Reasons For Liquidation: A Study Of Three Large Australian Companies

ABC Learning: Rise and Fall

Liquidation is defined as a procedure of eliminating the business activities and winding up its operations by selling out the assets to the interested parties is known as liquidation. In simpler terms, it means the removal of a company’s existence due to its insolvency and poor financial position. Generally, an organization becomes insolvent when it is not able to meet its financial obligations or liabilities on time (Khan and Williamson, 2016). However, the main objective of every firm is to operate its business for long run and experience the growth at constant rate. In pursuit of achieving such goal, every company hires competent staff and apply effective strategies but somehow such plans prove to be ineffective. Being operating in a competitive and uncertain environment, some conditions and circumstances forces them to shut their business. Such events or situations ultimately led to the liquidation of the organization. After the debacle of the operations, the assets of the company are then distributed to its shareholders and creditors.

There can be many reasons for which a company shut down its operations such as poor management of resources, failure in paying off the liabilities and many more. Mainly, an imbalance and mismanagement of company’s assets and resources results in the increase unpaid liabilities (Phillips, 2013). Moreover, if the same continues for the long run, the financial obligations would pile up and as a result the company has to stop its operations and goes into liquidation. Apart from this, the behaviour and attitude on part of employees and management also contributes to the winding up of the entity. The events like mergers, unnecessary segments, inadequate working capital, and inappropriate business model also bring the firm to an end. Sometimes, the organization eliminates its activities because of the accomplishment of the objective for which it was incorporated. Other reasons like practicing the illegal activities and some legal restrictions also bring up the situation of liquidation.

This section explains the events which resulted in the winding up of the three large Australian companies. It clearly discusses the reasons for their liquidation and explains about their situation. 

It was an Australian company founded in 1988 and was engaged in the business of providing child care services across the countries. The company had several child care centres in New Zealand and Australia and was doing well in all terms. Before its liquidation, it has experienced a constant growth in its business as the Australian market of childcare and education grown rapidly. In addition, the company was focused on expanding its business by constantly taking over day care centres and purchasing properties in prime locations. In 2001, ABC Learning got listed on ASX and at that time the market capitalization of the company was A$25 million. The firm has also acquired an American company having its business in the same industry. It was Learning Care Group Inc which had more than 400 childcare centres in the country. Such acquisition resulted in the upsurge of ABC’s market cap to A$2.5 billion in year 2006 (BusinessWire. 2005).

HIH Insurance: Acquisition and Decreasing Performance

With all such activities and quality services, the ABC became the largest service care provider and attracted many investors towards its business. However, being a single company in this industry, it started taking the advantage of monopolistic market and avoided the child safety policies (Sumsion, 2012). When investigated, the company was found guilty and all the allegations proved to be true. Such event had an adverse effect on the financial position of ABC as well as on its share prices. All this force the directors to declare the company insolvent and to file a petition for voluntary wind up of the business. During the liquidation process, it was found that the ABC was heavily burdened with its debt obligations and it had to sell 60 percent of its UK and US subsidiaries for meeting the same. However, after that in 2009, the company got delisted from ASX and was bought by Goodstart Limited during the same year (Butler and Connelly, 2016).

It was second largest insurance company operating in Australia with the assets worth $8 billion and 17 controlled entities in the group. At a time, it covered a large market share was considered as the largest company in the country. It got liquidated in 2001 and prior to that the balance sheet of the company has shown assets at $8 billion and liabilities at $7.1 billion. This reflected a critical position of the company as its financial performance got worse (Insurance Journal.  2003). Furthermore, in 2009 HIH acquired FAI Insurance for $300 million and this became the major reason for its declining position and performance. The net profits reported a decrease of 39% and the directors accepted their fault about spending more than required on the acquisition of FAI (Kelly, Kleffner and Leadbetter, 2012). All such circumstances resulted in the debacle of company’s operations and contributed to its liquidation.

It was an Australia based telecommunication company that was founded back in 1995. The business got ceased in 2001 after being declared insolvent by the auditors. According to them, the organization lack availability of cash required for meeting its financial liability. The shortage of cash in business started creating many problems which ultimately deteriorates its financial position (Monem, 2016). However, initially the company started as an OPTUS services reseller and mostly targeted the young generation. Before getting into liquidation it was the fourth largest telecommunication company of Australia having its business in approximately eight countries. The position of the company declined in 2000 when it spent $523 million on purchasing the license for its operations. As a result, One.Tel reported a loss of $291 million in the same year. Furthermore, the negligence in the behaviour of management also contributed to the winding up of the company (Hughes et al., 2016). The manager manipulated company’s books of accounts for their personal interest and this forces OPTUS to stop doing business with One.Tel. Backing off of the OPTUS created many financial problems for the company and ultimately it has to close its operation and move towards liquidation (Elliott, 2010). 

One.Tel: Mismanagement and Bankruptcy

Accounting Professional and Ethical Standards Board (APESB) has issued APES 110 Code of ethics which are to be followed by professional accountants. The CPA Australia and Charted Accountants in New Zealand and Australia have established the board and lay down some responsibilities. APESB is held responsible for issuing the ethical standards for the accountants and is liable to ensure that the professional accountants work ethically and as per the standards (Martinov-Bennie and Mladenovic, 2015). However, the code issued is similar to the code developed by International Ethics Standards Board for Accountants (IESBA). All the accountants working in Australia are required to follow this code unless there is any sort of legal restrictions for doing the same. The five codes of ethics explained by APS 110 are discussed further (APESB. 2010).

Following are the key ethics that are required to be followed by each and every accountant practicing in Australia. The code establishes a framework and the accountants are required to align with the same. They are as follows:

Integrity

It creates the sense of honesty and straight forwardness in the accountants and asks for the same from them at time of creating any business and professional relationships. The principle requires the member to deal fairly and try to create integrity in each of the business transaction that has taken place during a particular time period (Ball, Tyler and Wells, 2015). In addition, it does not allow the accountant to be in relation with any of the reports that contains false information. Overall, the ethic forces the accountant to work with full honesty and due diligence (CPA Australia. 2018).

Objectivity

 It requires the member to be free from biasness and should take all the decisions and judgements independently. The accountant should not change its decision because of some conflicts or in influence of others. Moreover, the principle of objectivity does not allow the member to conduct a professional practice in which the judgement can get influenced by others or can be changed due to biasness (IFAC. 2018).

Professional Competence and Due Care

The accountants must pursue required skills and knowledge that justifies its actions and practice. They are required to maintain their professional knowledge so as to deliver quality services to their clients. The services offered must be in accordance with the modified techniques, legislations and current developments. Furthermore, the principle states that the members should perform their functions within a legal framework and in diligent manner (CPA Australia. 2018).

APES 110 Code of Ethics for Professional Accountants

Confidentiality

This principle allows the accountants to keep confidentiality in their work and should respect the same. They are not allowed to disclose the important and secret information identified in their course of action to any third party without having proper approval and authority. They have to maintain secrecy in their practice and cannot use the confidential data or information for their personal purposes (IFAC. 2018). 

Professional Behavior

The accountants must pursue professionalism in their behaviour and are required to follow all the rules and regulations mentioned in the legal framework. They have to avoid the activities and actions which are against the law and should work professionally in the organization. No personal contacts are to be maintained by the accountants during their course of action (CPA Australia. 2018).

The companies operating in Australia and listed on ASX are required to align with some listing rules issued by Australian Securities & Investment Commission. Such rules help in the governance of entities and focus on improving their legal compliance. In respect of corporate governance, Listing Rule 4.10.3 is required to be followed by the companies under which they have to compare their structure of corporate governance with the recommendations given by CG Council (PWC. 2018). According to the rule, they have to adopt such recommendations in order to create good corporate governance. The companies must have an audit committee, risk management and remuneration committee and a board of independent directors (ASX. 2018). 

It is very usual to say that every company require funds to operate and fulfil its daily requirements. When the external sources of finance are used by the entity, it creates liabilities for it and is treated as a financial obligation. However, the same can affect the company’s operation if the management fails to meet its liabilities on time. As a result the position of the firm will decline and the situation of liquidation may arise. If the company cannot meet its liabilities on time, the shareholders will withdraw their money from the business and such situation will lead the company toward winding up. Therefore, it can be said that the debt or liabilities are the major factor contributing to the process of liquidation.

Conclusion 

From the above report, it can be concluded that the imbalance and poor management of assets can force the company to eliminate its activities and file for a voluntary wind up. Moreover, unethical behaviour from the management side also led to the situation of liquidation. The report also explains that if the laws and regulations are properly followed or implemented and the ethics are been complied, then the performance and position of the company increases in financial terms. Furthermore, it can easily deal with any type of business uncertainty and can avoid the possibility of getting liquidated. 

References 

APESB., 2010. APES 110 Code of Ethics for Professional Accountants. [online]. Available at <https://www.apesb.org.au/uploads/standards/apesb_standards/standard1.pdf > [Accessed 31 August 2018].

ASX., 2018. Corporate Governance Council. [online]. Available at: <https://www.asx.com.au/regulation/corporate-governance-council.htm> [Accessed 31 August 2018].

Ball, F., Tyler, J. and Wells, P., 2015. Is audit quality impacted by auditor relationships?. Journal of Contemporary Accounting & Economics, 11(2), pp.166-181.

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 31 August 2018].

Butler, D. and Connelly, A., 2016. Practicalities of winding up trusts and realizing trust assets. Australian Restructuring Insolvency & Turnaround Association Journal, 28(3), p. 24.

CPA Australia., 2018. APES 110 CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS. [online]. Available at: <https://www.cpaaustralia.com.au/professional-resources/accounting-professional-and-ethical-standards/apes-110-code-of-ethics-for-professional-accountants> [Accessed 31 August 2018].

Elliott, T., 2010. One.Tel one big debacle. [online]. Available at: <https://www.abc.net.au/news/2009-11-20/28324> [Accessed 31 August 2018].

Hughes, D.L., Dwivedi, Y.K., Rana, N.P. and Simintiras, A.C., 2016. Information systems project failure–analysis of causal links using interpretive structural modelling. Production Planning & Control, 27(16), pp.1313-1333.

IFAC., 2018. Revised Code of Ethics – Completed. [online]. Available at: <https://www.ethicsboard.org/projects/revised-code-ethics-completed> [Accessed 31 August 2018].

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 31 August 2018].

Kelly, M., Kleffner, A. and Leadbetter, D., 2012. Structure, Principles and Effectiveness of Insurance Regulation in the 21 st Century: Insights from Canada. The Geneva Papers on Risk and Insurance-Issues and Practice, 37(1), pp.155-174.

Khan, A. and Williamson, S., 2016. The liquidation of foreign companies in Australia. Australian Restructuring Insolvency & Turnaround Association Journal, 28(2), p.38.

Martinov-Bennie, N. and Mladenovic, R., 2015. Investigation of the impact of an ethical framework and an integrated ethics education on accounting students’ ethical sensitivity and judgment. Journal of Business Ethics, 127(1), pp.189-203.

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 31 August 2018].

Phillips, A., 2013. An analysis of official liquidations in Australia: Terry Taylor Scholarship 2012. Australian Insolvency Journal, 25(2), p.4.

PWC., 2018. Listing a company on the Australian Securities Exchange. [online]. Available at: <https://www.pwc.com.au/legal/assets/listing-company-asx.pdf> [Accessed 31 August 2018].

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.