Events leading to liquidation
Discuss about the International Corporate Governance Convergence.
Liquidation is the process of closing down a business and distributing all its assets to the claimants. It is that situation which occurs when a company becomes insolvent and is not capable enough of paying its liabilities. Basically it ran out of cash and have insufficient funds to pay off its obligations. At time of liquidation, all the assets remain are used to pay the creditors, lenders and shareholders as per their priorities (RAJASEKARAN, 2011).
However, it is always assumed that a company will be a going concern which means it will continue to operate for a long run in future. It is assumed that it will remain forever and there is no intention to stop their operations. But the assumption sometimes proved to be wrong as economy has its own factors to play. Situations like recession, depression, global crisis and many more are prove to be unfavourable for the companies which make them financially weak. But still, the companies try to fix such events as long as it can do under its control. However, sometimes the situations goes out of control which end up in the winding up of the company. The terminology used for this scenario is named as liquidation, which is faced by many Australian companies in the past (Lee and Lee, 2010).
The principle fact which is involved in the process of liquidation is the insolvency of the company and its inability to pay its liabilities and financial obligations. As there are different types of companies which operates in diverse geographical areas dealing with different business activities. So they have various economic conditions for them. In general, situations like conducting an illegal business, lack of cash and capital, weak financial skills, over or under trading and lack of planning and managerial skills may lead to the liquidation of the companies. They are forced to wind up their business and sell all their assets to make debt payments.
However, the events which led the three Australian companies to liquidation are discussed below. By critically analysing the case studies of all the companies, one can easily develop a better understanding of the events that results in pack up of the company.
It was at times, world’s largest service provider of early childhood education, operating its business in Australia. The company was listed on Australian Securities Exchange, having a great market capitalization in 2006. After facing a fallout from United States subprime mortgage crisis, the company was unable to make its debt repayments and the auditors were not able to prepare the financial reports as they do not have the previous year report. This led ABC to enter into administrative receivership (Barnes, 2007).
ABC Learning
Being the only player and a dominant one in the childcare market, ABC Learning got more liberalized which resulted in the escaping of few children. Due to which, the entity had to faced many challenges including the court hearings also. However, since it was financially strong it pay off all its claim but proved guilty in the court. In addition to this, it has faced an unexpected drop in its profit in 2007 and due to the fall in share price the company was unable to pay its debt. This resulted in the delisting of ABC from ASX and forces it to liquidate its business in June 2010 (Corbi, 2011).
It was once known as the Australia’s second largest insurance company which came into a provisional liquidation due to the insufficiency of funds for paying the debts. The demise of the company was the largest corporate collapse in the history of Australia. Earlier it was the company having high volume of assets which were been used to pay its liabilities. Even after settling off all the obligations, the company still left with some liabilities which created asset deficiency in the firm. In addition to this, HIH’s administrative staff was involved in the illegal and unethical practices which resulted in the losses for the company. The inefficiency of the management and staff also led the company to liquidate itself (Mirshekary, Yaftian and Cross, 2005).
Apart from this, the former director of HIH was sentenced to prison for pleading guilty for the four criminal charges. He was involved in the stock market manipulations and other related charges. Such criminal background degraded the reputation of the business, defamed it and make it financially weak. Also Standard & Poor withdraw its rating from HIH and half of its business was purchased by Germany’s Allianz. As a result of which, the company enters into a provisional liquidation on 15 March 2001 (Van et. al., 2007).
It was an Australia based telecommunications group established in 1995, when the Australian telecommunications industry degraded. The founders of the company are Jodee Rich and Brad Keeling who belongs from the high profile families. Prior to its liquidation, it was fourth largest telecommunication company of Australia dealing in providing mobile and network services to the customers (Griffith, 2011).
Despite of sufficient funding from the shareholders and the investors, the company reported a loss in year 2000. As a result of which, its share prices falls to a great extent. In addition to this, it came into a partnership with Optus but due to some issues it did not last long. Furthermore, the chief executive officer of One.Tel manipulated the final accounts of the firm and did not disclose the same to its shareholders and investors. As a result of which, company’s shareholders remained unaware of this mischief which causes financial stress in the company. Moreover, the strategies framed by One.Tel did not work well and force the company to wind up its business on 8 June 2001 (Barney, 2009).
HIH Insurance
There are many business ethics which are required to be followed by the company in order to operate legally in a country. Theories like legitimacy, Utilitarianism and virtue ethics are used for defining the good governance and ethics for a company. Legitimacy theory focuses on the norms and regulations of society, which every company is required to comply with. As per this theory, the actions, operations and activities of the entities must be in accordance with the society’s rules and regulations. The management of the organization must perform in the best interest of its community in which it is operating (Abrutyn, 2016). Utilitarianism is a theory in normative ethics which says that an action is right, if its outcome is in favour of majority of people. In other words, the companies must perform those activities which give positive outcomes for everyone. The people of organization should not work for self-motive and personal gain (Sheng, 2012). Another theory is virtue ethics which is concerned with all the virtues including honesty, integrity, moral values and many more. Companies should follow all these virtues in their business so to avoid the situation of financial stress (Van, 2014).
The term financial stress is explained as the condition where company is not able to meet its financial obligations, usually due to illiquid assets and insufficient funds. However this situation arises when companies do not follow the above ethics and work for their motives. In order to avoid such situations, entities must face their legal issues properly and should work according to the law. It should make a proper disclosure of its affairs in favour of society and its key people. Such disclosure is known as corporate social responsibility which has to be fulfilled by all the companies operating in Australia. This also led to the formation of a good corporate governance and achievement of desired outcomes.
However, when an organization does not follow such ethics and get involved in unethical and illegal practices, it has to face financial stress as a result. Such stress was also faced by the three Australian companies which end up getting liquidated. It was observed that initially they all were financially strong but not working according to business ethics. This turn their profits into losses, hamper their existence and developed a high degree of financial stress.
Talking about ABC Learning, the company was highly liberalized and the motive or the greed of earning more profits make the company to compromise the quality of service, left the workers unpaid and subsidies were misused. ABC Learning deviated from its motive of delivering best quality services to the children which result in the violation of Utilitarian theory and virtue of ethics. This makes the company weak and force it to get liquidate.
One.Tel
The case of HIH Insurance shows that its former director was caught involved in some kind of illegal practices which caused him sentenced to jail. This was the breach of legitimacy theory as it was against the society and the virtue of honesty. Along with him, the company’s top management was also involved in unethical practices which created financial instability in the organization. All this was the sign of breach of ethics ended up in the liquidation of the company.
Another case was the huge corporate collapse of Australia. It was the liquidation of One.Tel which was due to the manipulation in the financial statements of the company. In this, the shareholders and other key people were not aware about the modifications made in the final accounts by the CEO of the company. Lack of accountability and heard commenting was there which forces the company to face a high degree of financial stress. The company prohibits the theory of Utilitarianism and has a bad governance which led to the winding up of the business.
Therefore, it can be said that the not complying with the business ethics made the three companies to face a huge stress in financial terms due to the illegal activities and unethical practices. Also they did not perform in favour of society and works for their sole purpose and motives.
The whole concept, process and theory of liquidation highlights only one factor which is insolvency of the company. The insolvency means when a company is not able to pay off its liabilities due to insufficient funds. It is the huge amount of liabilities only, which brings a company to the edge of winding up. The whole scenario of liquidation revolves around on factor which is payment of liabilities. Unpaid financial obligations act as a cause and effect of liquidation. Like if there are no liabilities then there will be no need of selling the assets to pay them. As a result of which, no situation of liquidation will arise.
However, it is not always true that liabilities are the only factor for the winding up of a company. Sometimes there are other reasons also such as completion of an objective for which the business was established, ending of a time period of the business or when the company is operating illegally and for the wrong purposes. Also there can be events where the company may prove to be illegitimate and is require to shut down its activities. So, apart from liabilities there are other reasons also. But the major factor which contributes to the liquidation is the financial obligations or liabilities of the organization.
Conclusion
From the above report, it can be concluded that it is very much necessary for the companies to completely comply with all the business ethics and create a good corporate governance. In order to avoid the situation of liquidation, organizations must perform in favour of society and shareholders’ interest. The Australian companies which get liquidated did not followed the business ethics, rules and regulation and also violated many theories. The fraud conducted by their management forces them to undertake a financial stress and made them insolvent.
The report also stated that the liabilities are the major reason for the winding up of the company because they are the only items which left unpaid due to the lack of funds and the same resulted in the liquidation of the company. However, it was also stated in the report that there are many other and external factors which also leading the shutting down of an organization.
References
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Barney, J.L., 2009. Corporate scandals, executive compensation, and international corporate governance convergence: A US-Australia case study. Temp. Int’l & Comp. LJ, 23, p.231.
Corbi, R.J., 2011. Applies to Australian Liquidation. American Bankruptcy Institute Journal, 30(2), p.48.
Griffith.edu.au. 2011. The One.Tel Collapse: Lessons for Corporate Governance. [Online] Available at: <https://research-repository.griffith.edu.au/bitstream/handle/10072/42673/74746_1.pdf > [Accessed 14 May 2018].
Lee, C.F. and Lee, J. eds., 2010. Handbook of quantitative finance and risk management. London: Springer Science & Business Media.
Mirshekary, S., Yaftian, A.M. and Cross, D., 2005. Australian corporate collapse: The case of HIH Insurance. Journal of Financial Services Marketing, 9(3), pp.249-258.
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