On 20 September 2016, the Federal Court of Australia handed down its judgment in the case of Registrar of Aboriginal and Torres Strait Islander Corporations v Monaghan (No 2) [2016] FCA 1143 (Monaghan Case).

The Monaghan Case raises a number of crucial points that all Aboriginal and Torres Strait Islander corporations should be aware of - including the need for directors to receive appropriate training in managing a corporation.

The Monaghan Case also highlights the need for directors to comply with their duties under the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act), and to ensure that their corporation keeps proper records and books.

Decision

This case concerned the conduct of three former directors of the Southside Housing Aboriginal Corporation (Corporation), none of whom had any experience or training in managing an Aboriginal corporation.

The Corporation was a small not-for-profit that owned residential properties which it rented to Aboriginal people that needed access to affordable housing. The rental from the properties was the Corporation’s only source of income.

The Corporation failed to properly manage and maintain the properties it owned. For example, it did not take steps to recover significant amounts of unpaid rent from the tenants (totalling approximately $26,000). It also paid for expenses such as excess water charges and property damage caused by the tenants, which the Registrar argued the tenants should have been made responsible for. Further, it allowed the properties to fall into disrepair and was eventually forced to sell the properties to repay creditors.

Importantly, all three directors of the Corporation involved in the case lived in the properties for some time, and two of the directors did not pay all of their rent. The directors attended board meetings where the non-payment of rent and excess water usage by tenants was discussed, but failed to declare their conflicts of interest at those meetings.

Further, the Corporation failed to maintain adequate membership and financial records as required under the CATSI Act, and was twice placed under special administration after examination of its books revealed serious concerns relating to poor financial management.

Having regard to the above, the Court found that the former directors had failed to meet their obligation to ensure that the Corporation kept adequate books and records as required by s 363-1 of the CATSI Act. The Court also made declarations that two of the directors had breached their duty of care and diligence (s 265-1) and the duty not to make improper use of their position as directors (s 265-10).

The Court disqualified two of the directors from managing a CATSI corporation for a period of five years, and ordered them each to pay a penalty of $38,500 as well as the Registrar’s costs. A disqualification order for six months was also imposed on the third director.

Key messages

The three key messages to take from the Monaghan Case are as follows:

  1. Compliance with directors’ duties – It is crucial that directors understand and fully comply with their directors’ duties. As we saw in the Monaghan Case, the consequences for breaching these duties can be severe and can include disqualifications orders as well as heavy penalties.  
  2. Record keeping is essential – Directors also have an obligation under the CATSI Act to ensure that their corporation keeps proper books and records. This includes membership records and financial records that correctly record and explain the corporation’s transactions, financial position and performance. In the Monaghan Case, the inadequate records of the Corporation made it very difficult to identify what monies were owing by or to the Corporation and what the Corporation’s overall financial situation was.  
  3. Importance of corporate governance training –In its judgment, the Federal Court stressed the need for there to be appropriate training for directors and officers of Aboriginal corporations. The Court went so far as to suggest that such training should be a condition of a person becoming a director or officer. Griffiths J stated:

Finally, these proceedings vividly highlight the need for there to be appropriate training for people who are directors or officers of a CATSI Act corporation...  I respectfully suggest that consideration should be given to reviewing the relevant legislative regime to ensure that the Registrar has adequate powers and functions to provide appropriate training to persons such as the respondents and that adequate resources are available for this purpose.”

You can read the full Monaghan Case here.