Liquidation or Winding Up of an Organization
The liquidation or winding up occurs in an organization when the organization declares that it is no longer financially capable to repay the financial debt made to the creditors of the company and the company declares itself as bankrupt. Then the creditors of the company decides to liquidate the company .A liquidation of the corporate organization takes place when the organization has become insolvent and when there is no other option for the creditors of the organization to maximize their return. However the share holders also have to agree with the decision of the creditors that the liquidation of the company y should be done for the best interest of the creditors, investors and share holders of the company. Once the entire major stake holders of the company [] agree then a liquidator is appointed for the liquidation of the company. The appointed liquidator of the company is authorised to cease the business operations of the organization and also to sell the assets of the organization and to collect and distribute the fund among the creditors share holders and investors of the company as per predefined priorities.
In recent years several incidents of big corporate failure or company windup has taken place in Australia. Among the different organization the winding up cases of ABC Learning, HIH Insurance and OneTel phone are worth of study as these organizations have made sudden collapse due to acute financial crisis(Atsan, 2016).
The ABC learning was a well known brand of the Australian Child care industry. HIH Insurance group was another big brand of the Australian insurance industry. On the other hand OneTel, was the fourth largest telecommunications company in Australia and was one of the fastest growing companies that among the ,listed companies of ASX.
ABC learning was established in 1988 by Eddy and Le Neve Groves and became a listed company in Australia in 2001, and was doing a flourishing business with almost 2300 centres. The organization ABC learning failed due to the absence of range major corporate governance systems within the organization.There was complete absence of any application of investment appraisal by the group that was accountable for supervising the costly purchased of the care homes across Australia. Besides, there was no formal committee within the organization for overseeing the operational activities of the company. The organization was growing exponentially by purchasing properties at the major locations with in Australia and also bought several single day-care centres and smaller childcare groups as a part of the expansion process. In 1999 the organization owned around thirty centres. In 2001 the organization listed itself in the Australian stock exchange (ASX) and the listing of the organization made it capable to acquire more capital. From this time the organization registered a doubled operational growth in each financial year with a massively growing asset acquisition. In 2006 the organization owned around 660 centres in Australia and in 2008 before collapse there were 2,238 centres in Australia, New Zealand, the United States and the United Kingdom under the possession of the organization. Much of this huge acquisition of asset was not based on sound investment strategy which finally pushed the organization in huge financial crisis(Governance For Stakeholders, 2012).
Corporate Failures in Australia
The incorrect accounting policy followed by the organization [the revaluation of the ABC’s childcare licences was expected to generate A$390 million but the whole value creation process was based on future expected net cash flows to be generated from the revaluation of licences between 2001-2005 which may or may not be realised by the organization in reality] is also responsible for generating the huge liability of the company. In brief the non transparent business models, aggressive and unwise acquisition of capital assets, weak generation of the operation cash flow are mainly responsible for generating acute financial crisis within the company which finally led to the collapse of the organization(Couriermail.com.au, 2010).
The organization HIH is being perceived to practice ‘a conservative corporate culture’ but in reality there was huge absence of corporate governance and business ethics which led to the surprising downfall of the organization. One example of the lack of internal ethics and governance is that there was dearth of independent directors who works in all organization for taking sound business decisions and delivers disinterested advice to the organization. More over the chairman of the organization was the former partner of the organization which indicates towards unethical connections between the auditor and the chairman of the organization. An aggressive acquisition strategy which demands that the growth of the organization has to be attained at any cost also led the organization to accept several bad kinds of costly investments. More over the culture of the organization of never accepting the bad news badly created a conflict between the aspects of profit maximization and maintenance of sound corporate governance within the organization. The collapse of the HIH Insurance group (“HIH”) lead to a in a deficiency of A$5.3 billion in the Australian Economy and the collapse of this organization has become the Australia’s largest corporate failure. According to the report of the royal commission the company largely failed to the corporate mismanagement or in other words due to the lack of application of the corporate governance (Mak et al.,2005). Most breaches of corporate governance occurred within the organization when the company broke the law and corporate ethics for covering up the financial difficulties that arise due to the aggressive investment strategies(Jones, 2011). According to the investigation of the royal commission the organization HIH the main reason behind the failure of the organization is not any kind of pre-planned or systematic fraud rather the organization failed due to the lack of proper monitoring and ego of the decision makers who was not ready to accept their failures. A number of Directors of the organization were not being alleged for nor performing their duties and responsibilities in a proper manner and the chief executive officers of the organization were never being questioned or challenged by the board of directors when they were failing to take proper decisions (Longdog.com.au, 2011).
ABC Learning
The organization “One Tel” also collapsed due to the absence of the proper corporate governance. At the time of collapse the organization was operating in seven countries and the total sale of the organization was AU$653 million which is drawing an apparent sound financial picture for the organization. But the organization failed due to its very weak corporate governance structure. The excessive influence of the two chief executive officers over the Board of Directors of the organization is going against the corporate ethics and representing a weak presentation of corporate governance within the organization. There was no regular chairman in the board of directors of the organization and instead the CEO or the other executive directors acted as chairman of the board of directors of the company from time to time. The Non-executive directors of the company were not involved in the pr5oiper monitoring process of the organization. The audit operations as well as internal corporate governance and the executive remunerations of the organization were mainly regulated by the CEOs and the executive directors of the organization(Monem, 2011). The excessive control of CEO s over the Board of Directors of the organization made the Board almost ineffective and incapable in implementing control and monitoring over the operational activities of the organization. The large investors were badly misleaded by the CEO and executive directors of the organization and mainly relied over the apparent strong financial position of the organization. At the event when the organization were taking wrong strategic decisions then the non-executive and ostensibly independent directors maintained their silence instead of challenging the chief executive officers if the company. The auditors realised a conflict of interest and was compromised as they were also giving non-audit services to the organization. The worst kind of violation of the corporate ethics that happened in the organization is that the absence of an independent Board of directors’ chairman that weakened the whole internal monitoring and control process of the organization (Bartleby.com, 2008).
Thus the collapse of the organization of HIH and OneTel reveals that the poor corporate governance structure and inefficient management is the sole cause of the failure of these two organizations. The poor corporate governance strategy has led to the application of business strategies that reduced the long term sustainability of the organization and apparently though the organizations appeared as financially strong but application of unsustainable strategies ultimately led the organizations towards failure and collapse. The ego of the decision-making authorities has led to aggressive acquisition of assets at unreasonably high cost and making inflated financial reports that were projecting unrealistic profit estimation and value creation with respect to the companies. The preparation of this kind of aggressive financial reporting in one hand has covered the inefficient decision making process of the organization and on the other hand misleaded the big investors of the organization. The unethical connection between the co mpany executives and the internal auditors make the audit process of the organization completely inefficient and the audit process of the organization failed to rang the required alarm which was an essential requirement for stopping the collapse. Besides along with the inefficient financial investments the unjustified high remuneration of the executives also enhanced the financial burden of the organization which necessitated the collapse of the organizations.
HIH Insurance
Huge financial liability of the organization ABC learning was mainly caused the company to wind up finally in November 2008. Though during June and December 2007the total liability of the organization remained relatively constant but in December 2007 around A$1.1 billion of borrowings of the organization was being reclassified from current to non-current liabilities as it was not possible for the organization to repay those debts due to acute cash crisis. Under huge debt repayment pressure the organization was forced to sell 60% of its US subsidiary and its entire UK subsidiary(Sumsion, 2012)
Financial liability also was the cause behind the collapse of HIH and the In August 2001at the time of liquidation the amount of loss of the organization was in the range of AU$3.6 billion to AU$5.3 billion (Poborský, 2015)..
The weak corporate governance also created a huge financial burden in the organization and at the time of liquidation in 2000 the operating loss of the organization was AU$291 million.
Conclusion:
From the above discussions it can be understood that presence of a strong corporate governance structure is an essential requirement for ensuring the long term sustainability of the organization. Mere presences of the corporate governance with the organization will not serve the purpose; the organization has to practice the corporate governance rules and requirements in reality with striking stringency. The strong implementation of corporate ethics and corporate governance within the organization works as alarm bell when something wrong happens within the organization and protects the organization from long term damage and financial loss. On the other hand the presence of the weak corporate governance fails to detect any kind of malpractices and unethical activities with the organization and also failed m to prevent inefficient decision making within the organization. Thus continues inefficient decision making leads to the inefficient investments and the inefficient investments increases the financial liability of the organizations (Leung et al.,2014). With the enhancement of the financial liability of the organizations the managing bodies try to cover up the weak financial situation of the organization and tries to make more cover up and all these ultimately initiate of the collapse of a corporate organization .When an corporate organization fails financially then along with the stake holders of the company the economy of the country where from the corporate organization originates also faces huge economical loss. Therefore it is essential to take measures both the organizations and economic regulators of the country to ensure that the corporate organizations are strongly implementing the corporate governance within the organization.
Reference:
Atsan, N., 2016. Failure Experiences of Entrepreneurs: Causes and Learning Outcomes. Procedia-Social and Behavioral Sciences, 235, pp.435-442.
Bartleby.com. (2008). Australian Case Study in Corporate Governance – Hih Insurance | Bartleby. [online] Available at: https://www.bartleby.com/essay/Australian-Case-Study-in-Corporate-Governance-Hih-Insurance-PK6CTSXHKUEZ [Accessed 25 May 2018].
Couriermail.com.au. (2010). Key systems ‘missing’ from ABC. [online] Available at: https://www.couriermail.com.au/news/key-corporate-governance-systems-missing-from-abc/news-story/f601d3e4242f16efbc70610f9707de05?sv=96f188f44e8845619b7d48fa7cf73f91 [Accessed 25 May 2018].
Governance For Stakeholders. (2012). The ABC of a corporate collapse. [online] Available at: https://governanceforstakeholders.com/2012/12/28/the-abc-of-a-corporate-collapse/ [Accessed 25 May 2018].
Jones, M. ed., 2011. Creative accounting, fraud and international accounting scandals. John Wiley & Sons.
Leung, P., Coram, P., Cooper, B.J. and Richardson, P., 2014. Modern Auditing and Assurance Services 6e. Wiley.
Longdog.com.au. (2011). [online] Available at: https://www.longdog.com.au/be-daring-not-risky/corporate-governance-and/collapse-corporate-governan.pdf [Accessed 25 May 2018].
Mak, K., Deo, H.N. and Cooper, K.A., 2005. Australia’s major corporate collapse: Health International Holdings (HIH) Insurance” May the force be with you”.
Monem, R., 2011. The One. Tel collapse: lessons for corporate governance. Australian Accounting Review, 21(4), pp.340-351.
Poborský, F., 2015. Fundamentals of the Liquidation Method of Business Valuation. Procedia Economics and Finance, 25, pp.386-393.
Sumsion, J., 2012. ABC Learning and Australian early education and care: a retrospective ethical audit of a radical experiment. Childcare markets local and global: can they deliver an equitable service, pp.209-225.
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