In this following assignment, we are going to discuss about three companies who faced the problem of liquidation in past few years. These companies went into liquidation as they became incapable of paying their liabilities and other dues on time. Further, in this assignment we will be discussing about the facts that has led to the liquidation of the companies. Apart for this, we will evaluate the role of governance, ethics and other contributors in the liquidation of the companies.
Liquidation is a situation where a company has to wind up all its business activities and have to sell all the assets and inventories to pay the due debts. By selling all the assets and inventories companies generate cash to pay amounts to the creditors. The liquidation comes in two forms that are involuntary and voluntary. In the case of voluntary liquidation, company itself sell all its assets to finish of the dues of creditors where as in the involuntary liquidation, companies are forced to close yup their business and to repay the amount of creditors. Whatever the situation, companies ultimately have to wind up their businesses. There can be many reasons for the company’s liquidation like not paying the taxes from a long time, generating higher amounts from the creditors, failed to generate target sales, etc.
Here, we will discuss about three companies ABC Learning, HIH Insurance and One.Tel Telecom Company who faced the situation of liquidation in recent years. These are Australian based company who failed to attain the strong position in the market due to some uncertain conditions and situations. The liquidation process start with the decision of the director to close down the company and it concludes with the official proposal and distribution of the funds to all shareholders and creditors.
ABC Learning- High debts was one of the major reason in the liquidation of the company. In order to expand the business in overseas and other parts of Australia, the company borrowed large sum of money. At the time of financial crisis globally, it became incapable to refinance the huge debts due to which the administrators walked in. In the last, the company got much bigger for its self goods. Free market was not considered as the reason of fault instead the things were opposite from this fact. The main root of this was the regulation of already existing childcare industries at high level. ABC Learning was playing the role of dominant in the area of childcare market. It held an outstanding 25 per cent in Australian market. The over- regulation was the reason for establishing the dominant position. The high standard staffing and higher cost of accreditation prevented the competition to come on the stream and erected the essential barriers of entry. This is fact that parents look for the trusted organization that can provide the best childcare facilities but sometimes over regulation bring the negative consequences. So, paying the high-cost for the working families became the major issue. The families have to worry about the amount of money that they will have to pay for every week for the child care. The high prices are a clear reflection of inadequacy in the degree of supply (Garvis & Manning, 2017). Childcare industry is not capital intensive rather this is a highly competitive industry which must support more and more new entrants.
In the financial year 2007 and 2008, the company’s financial report stated that its current assets are 40 per cent of each dollar in accordance to the present liability. It showed that the company was under the crisis of potential liability. With this, according to the financial reports of the company, it was concluded that on that present date, the company was falling under the debt of around $ 1.9 billion. Later it was realized that the company’s debts are more in comparison to its assets.
The creditors of the company asked to sell the organizations due to the high debts and liabilities which the company had obtained to run the business regularly. The creditors of ABC Learning gave their consent to wind up thirty nine companies in order to recover the debts. The tax payers and Australia’s government proposed the company to avoid the situation of liquidation. The tax payers paid around the amount of sixty million for the continuation of the business operations but this proposal was rejected by the creditors of the company (Foreman, 2014). The company could have achieved an efficient position in the market by making some alteration in its framework as the organization has the potential to carry out its operations smoothly in the future. But the still the creditors did not give their consent and suggested to wind up the company in their final meeting.
HIH Insurance – The Company went under liquidation in the year 2001. During this year, the authorities of Australian prudential regulation gave the notice to HIH insurance to hire the liquidator. After which the company applied for the provisional liquidation.
There were some major reasons for this situation:
HIH insurance had the poor corporate governing system. This was brought into focus by lawyers and justice who all were handling the case of HIH liquidation. After that the company made the estimation of its assets in comparison to its liabilities of 5 billion dollars. Thus, the total balance of the company turned out to 7 billion dollar. In order to recover the amount of 50 million Australian dollar, the HIH was followed for 18 months by the royal commission. In the following year, HIH faced the issue of under provisioning of accounts due to which it raised the liabilities of the company (D'Amato, 2012). This provision helped in the reflecting the profits which could be obtained from the market. Further, company’s profit was decreased because of the expense that was incurred in another year. Therefore, all these situations resulted in liquidation of the HIH insurance company because the earlier policies and regulations which were framed for facing future uncertainties were not in alignment on the basis of the existing policies and accounting principles.
From many years there are cases related to abuse of reinsurance due to which these various organizations are incapable to generate the appropriate benefits from the company. One more reason for the liquidation of HIH was the undervaluation of the assets. According to the policies of (IFRS) International Financial Regulatory Standards, valuing the asset more than its original value is inacceptable. The HIH had stated wrong financial reports so as to maintain the interest of the shareholders but later the shareholders had to face huge losses and also it affected the treading market where the company used to trade its shares. These unexpected conditions had raised the uncertainty of liquidation for the company (Damiani, 2015).
One.Tel Telecom Company- The facts that revealed about the cause of liquidation of the company focused on the organization itself. It states that the company was not familiar with the rising financial crisis up to 2001 and so the company was charged with the debt amount of 300 million at the end of the May. The company had the staff of around 1600 employees who got discarded form the jobs in the end of June month. These regular conditions and circumstances raised the situation of liquidation for the One.Tel Company. To recover the sum of 488 million Australian dollars, the competitors of the company filed the complaint against the company. For prepaying these massive debts, the company raised the call charges that were more than the rival companies. With this, there were several issues relating to lack of efficient corporate governance and non compliance which led to the condition of liquidation for the company (Lewis, 2013). The management staff of the One.Tel became incapable to handle all these situations in the right manner due to which the company had to fall for the liquidation process.
As these above three companies fell under the severe debt condition, it became important for them to go through the liquidation process because this was the only way left for the board members and directors of the company. If the company would have ignored this situation of extreme debt for more time then it might have worsen the situation for the company. In order to shorten the risk factor, the directors of the company who hold the most supreme authority are needed to take the suitable decision for the company. As a fact, the directors of the companies are not wholly responsible for the extreme debt liabilities of the company but instead they are required to make an efficient decision regarding the equal division of income among the stakeholders and all creditors.
The convenient structure of the governance and ethics states that the authenticity and trust can be availed among the stakeholders and creditors by going through the process of liquidation. The liquidator holds the responsibility to distribute the assets of the organization fairly and equally so as to maintain the creditors’ interest (Müller, et. al., 2013). Apart from this, the person who practices the insolvency has to take care that no one must be allowed to interfere in the process of liquidation. These practitioners are aware about the unwanted outcomes which can affect negatively to the company’s creditors and shareholders. Following to this, the liquidator is accountable for the correct valuation of the assets of the company. Moreover, they also have to deal with the correct division of returns and outstanding claims. In the process of liquidation, the company should look for the benefit and interest of creditors rather than focusing on the stakeholders and directors of an organization.
The rise in higher debts is considered as the major reason for the liquidation of the companies. When the board members and directors of the company fail to come out with any practical solution to overcome the situation, they choose the way of voluntary liquidation. The decision to wind up the company is passed when creditors become sure that the company is not able to repay the amounts of debts. Moreover, the inappropriateness of financial management is also identified as one of the cause for the liquidation of these companies (Balcaen, et. al., 2012). The management staff of the company becomes unable to handle the financial affairs of the organizations efficiently due to which liabilities become the core reason for the liquidation of the companies.
This assignment has provided the deep analysis of the process of liquidation. It shows the various reasons due to which the three companies ABC Learning, HIH Insurance and One.Tel Phone have to go through the process of liquidation. Apart from this, the assignment provides the concerned events that were responsible for the situation. Furthermore, it shows that how liabilities can be the major reason for company’s liquidation.