Reasons behind Liquidation
In recent years a number of companies have gone into liquidation (been ‘wound up’) because they have not been able to meet their liabilities when they fell due. In Australia, there are some well-publicised examples such as ABC Learning, HIH Insurance and One.Tel phone company.
Use the companies above and find (via electronic journals) the events that led up to the liquidation. Discuss the ethics and governance in explaining the company’s financial stress. Were liabilities a major factor contributing to the liquidation of the company?
The process of winding up is known as the procedure of liquidation in which a business entity proceeds through the affairs of shut down the business permanently. In the process of liquidation, all the rights and liabilities are recognized; and the liquidator settles the claim of the creditors either completely or partially (Coad, 2014). It needs to be mentioned that certain reasons contribute towards the liquidation of the business entities; some of them are the adoption of aggressive accounting policies, fault in corporate governance, unethical reasons and others. The main aim of this report is to analyze and evaluate different reasons for the liquidation of three of the major companies of Australia; they are ABC Learning, One Tel Phone and HIH Insurance.
ABC Learning: ABC Learning used to be considered as one of the lading entities in the Australian educational sector. ABC Learning had a market capitalization of almost AUD$2.5 billion and was listed in Australian Stock Exchange (ASX). However, due to the effects of mortgage crisis, the company went to managerial receivership and huge amount of debt was also responsible for it. Established in the year 1988 in Queensland, ABC Learning established more than 900 centers all over the Australia. In the year 2006, the company expanded into the market of United States (US) and United Kingdom (UK) with the acquisition of Busy Bees Group for US$330 million (Blythe, 2017).
One Tel Phone: One Tel Phone was an Australia based telecommunication company established in the year of 1995. The major business strategy of One Tel Phone was to focusing towards the needs of the customers so that better products and services can be provided to them. One Tel Phone possessed the position of the fourth largest telecommunication company in Australia before liquidation. The aim of the company was to establish a youth oriented image by selling mobile phones and One Net services in Australia (Blythe 2017).
ABC Learning
HIH Insurance: HIH Insurance was the largest insurance company in Australia. In the years 1997 and 1998, HIH Insurance made many acquisitions both in Australia and globally. The company got listed in ASX in the year 1992. In the year 1995, HIH Insurance sold its stakes to the company of Switzerland and changed its name. At the time of liquidation, the total amount of loss of HIH Insurance was $5.3 billion. As a result of the cause of liquidation, many of the members of the company were convicted to imprisonment. For this reason, the collapse of HIH Insurance is considered as the large corporate collapse in Australia (Comino, 2015).
Specific events or reasons lead to the collapse of these three companies and they are discussed below:
HIH Insurance: The reasons are discussed below:
- HIH Insurance’s acquisition of FAI Insurance was a wrong move as it did consist of large amount of investment that was harmful for insurance business. The company had to face major damage due to this event (Leung, et al., 2014).
- Another wrong decision of HIH Insurance was to enter into the business financing the films that contributed towards more than hundred million dollars of loss to the company.
- The insurance form also had to face huge loss due to the natural disaster in Florida. This incident led to the development of huge amount of debt and this debt led to the loss for the company. This is considered as a major reason for the liquidation.
- The sudden or unexpected change in the accounting policy of the payment of compensation for the employees of California can be considered as another major event that led to the liquidation of HIH Insurance (Carnegie and O’Connell, 2014).
- As per the estimation of the liquidator, HIH Insurance lost approximately $800 million over a time of six months due to the reason of quicker expansion, complex structure reinsurance and the unsupervised delegation of authorities.
One Tel Phone: The following discussion shows the reasons:
- The strategy of One Tel Phone was to show superior amount of profit and to defer the major business expenses over three years. This adopted accounting policy of One Tel Phone was illegal as it was against the accounting standards and policies (Hill, 2013).
- In the year 2000, One Tel Phone reported a loss of $291 million due to the adoption of illegal accounting standards and policies. It affected the share price of the company and the share prices fall below $1.
- In the year 2001, the company faced shortage in the fund to run the business and the director of One Tel Phone, Rodney Adler sold 5 million shares for $2.5 million. As per the report of the administrator, One Tel Phone became insolvent and started to lay off 1400 employees (Goedeke, Mueller and Pankratz, 2017).
- Due to the process of liquidation, One Tel Phone was responsible for the compensation of $92 million as the company did not exercise their power of due care and diligence.
- In the second half of the year of 2007, ABC Learning had to face a fall of 42% in the profit that is for $37.1 million. At the same time, the company incurred a debt of $1.8 billion. These two are the major reasons or the collapse of ABC Learning.
- The share prices of ABC Learning fell by 43% to $2.15 after a low trading of $1.15. At the end of the period, the proprietor of ABC Learning was forced to sell the stakes of $20 million and $6 million at a sum of $2.7 million. Due to this, the company had to face trade suspension as the company failed to release its earnings for the year 2007 to 2008 (Newberry and Brennan, 2013).
- In the year 2008, ABC Learning fell into receivership due to huge increase in debt and the failure of the auditors to sign off the accounts.
- ABC Learning adopted incorrect method of intangible assets accounting. As per the company, the goodwill value of licenses and other intangible assets was $2.4 billion and only $8.4 million was charged for impairment. This aspect led to the wrong valuation of future cash flow and the company lost 42% in profit. It is considered as the prime reason for the collapse of ABC Learning (Brown and Davis, 2015).
In the business organizations, ethics concern the business’s judgment about the right and wrong. The business decisions taken by the management of the companies are influenced by the culture of the companies. All the business decision is required to be ethical and the managements of the companies need to decide the right course of action (Hartman, DesJardins, and MacDonald, 2014). Being ethical may involve the rejection of route that can lead to the biggest short-term profits. At the same time, the implementation of effective corporate governance policies leads to the controlled and directed ethical actions of the businesses. Business entities can become majorly beneficial from ethical behavior and effective corporate governance. Businesses can attract more customers towards their products and services that can increase the sales and profitability. Ethical considerations help in the reduction of employee turnover that leads to increased productivity. At the same time, it increases the goodwill that helps in attracting more employees (Crane and Matten, 2016).
The following discussion shows the ethics and corporate governance failure in explaining the collapse of the three companies.
- HIH Insurance did the acquisition of FAI Insurance without obtaining the approval from the Board of Directors. At the same time, the director abruptly resigned after the dispose of his shares. This whole scenario indicates towards the poor corporate governance in the company (Tricker and Tricker, 2015).
- Apart from the above, HIH Insurance made a poor decision by entering into the film business that was highly risky. It also shows poor decision making as well as poor corporate governance in HIH Insurance.
- HIH Insurance was involved in unethical business practice by not paying attention to continue work with due diligence and it shows the lack of ethics in the business operation of HIH Insurance.
- Improper management activities can be seen from Mr. Williams who issued prospectus with material omission and did overstate the profit for the year 1998-1999 (Tricker and Tricker, 2015).
- One Tel Phone did not comply with the ethical code of conduct with the violation of the accounting standards and principles.
- Major failure can be seen from the administration team of One Tel Phone in monitoring the financial performance of the company. In addition, the management of One Tel Phone ignored the investment areas with high risk. It shows the lack of corporate governance in the company (Clarke and Dean, 2014).
- One Tel Phone failed in adopting strong pricing strategy that contributed to the liquidation of the company as there was major loss of income for the entity. It shows the lack of ethics from the directors in discharging their duties.
- The incorrect adoption of accounting policies is considered as the prime reason for the liquidation of ABC Learning and it contributed towards the fraudulent activities in the accounting practice of the company. In addition, the management of ABC Learning unethical bookkeeping practices.
- Improper rendering of the services to the customers and government can be considered as another major unethical issue in the collapse of ABC Learning (Baber, et al., 2015).
The above discussions show the reasons for liquidation of the three companies along with the ethical and corporate governance issues. However, it needs to be mentioned that liabilities had a major role to play in the collapse of these three companies (Abid and Ahmed, 2014). In case of ABC Learning, the amount of liability was stable in 2007, but there was a reclassification of AUD$1.1 billion of borrowings from current and non-current liabilities as a result of refinancing. In the financial year 2007-08, there was 42% fall in the profit due to the increase in liabilities and the company had to pay AUD$1.2 billion due to the breach in debt covenant. The same type of scenario can also be seen in case of HIH Insurance. According to the internal report of HIH Insurance, the company had high debt leverage and insurance liability and it led the company towards insolvency (Abid and Ahmed, 2014). It needs to be mentioned that the company did the acquisition of FAI for $300 million that was worth $100 million. It created high debt for the company. In case of One Tel Phone, the management of the company was majorly responsible for hiding the liabilities of the business. The earlier discussion states that the company was responsible for the payment of $92 million as compensation that increased the liability of the company and majorly contributed towards the collapse. Thus, the above discussion indicates towards the role of liabilities to the collapse of these companies. For all the three companies, wrong business decisions led to excess amount of liabilities and the presence of these inabilities were major reason for the collapse of these three companies (Abid and Ahmed, 2014).
One Tel Phone
Conclusion
The above discussion indicates towards the fact that many events contributed towards the collapse of HIH Insurance, ABC Leaning and One Tel Phone. In case of all the three companies, the major reason for collapse was the wrong decision-making from the senior management like wrong expansion plan, wrong investment plan, adoption of wrong accounting policies, manipulation with the financial accounts and others. In addition, it can also be observed that the lack of ethics and ineffective corporate governance were also hugely responsible for the liquidation of these companies. Apart from all these, the increase in the liability of these three companies was another major reason for the liquidation. All these reasons together contributed towards the fall of HIH Insurance, ABC Learning and One Tel Phone.
References
Abid, G. and Ahmed, A., 2014. Failing in corporate governance and warning signs of a corporate collapse.
Baber, W.R., Kang, S.H., Liang, L. and Zhu, Z., 2015. External corporate governance and misreporting. Contemporary Accounting Research, 32(4), pp.1413-1442.
Blythe, S.G., 2017. Attention, balance and coordination: The ABC of learning success. John Wiley & Sons.
Brown, C.A. and Davis, K.T., 2015. The sub-prime crisis down under.
Carnegie, G.D. and O’Connell, B.T., 2014. A longitudinal study of the interplay of corporate collapse, accounting failure and governance change in Australia: Early 1890s to early 2000s. Critical Perspectives on Accounting, 25(6), pp.446-468.
Clarke, F. and Dean, G., 2014. Corporate Collapse: Regulatory, Accounting and Ethical Failure. In Accounting and Regulation (pp. 9-29). Springer, New York, NY.
Coad, A., 2014. Death is not a success: Reflections on business exit. International Small Business Journal, 32(7), pp.721-732.
Comino, V., 2015. Australia’s’ Company Law Watchdog’: ASIC and Corporate Regulation.
Crane, A. and Matten, D., 2016. Business ethics: Managing corporate citizenship and sustainability in the age of globalization. Oxford University Press.
French, A., Vital, M. and Minot, D., 2015. Insurance and financial stability.
Goedeke, J., Mueller, M. and Pankratz, O., 2017. Uncovering the Causes of Information System Project Failure.
Hartman, L.P., DesJardins, J.R. and MacDonald, C., 2014. Business ethics: Decision making for personal integrity and social responsibility. New York: McGraw-Hill.
Hill, J., 2013. Evolving Directors’ Duties in the Common Law World.
Leung, P., Coram, P., Cooper, B.J. and Richardson, P., 2014. Modern Auditing and Assurance Services 6e. Wiley.
Newberry, S. and Brennan, D., 2013. The marketisation of early childhood education and care (ECEC) in Australia: A structured response. Financial Accountability & Management, 29(3), pp.227-245.
Tricker, R.B. and Tricker, R.I., 2015. Corporate governance: Principles, policies, and practices. Oxford University Press, USA.
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