Reasons For Liquidation Of Companies: Case Study Of Three Australian Companies
Liquidation: Meaning and Reasons
The process which is followed at time of eliminating business operations and activities by selling out all of its assets and liabilities is known as liquidation. In other words, it deals with the debacle of company’s existence from the market or industry due to its insolvency and inability to meet its financial obligations. However, the main motive of every company is to run its business for long run and enjoy success and growth in the same. In lieu of achieving this objective, the corporations hire skilled and competent staff as well as employ strategic plans and policies in the business (Ream, 2016). However, sometimes such planning proves to be ineffective and wrong due to the unfavourable circumstances, uncertain environment and competitiveness within the industry. All such conditions force the business to shut down their operations and eventually all this lead to liquidation of the company. Once the business activities are eliminated, the assets and other resources of the firm are distributed to its shareholders and creditors (Butler and Connelly, 2016).
There are several reasons which bring the situation of liquidation such as poor management of available resources and assets, failure in making payments of liabilities, unfavourable market conditions and many others. Primarily, the mismanagement of company’s assets results in unpaid liabilities and if it continues in future, then company has to put an end to its operations and went into liquidation. Apart from this imbalance of assets, the behaviour of employees and senior executives also contributes to the winding up of the firm. The illegal and unethical practices done by management of the firm may result in the debacle of its business from the perspective of law. Furthermore, events like mergers, acquisitions, insufficient working capital, and unwanted divisions also lead to the liquidation of the company. Sometimes, the entity wound up its business due to the accomplishment of the objective for which it was incorporated. Therefore, apart from the failure on part of paying obligations, these are also the reasons which bring an organization close to its liquidation.
The following section discusses the situations and circumstances faced by three Australian companies which resulted in their liquidation and termination of business activities.
It was Australia based company involved in providing child care services all over the country. The entity was founded in 1988 and had numerous of child care centres in Australia as well as in New Zealand. Before its liquidation, it was performing well from all the aspects as it has enjoyed growth in its business due to the positive and upward trend in the child care and education industry of Australia. Furthermore, ABC was paying more attention on expanding its business by acquiring small day care centres and purchasing the properties in its targeted market. The company got listed on Australia Securities Exchange in 2001 and during the same year, it had market cap of AUD 25 million (BusinessWire. 2005). Along with this, it has also taken over an American company which was operating in same industry named as Learning Care Group Inc. The corporation had more than 400 childcare centres and acquisition of all them brought an upsurge in the market capitalization of ABC Learning to AUD 2.5 billion in 2006. With all such success and growth, ABC became the largest child care service provider in Australia. However, the company started taking advantage of being a monopolistic and had ignored the policies related to child safety. After the investigation done in this respect, ABC was found guilty and all the allegations proved to be true. As a result, the financial position of the firm declines along with the fall in its share prices. All such events force the company’s directors to declare the company insolvent and enable them to file a petition in the court for the purpose of voluntary wind up. At time of liquidation, it was found that there were heavy debt obligations on ABC and the firm had to sell 60 percent of its US and UK subsidiaries to pay its obligations. After the voluntary winding up, ABC Learning got delisted from ASX in 2009 and was acquired or bought by Goodstart Limited in the same year.
Case Study: Three Australian Companies
It was an Australian company engaged in offering insurance services to its customers across the country. It had approximately 17 controlled entities in the group and assets amounted to $8 billion before its elimination from the market. The debacle of the firm has taken place in 2001 and before that it had liabilities worth AUD 7.1 billion against its total assets of $8 billion. This represented a very critical position of the entity and moreover the acquisition of FAI Insurance in 2009 also resulted in the poor performance of the company. The directors accepted the fact they spent a lot on FAI’s acquisition and purchased the company for $300 million. All such events led the company towards liquidation and force it to wind up its operations and other business activities (Insurance Journal. 2003).
It was a telecommunication company operating its business in Australia and was founded in 1995. The business got liquidated in 2001 after getting insolvent according to its auditors. As per the auditor’s declaration, the firm was not able to meet its financial obligations due to lack of cash in the business. Such lack created many problems in the functioning of company’s operations which ultimately deteriorates its position and performance in financial terms. In its initial years, it started as a reseller of OPTUS services and targeted the young generation market (Elliott, 2010). Earlier, One.Tel was doing well and was considered as the fourth largest telecom company in Australia. However, in 2000 the position of the company declined because of the huge expenditure incurred by it on purchasing the licenses for its business activities. It cost the entity approximately $523 million to purchase the same. As a result, the financial statements of the firm reported a loss of $291 million during the same year. Apart from this, the carelessness on part of management also contributed to the winding up of One.Tel operations. It was also found that the managers and executives manipulated the final accounts of the company for their personal motives which enable OPTUS to take their investment back from One.Tel. Backing off of the OPTUS resulted in many financial issues and ultimately it force the company to eliminate its activities (Monem, 2016).
APES 110 Code of ethics are issued by Accounting Professional and Ethical Standards Board (APESB) which are to be followed by professional accountants. The APESB was established by The CPA Australia and Charted Accountants in New Zealand and Australia with a purpose to issue ethical standards that must be followed by all the professional accountants in their course of action (APESB. 2010). The codes developed by the board are very much similar to the one issued by International Ethics Standards Board for Accountants (IESBA). All the members and accounts have to follow the five codes of ethics explained by APES 110. They are as follows:
- Integrity: This principle allows the accounts to work with proper honesty and integrity while making any kind of professional and business deals. The members are required to deal with full integrity at time of conducting a particular business transaction. Moreover as per the code, the accountants are not allowed to be involved in type of unethical practices or should not be associated with the reports that contain unfair and false information. On a whole, they have to work with due diligence ( 2018).
- Objectivity:It allows the accountant to take decisions without getting influenced by others. Their judgements should be free from biasness and should not change because of any sort fo conflicts arising between the management and shareholders or other parties. Furthermore, according the principle the member cannot conduct a practice in which the judgement can be changed or influenced by others (CPA Australia. 2018).
- Professional Competence and Due Care: The accountant should have enough skills and knowledge that justifies its practices and actions. The competence must be present in the members so that they can provide quality work and services to the clients. Also they have to perform their functions ad roles within a legal framework (CPA Australia. 2018).
- Confidentiality:According to this principle, the accounts have to keep confidentiality in the process of their working and are not authorized to disclose all the information derived during their course of action. They have to maintain secrecy and keep the data confidential ( 2018).
- Professional behavior: While performing their duties, the accountant and members have to be professional and should adopt the same in their attitude. They have to avoid the practices or activities that are against the law and have to work professionally (CPA Australia. 2018).
APES 110 Code of Ethics for Professional Accountants
All the ASX listed companies are required to comply with some listing rules that are issued by Australian Securities & Investment Commission. They eventually help the companies to improve and maintain their legal compliance with the Australian government. In terms of corporate governance, Listing Rule 4.10.3 applied to every ASX listed company under which they have to amend their corporate governance structure as per the ASX CGC principles. There are eight principles laid down by Corporate Governance Council which helps the entities to create a good CG (PWC. 2018). They are as follows:
- Laying down solid foundation for the management and board.
- Structuring the board in a way to add value to the business.
- Performing ethically and with full responsibility
- Safeguarding integrity in corporate reporting
- Making disclosures on time and balanced.
- Protecting and respecting the rights of security holders
- Recognition and management of risk
- Providing fair remuneration ( 2018).
All the above principles helps in guiding the company in terms of establish good corporate governance. All the Australian companies are required to align with these principles so that their business can experience future growth and success at good pace.
The companies that got into liquidation are majorly because of their insolvency and their inability to meet financial obligations. Generally, most of the entities rely on external financing that creates liabilities for them and is treated as financial debt in their books of accounts. The failure to pay the same can create many problems for the company and will adversely affect its operations. Several financial issues will arise and the entity will be forced to wind up their activities and move towards liquidation. Declining position will also make shareholders to withdraw their money from the business. Overall, unpaid liabilities contribute to a great extent in the process of liquidation. They are major reasons for which companies generally wound up their operations.
Conclusion
The above report concludes that liabilities are the major factor for the winding up of the companies. This situation arises from the improper management of assets and other resources. In addition, unethical behaviour and violations of law also force the entities to go into liquidation. It can be said that if the three Australian companies discussed above properly followed the principles of corporate governance, then they can improve their position and avoid the situation of the debacle. The accountants should also follow all the ethical codes so that proper evaluation and examination of financial statements can be done and a true view of company’s financial position can be presented. Furthermore, the report also concludes that proper compliance with ethics and codes will allow the business to avoid uncertainty and the possibility of getting wound up.
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 10 September 2018].
ASX. (2018). Corporate Governance Council. [Online]. Available at: https://www.asx.com.au/documents/asx-compliance/cgc-principles-and-recommendations-3rd-edn.pdf [Accessed 10 September 2018].
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 10 September 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 10 September 2018].
Elliott, T. (2010). One.Tel one big debacle. [Online]. Available at: https://www.abc.net.au/news/2009-11-20/28324 [Accessed 10 September 2018].
IFAC. (2018). Revised Code of Ethics – Completed. [Online]. Available at: https://www.ethicsboard.org/projects/revised-code-ethics-completed [Accessed 10 September 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 10 September 2018].
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 10 September 2018].
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 10 September 2018].
Ream, P.G. (2016). Liquidation of constitutional meaning through use. Duke LJ, 66, p.1645.