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 . Was liabilities a major factor contributinng to the liquidation of the company?
Students need to support their analysis with reference to relevant material from the text and a minimum ofeight (8) suitable, reliable, current and academically acceptable sources – this should include at least 2 peer-reviewed academic journal articles.
Answer:
Introduction
The present report aims to discuss several events that led the companies to liquidate their business activities significantly in Australian region. The report covers discussion on three Australian companies that went into liquidation process due to financial stress. The companies are ABC Learning, HIH Insurance and One. Tel Phone Company. The study examines and discusses about the primary reason for liquidation event on liability factor that is not being able to meet by the companies as and when they become due. Accordingly, the report involves discussion on business ethics and governance to explain the financial stress of the companies as it affects the sustainable growth. Further, it has been identified in the report whether a liability factor is a major factor that contributes in company’s liquidation.
Background of the companies
ABC Learning was a largest company in Australia engaged in providing services of early childhood education that was founded in 1988. During the early years, the organization had 697 centers and acquired another largest operator in 2005. ABC Learning derived highest revenue amounted to $292.7 million while net profit amounted to $52.3 million during the financial year 2004/05 (Asx.co
m.au 2017). Besides, in 2008 the company went into voluntary liquidation, which was acquired by Goodstart Early Learning in 2009.
HIH Insurance founded by Ray Williams in 1968 considered as second largest insurance company in Australia with the business operations in the geographical areas of Asia, United Kingdom, United States and other regions. The company had total assets valued to $8,327 in 2000 but went into provisional liquidation together with the subsidiaries in 2001 as per the arrangement scheme (Hih.com.au 2016).
One.Tel Phone Company, in Australia was founded in 1995 and used to be fourth largest organization in telecommunication industry. The company was operating business by using 3GSM 1800 network and had strong customer base of 2.2 million approximately, while the revenue amounted to $653 million during the years 1998 to 2000 (Asx.com.au 2017).
Liquidation Events
The selected companies were largest companies by operation in their respective sector yet went into liquidation due to significant reasons. Liquidation is a state when company terminates its legal existence and concludes the business activities either voluntarily or by compulsory, which is also termed as winding up (Goldschmidt and Amoateng 2014, pp.24-25). The major reasons of company’s liquidation are:
- Increase in the current liabilities and inability to meet the obligation
- Increase in the value of fictitious assets which are not significant
- Fraudulent involvement or erroneous activities
- Lack of structured operation to derive sufficient profit and perseverance of massive losses
- High competition and frequent changes in government policies
Liquidation Events in ABC Learning
The company went into voluntary liquidation in 2008 subsequent to sale of 60% of the business to Morgan Stanley in order to repay accumulated debt valued to $1.5 million. During the later months of the company’s formation, profit reflected 42% fall and failed to meet the obligation valued to $1.8 billion. Consequently, the share price of the company reflected huge decline. During the year 2007-08, the company could not meet its obligations and failed to derive sufficient profits due to which trading of shares was restricted by the ASX (Asx.com.au 2017).
Liquidation Events in HIH Insurance
HIH Insurance went into provisional liquidation along with the subsidiaries on March 15 2001 with an estimated loss amounted to $5.3 billion approximately. The company’s collapse was considered to be largest corporate collapse and found that the organization had been involved in various fraudulent charges that resulted in members’ imprisonment. In the year 2000/01, there was a huge decline in the company’s net assets from $8 billion to $133 million with a slight movement of 1.7% in the value of assets. It was identified that the company’s loss was over $800 million in the period of six months in 2000 (Hih.com.au 2016).
Liquidation Events in One.Tel Phone Company
This company collapsed in 2001 because of huge losses amounted to $291 million approximately resulted in decline of company’s share below $1. In addition, the company experienced criticism for making high payments to the founders even in the period of huge losses. As a result, One.Tel sold off its shares worth $5 million at a value $2.5 million and went into liquidation due to huge losses as well as insolvency (Asx.com.au 2017).
Considering the reasons of company’s liquidation, it can be said that the major reason for a company’s winding up is the inability to repay the liabilities. In case of above- mentioned companies, it has been observed that the business was collapsed due to financial stress, erroneous activities and decline in the value of assets (Yawar and Seuring 2015, pp.1-23).
Ethics and Governance of financial stress of companies
In order to operate business activities in smooth and safe manner companies are required to consider the factors of ethics and governance. Factor of ethics refer to the values and ideologies that companies need to incorporate to govern the business activities for profit maximization and sustainable growth. Besides, governance refers to a set of rules that regulate the business policies as per the legal regulations. Ethics and governance play important role that regulates the business framework to provide genuine, transparent and fair presentation of financial information (Reinhart and Sbrancia 2015, pp.291-333).
In view of the collapse of the three selected companies, it has been noticed that the company failed to recognize and represent the financial information as per the relevant accounting standards and principles with respect to disclosure assets at higher value than the actual value. As per the ethical and governance policies, it is essential for the companies to present the financial statements in true and fair manner so that the users can evaluate the actual financial performance and position (Lozano 2015, pp.32-44). In case of ABC Learning, the company disclosed the value of goodwill without recognizing impairment charges $2 million. The company also misrepresented the value of business license and expected future cash flows that were uncertain in realization. Further, considering the case of HIH Insurance, the organization has been following conservative approach for corporate culture and deficiencies that resulted in huge decline in profitability (Hih.com.au 2016). The company found to practice unethical ways to record financial information with respect to the value of assets. The company was charged for fraudulent practices, share market manipulation and disclosure of false information to the stakeholders (Berger, Imbierowicz and Rauch 2016, pp.729-770). Such unethical business practices led the company into financial stress and resulted in liquidation. Similarly, One.Tel Phone Company found to be involved in unfair business ethics and governance in terms of inadequate management, improper monitoring of internal controls and misrepresentation of financial information resulted in financial stress experienced during the year 2001 (Gama, Segura and Milani Filho 2017, pp. 65-82).
Moreover, corporate governance plays major role in a company’s sustainable growth and profit maximization since it defines the manner in which the companies assures to provide investment return to the suppliers of finance. Directors of the company are responsible to ensure that application of good governance standards in business operation and representation of financial statements to report faithful representation of fundamental condition of the economy (Gertler and Kiyotaki 2015, pp.2011-2043). As in case of HIH Insurance or One.Tel Phone Company, there were indications that the actual liability of the companies had been understated by around $18 million and the same was not reported by the auditors too. Accordingly, the company presented unfair information of financial position, which resulted in weaken the overall profitability in later years. Therefore, it can be said that apart from the factor of liabilities, ethical business practice and good governance is essential for a company to maintain the sustainability. Improper presentation of the value of assets, fraudulent business activities and unfair income disclosure contribute to the liquidation of the company other than the factor of liabilities (Chell et al. 2016, pp.619-625).
Recommendation
In view of the factors that contribute to the company’s liquidation, it can be suggested that the business organizations should employ ethical business practices to maintain the company’s sustainability and to enhance the profitability. As the major business decisions are taken by the board, it is significant to have a independent director as company’s chairperson so that the business activities and monitoring the internal control system would be transparent and effective. It is further recommended that the management of company ensure the valuation of assets have been done at fair value by considering the prevailing market price.
Conclusion
Company’s collapse does not depend only on the financial crisis but also depends on the unfair and unethical business practices. It is essential for the companies to maintain effective monitoring on the business functions so that the financial information and is presented in true and fair manner. Moreover, inability to pay liabilities is a significant factor that contributes to the company’s liquidation but it is not the only factor. In the present discussion, it has been observed that liquidation of HIH Insurance and One.Tel organization occurred due to ineffective corporate governance and fraudulent business practices together with the non- disclosure of substantial interests. Moreover, in case of ABC Learning, the company went into liquidation due to huge losses and fall in share price. Accordingly, it can be concluded that ethics and governance is essential for the companies to maintain the sustainable growth.
Reference List
Asx.com.au, 2017. Home - Australian Securities Exchange - ASX. [online] Asx.com.au. Available at: <https://www.asx.com.au/> [Accessed 8 Apr. 2017].
Berger, A.N., Imbierowicz, B. and Rauch, C., 2016. The roles of corporate governance in bank failures during the recent financial crisis. Journal of Money, Credit and Banking, 48(4), pp.729-770.
Chell, E., Spence, L.J., Perrini, F. and Harris, J.D., 2016. Social entrepreneurship and business ethics: does social equal ethical?. Journal of Business Ethics, 133(4), pp.619-625.
Gama, A.P.M., Segura, L.C. and Milani Filho, M.A.F., 2017. The Impact of Investment in Intangible Assets on the Market Value. In Equity Valuation and Negative Earnings (pp. 65-82). Springer Singapore.
Gertler, M. and Kiyotaki, N., 2015. Banking, liquidity, and bank runs in an infinite horizon economy. The American Economic Review, 105(7), pp.2011-2043.
Goldschmidt, A. and Amoateng, M., 2014. Reading (in) between the lines: winding up close corporations: company law. Without Prejudice, 14(2), pp.24-25.
Hih.com.au. 2016. HIH Insurance - Home Page. [online] Available at: https://www.hih.com.au/ [Accessed 20 Aug. 2016].
Long, D.M., Wann, C. and Brockman, C., 2016. UNETHICAL BUSINESS BEHAVIOR AND STOCK PERFORMANCE. Academy of Accounting and Financial Studies Journal, 20(3), p.115.
Lozano, R., 2015. A holistic perspective on corporate sustainability drivers.Corporate Social Responsibility and Environmental Management, 22(1), pp.32-44.
Reinhart, C.M. and Sbrancia, M.B., 2015. The liquidation of government debt. Economic Policy, 30(82), pp.291-333.
Tomaras, P. and Tsalikis, J., 2017. Priming Effects on Cross-Cultural Business Ethical Perceptions. In Strategic Innovative Marketing (pp. 211-216). Springer International Publishing.
Yawar, S.A. and Seuring, S., 2015. Management of social issues in supply chains: a literature review exploring social issues, actions and performance outcomes. Journal of Business Ethics, pp.1-23.
