Describe about the Report on Causes of Liquidation of the Companies in the Recent Decade.
The objective of every business is to flourish by growing continually, achieving the targets and expanding the business as far as possible. In order to make it possible, every organization tries its best by hiring best managerial personnel and providing them with all the resources needed to accomplish the goals (Dagwell, Wines, & Lambert, 2007). However, it is well known that the business is surrounded by the uncertainties and thus, the circumstances may lead to shut down the business at any stage. The shutting down of business in case of a company is followed by the liquidation process. The process of liquidation involves legal steps taken to bring the legal existence of the company to an end. In most of the cases, it is observed that the business is shut down because of poor management of the resources (Van Bael & Bellis, 2003).
The mismanagement of the resources creates imbalance in the assets and liabilities, which is critical for the survival of a company. In case the mismanagement is continued for longer period of time, the liabilities would pile up, and the company will be pushed into liquidation due insolvency. Further, the unethical management practices and loopholes in the governance mechanism also are important factors to be considered in regard to liquidation (Faghfouri, 2012). In the recent years, many companies have been seen to be wounded up, the prominent reason for which seems to be the huge accumulation of debt and liabilities (Van Bael & Bellis, 2003). In this context, in the current report, the reasons for liquidation of the companies in the recent years have been explored.
ABC Learning was a company registered in Australia and engaged in the business of running childcare centers in Australia and New Zealand. The company was running its business smoothly for several past years and grown rapidly emerging as a giant in the childcare and education market (Corbi, 2011). In the year 2005, the company purchased Learning Care Group Inc of America, which was engaged in the similar line of business with more than 400 childcare centers (BusinessWire, 2005). Everything was going according to the plans, but suddenly, one day the directors of the company announced that the company is insolvent. In November 2008, the company resolved to file a petition before court for voluntary winding up, which was a big shock to the investors (Corbi, 2011).
During the proceedings of wind up, it was discovered that the company was heavily burdened with debt as depicted from the gearing ratio of 2.03 times (McRober, 2009). Further, it was observed during the inquiry that the management manipulated the book of accounts to conceal the true picture of the state of affairs to the investors and creditors (McRober, 2009).
Liquidation of HIH Insurance
HIH Insurance Limited was a large size company having 17 controlled entities in the group at the time when the company went into liquidation. The HIH group as a whole occupied a large share in the market (Kehl, 2001). In the year 2001, the business of the company came to an end when the court approved the liquidation petition of the company. The balance sheet of the year 2000 showed a balance of total assets of $8 billion and liabilities of $7.1 billion, which depicts a critical condition of the state of affairs of the company. It was observed that HIH acquired FAI Insurance for $300 million in the year 1999, and since then the financial position of the company got deteriorated day by day (Kehl, 2001).
It has been observed that the company posted decline in the net profits amounting to 39% immediately after the acquisition of FAI. Further, the defaulting directors of the company admitted later on that they expensed more than what was legitimately required in buying FAI (Kehl, 2001).
One.Tel, an Australian company, engaged in the telecommunication line, was declared to be insolvent by the auditors in the year 2001. The auditors found that the company was lacking cash and facing severe financial crunch since past few years (Monem, 2016). Further, in regard to the liquidation of One.Tel, It has been observed that the year 2000 happened to be the turning year for the company. In this year, the company expanded heavy money amounting to $523 million to purchase licenses for operations. Immediately after the purchase of licenses, the financial position of the company got damaged so badly that it reported huge operating loss amounting to $291 million (Monem, 2016). Further, it has been found that the management of the company was also negligent in discharging its duties, which also contributed to the winding up of the company.
The findings of various report of investigation conducted post liquidation of the companies reveal that the primary reason for collapse of the business was mismanagement in the company. For example, the report of the investigation conducted in respect of the HIH Insurance failure revealed that the management was negligent in discharging their duties. Further, the report also revealed that the management was involved in manipulating the financial statements of the company for anterior motives (Insurance Journal, 2003). The circumventions of the management of its authorities indicate unethical conduct of the management and the failure of the governance on the part of the company.
The governance and ethics plays a vital role in the success and the survival of the business, thus, there must exists a strong governance mechanism in the companies (Rezaee, 2009). The failure of companies such as ABC Learning, HIH Insurance, and One.Tel are the examples where to the role of good corporate governance could be observed. From the finding of the liquidation of these companies, the root cause was observed to be the prevalence of the unethical practices. Therefore, it is necessary that the companies include an environment of ethics by maintaining high standards of corporate governance.
A detailed inquiry into the causes of failure of HIH Insurance reveals that the company became incapable of discharging the liabilities due insufficiency of the funds. It has been found that the deterioration in the company’s cash position was mainly due to impudent purchase of FAI Insurance at $300 million (Kehl, 2001). In this deal the directors of the company were involved in manipulations and the same was accepted by the directors later on. Due to this deal with FAI Insurance, the company overloaded with the liabilities and eventually went into liquidation. The reason declared for liquidation of the company was insolvency caused due to inability of the company to pay off the debt owed by it.
The findings reveal that the company owed $7.10 billion debt in total against the total assets of $8 billion (Kehl, 2001). This implies that the approximately 90% of the assets of the company were financed through debt, which is miserable condition of any business. However, digging out deeper into the reasons for failure of HIH insurance, it has been found out that the major reason was lack of governance. The loopholes in the system in prevalence in the company and the regulatory environment both were responsible for the failure of HIH Insurance. Therefore, it could be articulated that though liabilities being excessive was the major factor that contributed in liquidation of HIH Insurance, but this accumulation of liabilities was due to the negligent management (Kehl, 2001).
Further, it has been analyzed that the collapse of HIH Insurance affected the personal and domestic insurance business in the Australia adversely. Liquidation of business is not considered in favor of the society because it causes reduction in the national output and increases the unemployment (Kehl, 2001). Due to the closer of the established business, the employees get suddenly unemployed and production of the good and services is stopped. Particularly, the collapse of the company like HIH Insurance, which was operating at a large scale, has even more catastrophic effects on the society (Kehl, 2001).
Another example of collapse of business due to inability to payoff liabilities is failure of ABC Learning. The analysis of the facts and findings in regard to the failure of ABC Learning depicts that the company accumulated debt way more than its capacity to pay off. The main reason for accumulation of debt was the acquisition of Learning Care Group Inc of America. After acquiring Learning Care Group Inc of America, the gearing ratio of the company went up to 2.03 times (McRober, 2009). The gearing ratio of 2.03 times depicts that the debt owed by the company is twice of its equity, which can be considered to be potential danger to the solvency of the company.
Further, in respect of failure of ABC Learning, it has been analyzed that the management policies were also the major reason. The management of the company formed business model, which looked unsustainable (McRober, 2009). In this business model, the management provided for cutting cost in the areas where it was not needed. The cost cutting in this way resulted in deterioration in the quality of the services, which gradually affected the revenues of the company. Further, the management’s expansion policies were also highly criticized and these were held to be one of the primary reasons for the collapse of the company (McRober, 2009).
Another case of management failure on the part of planning and framing strategies for the business came out when the OneTel got liquidated. In respect of the collapse of OneTel, it has been analyzed that the main reason was the inefficient management (Elliott, 2010). The inefficiencies of the management were clearly visible in the imprudent decision of expansion taken by it. A year before the company went into liquidation, the management decided to purchase more licenses to enhance the scale of operations. For this purpose, the management expanded an amount of $523 million, which caused serious damages to the financial health of the company (Monem, 2016).
Further, it has been observed that the management of the company did not pay the required attention to the cash position. The poor planning of management and non-standardization of the sales policies caused problems of cash, which ultimately dragged the company into liquidation (Elliott, 2010). The auditors of the company found the financial position of the company miserable and pointed out the management to have a thoughtful look over the cash position of the company. However, the inflexible business modeling and failure to set correct direction on the part of the management laid the company to wind up ultimately in the year 2001 (Monem, 2016).
Conclusion and Recommendations
The liquidation in respect of a company means end of the legal status of the company though statutory processes prescribed in the statues. The reason for liquidation could anything such as insolvency, bankruptcy, and member’s discretion, but it should be resorted to at last. This means that matter giving rise to liquidation should first be tried to be sorted out mutually by the company and the creditors and if this is not possible then the legal process of winding should be resorted. This is because the liquidation affects the society as a whole adversely.
From the discussion carried in this report, it has been articulated that the major reason for the liquidation of the companies was insolvency and the insolvency was being cause due to negligent management. Further, the negligent management was the result of weak corporate governance and ethical environment within the companies. In strengthening the corporate governance, the regulators play a vital role, thus, the loopholes in the regulatory mechanism in Australia could also be said to have contributed in these liquidations of the companies. Therefore, In order to stop the unethical practices and the liquidations of the companies, following recommendations have been made:
The regulatory reforms in the corporate sector are inevitable and thus, more stringent regulations for the companies in regard to reporting and disclosing the state of affairs should be made (Griff, 2014).
The regulators must operate transparently emphasizing the adoption of more the ethical practices by the companies.
The governance mechanism of the companies should also be restructured by appointing higher level committees and establishing the oversight board (Calder, 2008).
References
BusinessWire. 2005. Learning Care Group, Inc. Announces Proposed Acquisition by A.B.C. Learning Centres Limited. [Online]. Available at: https://www.businesswire.com/news/home/20051115006409/en/Learning-Care-Group-Announces-Proposed-Acquisition-A.B.C [Accessed on: 02 September 2016].
Calder, A. 2008. Corporate governance: a practical guide to the legal frameworks and international codes of practice. Kogan Page Publishers.
Corbi, R.J. 2011. Chapter 15 Applies to Australian Liquidation. American Bankruptcy Institute Journal, XXX (2), 1-3.
Dagwell, R., Wines, G.L., and Lambert, C. 2007. Corporate Accounting in Australia. UNSW Press.
Elliott, T. 2010. One.Tel one big debacle. [Online]. Available at: https://www.abc.net.au/news/2009-11-20/28324 [Accessed on: 02 September 2016].
Faghfouri, P. 2012. The role of governance structure in the context of crisis management: an empirical analysis on a German sample of non-family and family businesses. Springer Science & Business Media.
Griff, M. 2014. Professional Accounting Essays and Assignments. Lulu Press, Inc.
Insurance Journal. 2003. HIH Report Cites Mismanagement as Cause of Collapse. [Online]. Available at: https://www.insurancejournal.com/news/international/2003/04/21/28160.htm [Accessed on: 02 September 2016].
Kehl, D. 2001. HIH Insurance Group Collapse. [Online]. Available at: https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/Publications_Archive/archive/hihinsurance [Accessed on: 02 September 2016].
McRober, A. 2009. ABC Learning Centres Limited – did the annual reports give enough warning? The FINSIA Journal of Applied Finance, 1(2009), 12-15.
Monem, R. 2016. The One-Tel Collapse: Lessons for Corporate Governance. [Online]. Available at: https://www98.griffith.edu.au/dspace/bitstream/handle/10072/42673/74746_1.pdf?sequence=1 [Accessed on: 02 September 2016].
Rezaee, Z. 2009. Corporate governance and ethics. John Wiley & Sons.
Van Bael & Bellis. 2003. Business Law Guide to Belgium. Kluwer Law International.
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