Factors Contributing to the Collapse of One-Tel
Added on 2019-09-30
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Accounting Financial ACC701Contents:1.Events that led up to the liquidation2.Ethics And Governance3.Was liabilities a major factor contributing to the liquidation of the company?4.Academic References
1. Events that led up to the liquidation:i)ABC Learning CenterABC’s acquisitions resulted in the recognition of the licences and goodwill of operatingthe childcare centres– both of which are intangible assets. These were recorded at fairvalue on its balance sheet. Goodwill has been increased to A$271 million and licences toA$2.4 billion by the end of FY2007/8. However, the impairment charges are very less forthese intangibles. They were only A$2 million for goodwill and A$8.4 million forchildcare licences over the two financial years. Intangible assets often become valuelesswhen a company runs into trouble.Between June and December 2007, ABC’s total liabilities remained relatively constant.However, in December 2007, around A$1.1 billion of borrowings was reclassified fromcurrent to non-current liabilities, due to refinancing.ABC has taken loan from several leading banks. On June 13, 2007, ABC finalised asyndicated multi option bank facility for A$1.48 billion. In the first half of FY2007/8,due to one-off charges, profit fell 42 per cent, and covenants for debts amounting toA$1.2 billion were breached. As it headed into trouble, ABC tried to renegotiate a loanagreement with its bankers. A turnaround plan was rejected by the banking syndicate.ABC neither have enough operating cash flow nor able to generate operating cash flow topay interest, suppliers, salaries and dividends. It emerged that the Groves and some of theother ABC directors had pledged their shares to borrow money. As the share price went down, they were forced to sell shares equivalent to 5.6 per cent of the company to satisfy margin calls. Due to this, number of shares came to market which results in further decrease in share price of ABC.All the above mentioned factors leads to the liquidation of the Company.ii)HIH Insurance:HIH is comprised of several separate government–licensed insurance companies,including HIH Casualty and General Insurance Limited, FAI General InsuranceCompany Limited (FAI), CIC Insurance Limited (CIC) and World Marine and GeneralInsurances Limited (WMG).HIH wrote many types of insurance in Australia, the USA, and the UK. In Australia, thisincludes compulsory insurance (such as workers’ compensation and compulsory thirdparty motor vehicle) and non–compulsory insurance (such as home contents and travelinsurance).
A brief recent history of HIH is provided below.Date EventJun 4 1992 British insurance broker CE Heath floats off 45 per cent of itsunder–performing subsidiary CE Heath International Holdings Ltd(HIH) on the stock exchange. HIH in 1991 had net assets of$A39.7 million.April 1995 HIH Insurance Ltd acquires CIC InsuranceJun 6 1996 HIH acquires Utilities InsuranceJan 8 1997 HIH becomes Australia's largest underwriter of bancassurancebusiness after acquiring Colonial Mutual General Insurance.Sep 1998 HIH blacklists stockbroking analysts who disputed its assessmentof the companyJanuary 1999 HIH wins a $300-million takeover bid for FAI Insurance3 March 1999 HIH posts a 39 per cent fall in 1998 net profit to $37.6 million,blaming damage claims19 Nov 1999HIH admits it paid more than it expected for FAI.June 2000 Analysts are concerned about HIH after the Australian PrudentialRegulatory Authority's (APRA) proposes to increase capitaladequacy requirements for insurers13 Sept 2000HIH sells part of its domestic personal lines business to Germaninsurance giant Allianz for nearly $500 million14 Sept 2000HIH shares tumble to an all-time low after a lower than expectedprofit result and criticism of the Allianz deal14 March 2001 NRMA Insurance buys HIH's workers' compensation portfolio.15 March 2001 HIH Insurance goes into provisional liquidation with losses of$800 million16 March 2001 APRA says HIH's woes stem largely from a reassessment ofclaims liabilities11 April 2001 Provisional liquidator warns it could take up to 10 years beforesome creditors are paid.16 May 2001 Australian Securities and Investments Commission launches itsbiggest ever investigation, seizing HIH documents21 May 2001 The federal government announces a royal commission into whatis Australia's biggest corporate collapse.iii)One Tel phone Company:One-Tel was launched on 1 May 1995. Under an agreement with Optus which was thesecond largest telecommunications company in Australia, One-Tel received SIM cards,customer call details, and network service from Optus. One-Tel had to pay Optus for the callcharges and a monthly access fee for each of its subscribers.
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