I am satisfied the organisation was being conducted for profit until comparatively recently, it is not presently being conducted on that basis. MFISL acknowledges it may find itself back in a situation where its funds are effectively being diverted if the Supreme Court proceedings are unsuccessful and it is required to make good on its obligations to AFIC. But that is an issue for another day, I was told. I was encouraged to conclude the organisation was not currently being conducted for profit. MFISL sought to reinforce that claim by referring to the improvements in its policies and practices which were described by Mr Dornan and Ms Silva. So long as the payments were not being made and the policies and practices were substantially compliant, the Minister – or this Tribunal standing in the Minister’s shoes – should not revoke MFISL’s approval under the Act. I was told any shortcomings could be addressed through the imposition of conditions.
The Minister disagrees that events occurring since mid-2016 have changed everything. Ms Williams, counsel for the Minister, said there were still doubts over the quality of the policies and practices of MFISL. She also said the commencement of the Supreme Court proceedings was not as significant as MFISL argues because the proceedings may be unsuccessful. But there are two other problems because:
·Liabilities continue to accrue while the proceedings are on foot – and the fact MFISL must make provision for those liabilities in its accounts means those funds are still being applied within the meaning of reg 26(c)(i), even if they are not distributed within the meaning of reg 26(C)(ii);
·The proceedings do not adequately address the problems with the Greenacre lease.
The Minister acknowledges the Supreme Court proceedings are potentially meritorious. I agree they have some prospects of success, although it would be impractical and inappropriate to go beyond that preliminary assessment. There is more force in the Minister’s next contention: I think funds are in fact being applied at the point when the liability accrues but before anything is paid. But the Minister’s last point is even more powerful.
I agree the prayer for relief in the Supreme Court proceedings does not adequately address the problems with the Greenacre lease. Even if the proceedings are ultimately successful, the Greenacre lease will remain in place for the balance of the 25-year term. The statement of claim does not dispute that the obligation to pay the inflated rental due under that lease will continue into the future, even if MFISL succeeds in recovering earlier payments. That means MFISL’s funds will continued to be applied otherwise than for the purposes of the school, and they will continue to be distributed (if indirectly) to AFIC. The current moratorium on payments – if that is how it is properly characterised – can only be temporary. While there might be more room for doubt over the other payments and obligations that are subject to challenge, I am satisfied the liability to make payments under the Greenacre lease leads to the application of funds. But even if I am wrong in that conclusion, I am satisfied it is a matter that is properly to be taken into account pursuant to s 75(6)(d) of the Act. It is undesirable that the school should be accruing significant liabilities in this way. Those liabilities hang over its head and threaten its viability if things do not go well in court.
Mr Coleman SC, counsel for MFISL, suggested the statement of claim might yet be amended to enlarge the claim in a way that might address the Minister’s concerns about the Greenacre lease. I suppose it is also possible AFIC might make concessions. But none of that has occurred as yet. I must make my decision with reference to the material in front of me. Even if I accept the financial policies and procedures are substantially compliant – in other words, if I accept the evidence of Mr Dornan and Ms Silva at its highest – the totality of the material before me suggests MFISL is still being conducted for profit, and that it will continue to be conducted for profit into the foreseeable future.
The fit and proper person requirement
I turn next to the ‘fit and proper person’ requirement. I have already explained s 75(6) says I must take into account whether the entity seeking approval ‘has complied, or is complying with laws…relating to the provision of school education’ together with any other matter the Minister considers relevant.
I have already set out an extract from reg 29(2) which identified the sort of purposes for which recurrent funding might legitimately be expended. I have also found that, on MFISL’s case, it has expended monies for impermissible purposes prior to the change of management in 2016. Given my conclusions about the ongoing obligations under the terms of the Greenacre lease, it follows I am satisfied MFISL continues to pay out monies for impermissible purposes. That must count against a finding that MFISL is a fit and proper person.
There are other regulations which are relevant to my enquiry under s 75(5) – most obviously reg 28. That provision directs attention to the entity’s internal structures, processes and personnel. I have already mentioned the evidence of Mr Dornan and Ms Silva in particular, although I also heard evidence from Mr Bennett, a non-executive director. I was also provided with information about the other directors.
Ms Williams acknowledged the current directors of MFISL were individuals of integrity. I accept they are individually and collectively competent. I note:
·Ms Silva has extensive experience in the management of schools. (Indeed, there was some question over whether she could devote the time to MFISL given her involvement with schools elsewhere. In her oral evidence, she offered assurances about her commitment to MFISL, which I accept.) While aspects of her evidence about the detail of property valuations (transcript at pp 34-36) were challenged (transcript at pp 32-33), she presented as a calm, well-intentioned professional with a commitment to ethical and effective management.
·Mr Martyn Bawden is an experienced educator who has taught in public schools since 1976; he was a school principal for approximately 15 years: exhibit 15.
·Mr Geoff Dornan has extensive experience in school management and accounting. He holds an MBA and has served on the board of the Association of School Business Administrators: exhibit 10. He was challenged in cross-examination over the detail of MFISL’s accounting procedures (specifically, the requirement in the Regulations that dictates how an entity accounts separately for all Commonwealth monies: transcript at pp 42-44) and in relation to details of the valuation of the campuses (transcript at pp 44-50), but those questions do not cause me to doubt his expertise or diligence.
·Dr John Bennett is an adjunct professor in the School of Education at the University of New South Wales and a former chief executive of the Office of the Board of Studies in New South Wales. He holds a doctorate and masters’ degrees in education: exhibit 12.
·Mr Jim McDowell is a legal practitioner and corporate executive with extensive experience in management. He is chancellor of the University of South Australia and Chairman of the Australian Nuclear Science and Technology Organisation: exhibit 13.
·Mr Rodin Genoff is an experienced consultant and director with an interest in cultural diversity and business development: exhibit 16.
These board members were appointed after the previous board resigned in early 2016.
Regulation 28(1)(b) also requires that I consider the governance arrangements, including the ‘arrangements for managing and supervising the provision of education at the school’ and ‘arrangements to ensure compliance with the laws…relating to the provision of education’. While there were certainly issues with the governance of MFISL, I am not aware of any evidence suggesting there is a serious problem with the provision of education within the school. I note the inspection report of the Board of Studies, Teaching and Educational Standards of NSW dated 18 August 2015 concluded the school was mostly compliant with the relevant standards. The report concluded the school should be re-accredited albeit that the author recorded concerns over governance issues. I was provided with evidence about the school’s policies and procedures in Ms Silva’s statement, and Mr Dornan discussed some of the improvements that were made in the course of his evidence. I am satisfied the board has those matters in hand. I also accept the board has taken genuine steps to ensure compliance with the law, although question marks remain over compliance with detailed requirements over accounting for monies provided by the Commonwealth, and some other matters.
Regulation 28(2) requires that I consider the governance arrangements with particular reference to arrangements for the entity to receive independent and professional advice on its obligations. I do not understand there to be any suggestion that the board is disinclined to seek advice appropriately.
I am not aware of any other matters that are relevant to my deliberations, although I should mention one further issue. I do not accept I will be assisted by evidence from the student body or the community. There was some suggestion at the outset of the hearing that the school captain or perhaps teachers from the school would be made available to provide evidence. I do not doubt the passion and commitment of teachers and students to the school, and I am aware of the implications of this case for their future. But their evidence is not relevant to a dispute over governance and accountability, and the ability of the entity to comply with the Act. I did note students from the school attended the hearing in any event. I understand many of them were enrolled in a legal studies class. They were respectful and well-behaved, and it was entirely appropriate that they attend the public aspects of the hearing.[8]
[8] Parts of the hearing were conducted in private and confidentiality orders were made.
While I am satisfied MFISL is likely to meet the expectations in reg 28, my findings about the ongoing liability to make payments that are inconsistent with the requirements under the legislation makes it difficult for me to be satisfied MFISL is now a fit and proper person within the meaning of s 75(5) of the Act.
Other considerations relevant to approval
The Minister has also expressed doubt over MFISL’s compliance with s 78. Section 78 sets out the ongoing funding requirements for approved authorities. Section 78(2)(a) requires that the approved authority ‘deals, in accordance with the regulations, with financial assistance’, while s 78(2)(b) requires that the authority comply with the regulations directed to monitoring compliance. Section 78(3) goes on to require that the approved authority distribute financial assistance it receives ‘in accordance with a needs-based funding arrangement that complies with any requirements prescribed by the regulations…’.
The findings I have already made about MFISL’s performance under the old regime suggest MFISL did not deal with financial assistance in accordance with the regulations. Its distribution of financial assistance was also at odds with the concept of a ‘needs-based funding arrangement’ because funds provided by the Commonwealth were not made available to meet the needs of students as contemplated in the Act. The ongoing commitment to the Greenacre lease confirms MFISL will remain unable to comply with ss 78(2)(a) and 78(3).
Ms Williams asked Ms Silva and Mr Dornan a number of questions about the adequacy of policies and procedures and monitoring arrangements. While they were challenged on some of the detail of that evidence, I was not satisfied the shortcomings that were identified were such that MFISL was not substantially compliant with its obligations under s 78(2)(b) at present. Even if I accept the applicant was not fully compliant with s 78(2)(b) as the Minister argued, it is likely the instances of non-compliance could and would be addressed by the board within a reasonable timeframe.
CONCLUSION
I have concluded MFISL was not compliant with s 75 in the past because it was, prior to March 2016, being conducted for profit. I have also concluded it was not a fit and proper person prior to that point, and that the organisation was not compliant with its obligations under s 78. It follows the discretion in s 81 to revoke or vary the approval has been enlivened.
Since the change in management in March 2016, I am satisfied many things have changed, or are changing. The change in personnel and the introduction of new policies and practices suggest the organisation is making progress towards the goal of being considered fit and proper. It is also more likely to be capable of satisfying its obligations under s 78. If the internal governance arrangements and the policies and practices were the only issue, I would not be inclined to revoke the approval – although I would require the ongoing approval to be subject to conditions that would reassure the Minister, the school community and the wider public that MFISL was complying with its obligations.
But while changes have been made, some things have stayed the same. I refer in particular to the ongoing burden of the uncommercial arrangements with AFIC. I have explored the historical entanglements between MFISL and AFIC which have resulted in significant amounts being diverted from the coffers of MFISL to AFIC, and perhaps to others. MFISL says the flow of payments has stopped and it has commenced legal proceedings. At a minimum, it says I should accept the organisation is not being conducted for profit now, whatever the outcome of the Supreme Court proceedings, so the decision under review should be set aside and funding should be allowed to resume pending further developments.
That is dangerous ground. Even if MFISL is not currently paying out on its obligations to AFIC, it must make some sort of provision for them in its accounts, if only to avoid a suggestion of insolvency. If it is doing that, I think it is still applying money otherwise than for the purposes of the school, even if it is not distributing those funds pending the outcome of the litigation. Further, the litigation does not address the ongoing obligations under the long-term Greenacre lease. It is unclear how the uncommercial aspects of that arrangement will be wholly undone by the litigation even if the proceedings are eventually concluded in MFISL’s favour. Those findings make it clear that, at a minimum, MFISL continues to be operated for profit.
While I have the power to vary an approval and make it subject to conditions under s 81(2), I do not think that power extends far enough to permit me to effectively waive significant ongoing non-compliance. That would be inconsistent with the whole purpose of the legislation. That is what I am being asked to do, especially in relation to the uncommercial aspects of the Greenacre lease. Even if it could be argued approval might be given on condition that:
·MFISL diligently pursued the litigation out of separate funds (because financial assistance provided by the Commonwealth should not be expended on litigation);
·the payments to AFIC remain suspended pending the outcome of the litigation and further review; and
·any further shortcomings in the policies and procedures and governance arrangements were addressed;
there is no plan for dealing with the ongoing implications of the Greenacre lease. Financial assistance provided by the Commonwealth will continue to leak from MFISL to AFIC. In those circumstances, the only appropriate course is to affirm the decision under review.
That is a hard outcome for MFISL, and for the students and community it serves. But the ultimate responsibility must be laid at the door of the previous management of MFISL.
I certify that the preceding 69 (sixty-nine) paragraphs are a true copy of the reasons for the decision herein of Deputy President Bernard J McCabe
......................[sgd].................................
Associate
Dated: 23 December 2016
Date(s) of hearing: 28-29 September 2016 Counsel for the Applicant: Mr I Coleman SC Solicitors for the Applicant: Mitry Lawyers Counsel for the Respondent: Ms K Williams Solicitors for the Respondent: HWL Ebsworth
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