Liquidation of ABC Learning
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
Required
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 overall assessment mainly focuses on identifying the reasons behind the liquidation of ABC Learning, HIH Insurance and One Tel Phone Company. in addition, the evaluation also helps in understanding the events that led to the liquidation of the company. The financial viability of the companies before the liquidation occurrence is mainly evaluated to understand the actual problems that happened before the company became bankrupt. Moreover, the factors involved in the liquidation process of ABC Learning, HIH Insurance and One Tel Phone Company is directly evaluated. the assessment mainly aims in focusing the expenses and debt accumulation, which is conducted by ABC Learning, HIH Insurance and One Tel Phone Company.
The main event that led to the liquidation of ABC Learnings occurred after 2001, where the company enlisted in the Australian stock market. ABC Learning after the listing, obtained high end debt to increase its centres in Australia and International market. The high debt obtained by the company was the main event, which increased the chance of their liquidation process. The debt accumulation of ABC Learnings mainly increased exponentially after the share issue, which was used in the expansion plans of the organisation. In addition, the number of centres of ABC Learnings mainly increased from the level of 43 in 2001 to 2238 in 2007, which was only possible with help of high-end debt accumulation. Moreover, during 2005 Eddy Groves mainly manipulated the Annual report to boost their overall financial progress and project the investors with high profit financial report. The financial troubles of ABC learning relatively started from 2007 where Its overall profit declined by 42% in 2007, which directly affected its ability to pay the 1.8 billion in debt accumulated by the organization (Leong 2015). The directors of the organization had to dump their shares due to margin calls, which increased the supply of shares in the market and directly affected its share price, which declined by 43%
Events leading to ABC Learning’s liquidation
After evaluating the case of ABC learning it could be identified that there was certain levels of ethics and governance which was violated by the organization and its directors to support their need for finance. furthermore, the CEO of the organization manipulated the annual reports to support it financing needs and boost its share price. The problems of governance were identified when the company was not utilizing adequate strategy for their expansion process. Moreover, ABC learning was directly accumulating debt from the market to support its expansion process without the concern of solvency (Scott 2015). The high debt accumulation conducted by the organization was directly affecting its capability to support the interest payments, as the overall revenue of ABC Learning declined. This incapability of the organization to support its interest payment was directly triggered by negligence in conducting governance. There were certain ethical dilemmas which was adopted by Eddy Groves for improving the figures on its annual report. Eddy Groves directly increase the values of intangible assets in accordance with its revenues to depict ABC learning as a high profitable organization (Press and Woodrow 2018). This ethical dilemma directly indicated the manipulation which was conducted by directors to lure in more investors and increase their share price.
Therefore, ABC learning case study directly reflects the overall problems that was created for the organization after accumulating high level of debt in its operations. The debt was mainly accumulated to support its rapid expansion process, which did not increase revenues of the organization, as expected by the management. Furthermore, the rising interest payments that was needed by the organization was not being supported by its revenues and net income. Hence, it could be stated that liabilities of the organization played a vital role in its liquidation process. The company accumulated high liabilities, which they were not able to pay and were forced to liquidate. In this context, Hoyle, Schaefer and Doupnik (2015) stated that companies with the problems of debt needs to adopt adequate Business strategy for improving their operations and supporting then debt payments. On the other hand, Arnold and Kyle (2017) argued that companies with high debt accumulation is relatively forced to reduce their profits due to high interest payments to the lenders.
The HIH Insurance fraud is considered to be one of the largest corporate collapses that was faced by Australia during 2001, where more than $5.3 billion worth of assets was lost by HIH Insurance. The problems of HIH Insurance was mainly conducted by the management of the company who used manipulative provisions and unethical measures in conducting their operations. The main problem that was faced by HIH Insurance was its aggressive expansion towards the business strategy, which led to its downfall. Moreover, the company started to provide insurance to business segments, which operated both domestically and globally. Furthermore, the company started to provide insurance services at lower insurance premiums and selected factors that it did not fully understood (Adam and Borsellino 2015). This directly in the increased the overall business and legal risk of the organization. The company acquired some troubled insurance businesses with high price which increased its overall depth accumulation the support its expansion process. Moreover, the controversial acquisition of FAI for $300 million has been considered under question, as the company’s overall value was $100 million. Additionally, the organization continued with its unethical measure by conducting stock market manipulation, disseminating of false information, and changing its overall annual report.
Ethics and governance issues of ABC Learning
After evaluating the case of HIH Insurance under the ethical consideration, it could be identified that the organization has not improved its overall operations, instead it used on ethical measures for supporting the operations of the company. The members of the board were criminally charged and sentence by the Australian government after the initiation of Royal Commission to discover the problems and activities of HIH Insurance (Leung et al. 2014). The commission directly imposed charges on elder who pleaded guilty for the disseminating information, misleading statements, and intentionally conducting dishonest measures. The members were also charged with stock market manipulation, which allowed the members to benefit from the rising prices of the organization. The commission held some of the members responsible for the demise of the largest insurance company in Australia for the fraud of $5.3 billion. The board member of the company broke all the ethical rules that needs to be maintained by the organizations for boosting the share price of HIH Insurance and increasing the profit level of their Investments. Ghani and Muhammad (2016) stated that with the inclusion of unethical measures in the operations of the organization, investors would not rely on the financial report or statement that are provided by the company, as they might consist of false information.
The demise of HIH Insurance was not only supported by the liabilities of the organization but also the condition and decisions that was made by the management. The company’s major demise started from the accumulation of risky insurance premiums that was surely to increase debt of the organization. moreover, the decision for complying with the risk insurance premiums was a Problem with the Governance of the organization. After the decision the liability of the organization increased exponentially over the period due to the increasing claims from risk insurance premiums. The debt of the organization increased exponentially and forced the company to take up an ethical measure like manipulating the stock market and distorting the information for increasing its share price and Demand among investors (Damiani, Bourne and Foo 2015). Therefore, it could be understood that the demise of HIH Insurance was not triggered by its liability accumulation instead the problems started, due to the unethical provisions conducted by the organization to support its future operations.
One.Tel was considered the fourth largest Australian telecommunication company during 2000, while the decisions made by the management led to its decline and liquidation. the company. the operations of One.Tel started from 1995 to 1997, where it conducted its operations and targeted youngsters as its main customers. the company was making adequate money before it started to think of the IPO initiation, which relatively started the overall problems for the organization. the IP on Sat was conducted during 1997 where the shares value that $2.8. this allowed the organization to acquire adequate capital to support its expansion process and rapidly conduct operations all over Australia. The company directly focused its operations on Acquiring more license and improving its overall telecommunication infrastructure. The acquisition of new licenses directly increased the expenses of the organization to $523 million, which helps in improving the level of profits that could be generated from operations. During 2000 the company reported a loss of $291 million during the fiscal year, while the directors of the company enjoyed a basic salary of $560,000 and $6.9 million bonuses (Carnegie and O’Connell 2014). This directly sparked the concern among investors which reduced the overall share price below $1. During 2001 the company was declared insolvent where all its employees were laid off, due to thein capability of the organization to continuous operations.
Contribution of liabilities to ABC Learning’s liquidation
From the valuation of One.Tel case study, it could be identified that the company was using unethical measures from the start office business. the company directors and managers were using manipulative measures to control its financial report which was being inflated to project hair growth and profits obtained by the organization. Rich and Keeling, the managers of the organization used unethical measures in manipulating their annual report and projecting a highly profitable organization. From the case study it could be identified that One.Tel who was not able to conduct ethical measures in its operations, which led to its decline over the period (Miglani, Ahmed and Henry 2015). Hence, it could be identified that your organization was directly involved in an ethical measure for boosting its share price and annual report. On the other hand, the directors of the organization were selling the shares by initiating false rumors and making profit from their trading. Carter and Warren (2018) argued that investors are not able to understand the words that are conducted by organization until and unless they become insolvent and disclose their financial condition.
The operations of the organization relatively indicated that liabilities played a major role in the demise of the organization. However, the contribution from unethical measures was also equivalent to the liabilities obtained by the organization. the company is main problem started from the purchase of network spectrum in Australia, which increase the losses for the fiscal year. This relatively instigated the continuous selling of shares by the investors and declined its value below $1. Hence, it could be identified that liabilities of the organization did not play a major role in liquidating the company instead the decisions made by the management led to its decline.
Conclusion:
From the overall evaluation of the above case studies it would be identified that liquidity is relevantly one of the major concerns which led to the downfall of all the above companies. however, the negligence of ethics and governance in the organization was actually the main concern regarding the downfall of the organization. The evaluation indicated that the company’s liquidity problems could be controlled if the ethics and governance condition was adequate. The company was manipulating its operations from the start and was using unethical measures to inflate their balance sheet. This led to the accumulation of high-end debt and forced them to eventually liquidate
References
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Arnold, G. and Kyle, S., 2017. Intermediate Financial Accounting Volume 2. Lyryx.
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Damiani, C., Bourne, N. and Foo, M., 2015. The HIH claims support scheme. Economic Round-up, (1), p.37.
Ghani, E.K. and Muhammad, K., 2016. The Effect of Freemind on Students’ Performance in an Advanced Financial Accounting Course. International Journal of Academic Research in Business and Social Sciences, 6(7), pp.262-275.
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