Liquidation

Liquidation of three companies in Australia

Executive Summary

This paper aim is to provide brief understanding about the events that led to liquidation. In regards to this study, different companies’ such as ABC learning, HIH insurances, and One-Tel phone, event was found which causes of liquidation. Likewise, ABC learning failed to pay the liability due to subprime mortgage crisis which affects the community in terms to provide help of children.

Moreover, HIH insurances made more investment in the different portfolio without collecting the sufficient information that also affects the company effectiveness to earn the profit. At the same time, the high prices of product offering are also cause of company failure to pay the liability to creditors and investors.

Furthermore, the One-Tel phone is considered the deficiency a major event that made the company failure to pay debts. The deficiencies are the weakness in internal control, poor pricing policy, strategic mistakes, etc. It affects the company in regards to operate the functions and repay its debt to its shareholders. So such practice indicates the different events that led to liquidation. Thus, it is stated that the liability is considered as a major contributor of liquidation. 

Introduction

This assignment discusses the events/ causes that led to liquidation. In addition to this, the organization usually goes on the liquidation when the company is insolvent such as they are failing to pay obligation or liabilities to its creditors and shareholders.

However, it indicates that the company operations are brought to an end, and its assets are sold into the market, and the selling price is divided equally among the shareholders and creditors. Therefore with the undertaken of this paper, it is identified that why ABC learning, HIH Insurance, and One.Tel Company has led to liquidation (Kelly et al., 2015).

At the same time, there is also discussing that liability is the major reason or a factor through which companies are deciding liability. At last, the study also describes the ethics and governances in references to explaining the company financial stress.

Analysis and Findings

This part describes the different companies which have gone to liquidations which are situated Australia. These companies are the ABC learning, HIH Insurances and One.Tel Phone Company. Thus, in this study, the different events will analysis, and on that basis, observations would be performed.

Events that led to the liquidations

ABC learning: ABC learning is considered as an Australia company which offers the childhood education services. The event that led to being the reason of liquidation for the ABC learning is the subprime mortgage crisis that caused debt repayments.

At the same time, the poor policy of the government and the corporation also raises the situation of the insolvency. It results in the liquidation of the company. It is also identified that the ABC learning was failing to earn profits and provide quality services to the children because their staffing cost is quite equivalent to operating revenue. So in such situation, the profit margin of the company is quite less (Sydney Morning Herald, 2017).

In addition to this, ABC learning was also proved to be failed as it focuses more on the profit/ revenue generation instead of fulfilling the requirements of different stakeholders. At the same time, the company didn’t fulfill the compliances and non-financial accountability that developed negative goodwill in the market of Australia.

Due to this, it affected their ability to generate profits. This result in failure to meet the stakeholder’s needs and because of this, investors break their contracts and demands for their return which ABC learning failed to pay. Thus, such events indicate the cause of which ABC learning led to take liquidation decision in 2008.

HIH Insurances: HIH is considered as an Australia second largest insurances company. The demise of the HIH was because their debt leverage and insurances liabilities were high that proved to be the real risk of insolvency (Parliament of Australia, 2001).

It is also determined that company was also not involved in investing in the different portfolio and they purely functioned on the old claims services. Besides that, the real event of HIH business failure is that it primarily made aggressively expanded business strategies and covers almost all insurances business segment in both the market domestically and globally.

Other than that, the skimming pricing strategy of the HIH was also considered as one of the events which didn’t contribute appropriately for the company. It is because HIH entered into the highly competitive market by offering their product at the high price as compared to its competitors.

Moreover, HIH has chosen that sector in which it didn’t have any clear understanding and this practice leads to business issues and legal risks. In addition to this, the action due to which HIH was criticized more is that it acquired the FAI from Rodney Adler with $ 300 Million, but later it was revealed that it worth only $100 Million.

This practice of HIH insurances affects the goodwill of the company. Therefore, it can be stated that negative image, generation of high cost, lack of specialization in the different segment of insurances. Thus, these all areas become an event that led the HIH insurances to come to an end.

One.Tel Phone: It was the Australian based telecommunication company which is publically listed. It is reported that company has failed expectation, adopted wrong pricing policy and performed strategic mistakes, etc. There is also deficiency exist in the internal control, financial reporting audit quality etc. such deficiencies become a vital reason of collapse the one-Tel (Monem, 2011).

At the same time, poor performances of the board of directors and executives were also considered as a reason of company failure. OneTel collapsed because of some corporate governances failures. Firstly, the CEOs have ineffective performances and have less control over the activities. Secondly, large investors didn’t know about the true financial performances of the OneTel.

Thirdly, non-executives directors did not perform well because they did not have the close association with the CEO. Fourthly, the auditor had a conflict of interest. Lastly, BOD was ineffective and was unable to monitor the management behavior properly and control the BOD agenda. Therefore, this influences the revenue of the company. It is also estimated that One.

Tel was also facing strong competition in the Australia market as different companies were entering into the market with product innovation that affects the One.Tel position in an adverse manner. Thus, the ineffective management of the OneTel could be considered as an event that created the situation of liquidation.

Ethics and corporate Governances that raise the stress of company

This part discusses the ethical issues and problems that are found out by the corporate in their governances. In regards to this, ABC learning, HIH insurances, and one-Tel phone ethical issues were analyzed to find the areas where they are lacked or proved to be incompetent.

ABC Learning: The ethical issue that is performed by the ABC learning is that it didn’t follow the compliances and corporate governances. Likewise, it focuses more on the profit/ revenue generation instead of fulfilling the requirements of different stakeholders.

Besides that, it provides low-quality services to the children and spends less for the staff that de-motivates them to work effectively. Therefore, low employees performances, poor policy adoption result in making company inefficient to pay its obligation. Thus, such practices create the stress to the company and at last, company would be declared as an insolvent (Mishra & Bhattacharya, 2011).

HIH Insurances: The ethical issue which is identified in the HIH insurances is the lack of dependencies of non-executives from the management. There is inadequate risk management adopted by the HIH insurances, and it is considered as an unethically. Another ethical issue is that HIH insurances highlighted the false information to the investors.

Likewise, they showed that they acquired the FAI from Rodney Adler with $ 300 Million, but later it was revealed that it worth only $100 Million. So this practice is considered as an unethical. Due to this, HIH insurances reached to the situation of liquidation.

One-Tel Phone: The major deficiencies that are present in the corporate governances are the poor internal control as there is insufficient design, there is lack of checks & balances, absences of prioritization, etc. Weakness in financial reporting, less audit quality is considered as an issue for the corporate governances.

At the same time, lack of management communication within the boards and ineffective way to flow the information are the cause of the poor performances of the company in the market (Jones & Peat, 2014). Ineffective performances lead to dissatisfying the maximum customers. In short, it influences the company availability to earn profits.

Therefore, it directly impacted the company sustainability. Thus, due to constantly declining in the performances of the company, it comes to the stage of liquidation. So, the poor management is the ethical issues in this study.

Liabilities are the major contributor to the liquidation of the company

According to Adams & Young (2013), liabilities plays a vital role in the liquidation of the company as, without existences of liability, the company could not be able to purchase the assets and does not have cash on hand to operate their regular activity. At the same time, high liability is also considered as a major contributor to the liquidation.

It is because the company which has high liability then they become liable to pay the obligation to all creditor or shareholders. If the company fails to pay the obligations, then they are considered as bad debts or insolvent. In the end, it results in the liquidation of the company.

So it indicates that the company with high/ low liability could not be able to sustain long term in the market. Thus, it is necessary for the organization to make a balance between the equity and debt to sustain at the longer time on the market.

On the other hand, liability develops the chances for the company to face the situation of insolvent if the company has more debts over equity. Likewise, in the above mention companies, it is defined that all the three companies in Australia failed to pay liability to its creditor that’s why they faced the situation of liquidation.

It is also found that all three companies faced different situation due to which they decided on liquidation. But the common aspect that occurred in the situation is the high liability in which companies fail to pay its obligation to their creditors and shareholders.

In context to ABC learning, Cheng & Weiss (2012) analyzed that the company went to the liquidation due to the fallout of subprime mortgage crisis that caused debt repayment. Due to the fallout of crisis, ABC learning failed to pay the debts and liabilities, and at the same time, they also failed in developing the effective policy for compensating their loss.

So, this situation indicates that the subprime crisis leads to ABC learning liquidation. In context to HIH insurances, Sumsion (2012) find the reason due to which company didn’t pay its liability because firstly at its initial level it invested in different insurances sector without collecting the relevant facts about the portfolio.

At the same time, increasing competitors and rising innovation in the product was also influenced the company effectiveness adversely to generate the profits. Therefore, these become a cause of declining in profits and increase the liability of the company, and because of less earning, they decided on liquidation.

According to Carnegie et al., (2014), decreasing share price of the One-Tel Phone is main biggest cause that reflects clearly in the company effectiveness of earning profits. The deficiency that found out is the weakness in internal control, poor pricing policy, strategic mistakes, etc.

These are the major aspects which affect the company efficiency to pay it’s all debts, and due to increasing the debts over the equity than in such situation, they were failing to operate their business and able to sustain in the market. Thus, these aspects forced the company to decide on liquidation.

Hence, the above study gives different real absence situation that caused the situation of the liquidation, and the common part is noticing in all situations is the lack of their ability to pay its liability or obligation. So such discussion reflects that the liability is the main contributor of the liquidation of the company.

Recommendations/Conclusion

By above study, it can be recommended that business owner or any corporate should hardest to avoid the decision of liquidation. It can be achieved by using the voluntary company arrangement in which company debts can be rescheduled with a proportion possible written off.

The voluntary company arrangement is considered as a formal arrangement between the company and its creditors in regards to pay a proportion of the debts over the certain period of up to 5 years and within unaffordable balances being written off. So, this practice would help the companies to avoid the decision of liquidation (Mishra & Bhattacharya, 2011).

Besides that, to sustain in the market, companies need to adopt the advanced technology like the digital platform to save their maximum costing, and this assists the company to pay its obligations on time. Thus, it can be concluded that in case company failed to pay its obligations/ liability then it mainly results in liquidation. So it defines that the liability is major contributors of liquidation.

References

Adams, M. A., & Young, A. (2013) Scheme of arrangement for creditors in Hong Kong: enhancing Hong Kong’s scheme and lessons from Australia. International Corporate Rescue, 10(4), pp. 233-239.

Carnegie, G. D., & 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.

Cheng, J., & Weiss, M. A. (2012) The Role of RBC, Hurricane Exposure, Bond Portfolio Duration, and Macroeconomic and Industry‐wide Factors in Property–Liability Insolvency Prediction. Journal of Risk and Insurance, 79(3), pp. 723-750.

Jones, S., & Peat, M. (2014) Predicting Corporate Bankruptcy Risk in Australia: A Latent Class Analysis. Journal of Applied Management Accounting Research, 12(1), pp. 13.

Kelly, R., Brien, E. O., & Stuart, R. (2015) A long-run survival analysis of corporate liquidations in Ireland. Small Business Economics, 44(3), pp. 671-683.

Mishra, A. S., & Bhattacharya, S. (2011) The linkage between financial crisis and corporate governance: A literature review. IUP Journal of Corporate Governance, 10(3), pp. 71.

Monem, R. (2011) The One. Tel collapse: lessons for corporate governance. Australian Accounting Review, 21(4), pp. 340-351.

Parliament of Australia (2001) HIH Insurance Group collapse. [Online] Available at: http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/Publications_Archive/archive/hihinsurance. (Accessed: 09/09/2017)

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.

Sydeny Morning Herald (2017) Numbers finally start to add up as operators go back to basic. [Online] Available at: http://www.smh.com.au/business/numbers-finally-start-to-add-up-as-operators-go-back-to-basics-20110121-19zy6.html (Accessed: 09/09/2017).

 

 

 

 

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