Reasons behind Liquidation of Australian Entities: A Case Study
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This report explores the reasons behind the liquidation of well-known Australian entities like HIH Insurance, Stella Homes, and Aluminium Boats Australia. It discusses the background of the companies, the APES 110 Code of Ethics for Professional Accountants, corporate governance issues, and the types of liquidation.
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Running head: ADVANCE FINANCIAL ACCOUNTING Advance financial accounting Name of the student Name of the university Student ID Author Note
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1ADVANCE FINANCIAL ACCOUNTING Executive summary The purpose of this report is to find out the reasons behind liquidation of some of the well known Australian entities like HIH Insurance, Stella Homes and Aluminium Boats Australia. The report will discuss about the background of the companies and the reasons that lead those towards liquidation. It will further discuss theAPES 110 Code of Ethics for Professional Accountantsand willhighlight 5 codes of ethics. Further, it willfocus on the issues related to corporate governance that led to the collapse of above mentioned entities and the liquidation type that was called for each of the entities.
2ADVANCE FINANCIAL ACCOUNTING Table of Contents Introductions..............................................................................................................................3 Company backgrounds...............................................................................................................3 Reasons behind liquidation........................................................................................................3 Corporate governance and ethics...............................................................................................5 Corporate governance issues contribution to collapse...............................................................5 Types of liquidation and contribution of liabilities for liquidation............................................6 Conclusion..................................................................................................................................7 Reference....................................................................................................................................8
3ADVANCE FINANCIAL ACCOUNTING Introductions Liquidation is the process under which the entity sells its inventories at discount for generating cash. This process involves bringing the business to end and distributing its remaining assets to the claimants. This process generally takes place while the company is not solvent anymore that is it is unable to meets its obligations. The report will focus on finding out the reasons behind liquidation of some well known Australian entities like HIH Insurance, Stella Homes and Aluminium Boats Australia. The report will discuss about the APES 110 Code of Ethics for Professional Accountantsand willhighlight 5 codes of ethics. Further, it willfocus on the issues related to corporate governance that led to the collapse of above mentioned entities and the liquidation type that was called for each of the entities (Chan and Martek, 2017). Company backgrounds Aluminium Boats Australia – It was established in the year 1999 and the main business of the company was repairing and building boats. The company was specialised in leisure craft and ferries and only used highest quality of materials and the latest techniques for construction. Further, it used to provide the tailored solutions for the private as well as commercial owners. The company was proud for its team for trades-people that were bringing strong knowledge base, specialised and extensive knowledge together. Their dedicated and experienced team used to deliver each vessel with the reputation for excellence and quality (Aluminium Boats Australia | Shipbuilders Brisbane, Australia, 2019). HIH Insurance – HIH Insurance Limited that was an Australian public listed entity was the 2ndlargest general insurance company in Australia before the company’s collapse during the year 2001. It used to cover different segments for insurance such as private and public liability, commercial and industrial insurance, property and worker’s compensation insurance. It was also expanded its business globally into UK and US markets. At the time of its liquidation the company’s estimated loss was amounted to $ 5.3 billion due to underestimation of liability and over estimation of assets and it was the biggest corporate collapse in history of Australia (Hih.com.au, 2019). Stellar Homes – It is the leading real estate development entity based in South Florida that reshaped Miami-Dade, Palm Beach countries with the stellar quality, environmentally friendly, modern designed and healthy communities. Since 2009, it served more than 2000 happy residents and it was developing and investing in some of most desired suburban, urban and coastal locations of South Florida. Stellar Homes analyze and considers each of its projects impact on the area carefully with foal for enhancing the lives of the communities and residents under which it was built. Further, while planning for each project the construction and design teams considers efficiencies associated with the materials, designs, operations and constructions (Steller, 2019).
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4ADVANCE FINANCIAL ACCOUNTING Reasons behind liquidation Aluminium Boats Australia – Aluminium Boats Australia Pty Ltd was placed in voluntary administrator after it lost one of the navy vessels. The reason behind the company’s collapse was the fire that destroyed the HMAS Bundaberg in the month of August 2014. The fire that devastated Australian Navy patrol boat amounting to $ 54 million was blamed for the demise of the company. While going through the maintenance at Hemmant shipyard HMAS Bundaberg was demolished that led to placing the entity into voluntary administration (Biddle and Macpherson, 2017). Soon after that it lost the contract for maintenance and servicing of the Australian Navy vessels that forced the company to cut 90 jobs. Apart from that 70 staffs sacked after appointment of the FTI Consulting administrator, who were estimated to take lower than 5 weeks time for assessing the future of the entity.As per the statement of the company’s director, Mr. Whitewood, the company was expecting that the business still could recover though the assistance of administrator. In October 2013 only the general manager of the entity, Tommy Ericson stated that the company was expecting that the year will go very well and was planned for 25% increase towards the number of staff members. Further, the entity was going through tough times fighting off with cheap imports from Taiwan, Malaysia, China, Italy and US and very few number of people actually are able to keep going through such crop imported into the nation (Kashyapet al.,2019). HIH Insurance – On 15thMarch 2001, APRA (Australian Prudential Regulation Authority) served the company with the notice to appoint the liquidator. After that the company made application for provisional liquidation to the court for the below mentioned reasons – Deficit for assets over liabilities was estimated to be AUD 5 billion out of total balance sheet amount of AUD 7 billion. Royal commission tracked the entity for the period of more than 18 months for recovering cost of more than AUD 50 million. It has inefficient corporate governance in accordance with the justice in charge for reviewing the company’s insolvency. Conglomerate complexity issues raised for different times Re-insurance abuses that were done for numbers of years and hence, the company was not getting all the things right at all the times (Ballantyne, 2015). Inappropriate and inadequate asset valuation as the company generally used to show the assets at the higher values as compared to the actual values. In accordance with the IFRS, the entity must value the assets at actual prices or the lower of cost and market value. However, the company used to record their assets at higher than its market value which in turn shows higher credibility for the entity rather than actual (Damiani, Bourne and Foo, 2015). Stellar Homes – Home builder company Stellar Homes collapsed with leaving number of South Australian owners for home with the half – built homes. As per the joint administrator of the company Peter Macks from Macks Advisory stiff competition is there for working under the sector for residential construction. Basically the tough economic climate in the location of South Australia for the builders was the main reason for the competition. Eventually, it led to reduction in sales that resulted into crisis of cash flows. Owing to the collapse, around 36 homes those were in various stages of construction and 173 tradies for7 News Reportswere
5ADVANCE FINANCIAL ACCOUNTING left in lurch those involved amount of $ 1.5 million. Though the administrator was not able to estimate it accurately, it was estimated to be $ 1.5 million owed to the unsecured creditors and $ 3.4 million was owed to the secured creditors and the entitlements to the staffs were yet to be finalised (Weekes 2017). Website of the company was shut down however; the company stated that the administration was I best interest for all the creditors (Steller, 2019). Corporate governance and ethics APES110 Code of Ethics for Professional Accountants was issued by APESB (Accounting Professional & Ethical Standards Board Limited). All the professional members from Australia shall be complied with the APES 110 while providing the professional services. However, this code is not meant for detracting from any of the responsibilities that are imposed by the regulations or laws (Apesb.org.au, 2019). APES 110 Code includes 3 parts where Part A determines fundamental principles for professional ethics for the members and delivers conceptual framework those must be applied by the members to – Recognising the threats for complying with fundamental principles Analysing the consequence of identified threats and Applying safeguards, wherever required, for removing threats or reducing them to to the acceptable level (Tricker and Tricker, 2015). 5 codes of ethics under stated under APES 110 Code of ethics are as follows – Integrity – integrity principle imposes the obligation on all of the members to be honest and straightforward in all business and professional relationships. Integrity objective further implies the truthfulness and fair dealings. Objectivity – objectivity principle oblizes all of the members for not compromising business or professional judgements due to conflict of interest, bias or any undue influence of others Due care and professional competence - Due care and professional competence principle imposes the below mentioned obligation on all of the members – Maintaining the professional skill and knowledgeat the required level for assuring that employees or clients receive the competent professional services (Du Plessis, Hargovan and Harris, 2018) Acting diligently in compliance with the required professional and technical standards while providing the professional services Confidentiality-confidentialityprincipleimposestheobligationonallofthe members to abstain from (i) disclosing the confidential information generated from business and professional relationships to outside of the firm without specific and proper authority unless professional or legal duty or right is there to disclose (ii) using the confidential information generated from business and professional relationships for their professional advantages or for the advantages of 3rdparties (Ali, 2016). Professional behaviour - Professional behaviour imposes the obligation on all of the members to comply with the relevant regulations and laws and avoiding any omission or action those members shall know or know that it may disrepute the profession. (Sivathaasan, 2016). Corporate governance issues contribution to collapse Aluminium Boats Australia –
6ADVANCE FINANCIAL ACCOUNTING The corporate governance that was violated by the company was due care and professional competence that imposes an obligation on all of the members that they shall maintainthe professionalskillandknowledgeatthe requiredlevelfor assuring that employees or clients receive the competent professional services. Further, they shall act diligently in compliance with the applicable professional and technical standards while providing the professional services. As the company collapsed due to the fire that occurred in the Australian Navy patrol boat likelihood is there that the company did not applied due care and professional competence while the boat was manufactured. Further, the boat may have been destroyed as the company did not apply the applicable professional and technical standardswhilemanufacturedtheboatsandprovidedtheservices(AluminiumBoats Australia | Shipbuilders Brisbane, Australia, 2019). HIH Insurance – Various corporate governances those were violated by the company are as follows – Objectivity for lack of independence from management for the non-executive director – audit committee member Justin Gardener was the auditor for FAI during 1980 and FAI had been sold to the HIH during 1998. The transaction of this takeover was considered as one of the main reason behind failure of HIH as it paid huge cost for acquiring FAI. Misjudgement of financial performance and undue diligence for the investigation led to the awful transaction. However, Justin Gardener’ independence was questioned owing to his interest conflict (Doyle, 2017). Professional behaviour for inadequate risk management – though the company’s board set the investment committee for appreciating the investment risk and set the guidelines for investment on property and currency dealings, 3 major failures on account of investment provides the evidences that risk management of the company was not well shaped and well performed (Hih.com.au, 2019). Stellar Homes – Corporate governances that was violated by the company are as follows – Analyses of the financial reports were not done properly that led to decline in sales sales which in turn raised the cash flow issues. Types of liquidation and contribution of liabilities for liquidation Though various corporate governance issues were involved with the liquidation of all the 3 companies, liquidity issues cannot be ignored as a reason of liquidation. The fire that devastated Australian Navy patrol boat amounting to $ 54 million was blamed for the demise of the Aluminium Boats Australia. Eventually it left the company with large amount of debt and credits. The company placed into voluntary administrator. In case of HIH the deficit for assets over liabilities was estimated to be AUD 5 billion out of total balance sheet amount of AUD 7 billion. Hence liability was a major reason for its liquidation (French, Vital and Minot, 2015). The company applied for provisional liquidation (Anderson 2018). Further, in case of Stellar Homes at the time of its liquidation, it was estimated that $ 1.5 million owed to the unsecured creditors and $ 3.4 million was owed to the secured creditors and the entitlements to the staffs were yet to be finalised. Hence liability was a major reason for its liquidation. The company was placed into administration that is forced liquidation.
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7ADVANCE FINANCIAL ACCOUNTING Conclusion Biggest companies from Australia went into liquidation owing to various insolvent issues and poor management. Issues associated with insolvency were raised in front of the entity while the members from board did not work well for entity and corporate governance of the entity went poor. Further, chances of liquidation go up with the higher amount of debt. As all the above mentioned entities were at higher amount of debt and were not following the requirements of accounting standards they got liquidated for the issues. Hence, the entities from Australia shall maintain their accounts and business operation with high quality so that shareholders will not propose to take their consent back.
8ADVANCE FINANCIAL ACCOUNTING Reference Ali, S., 2016. Corporate governance and stock liquidity in Australia: A pitch. AluminiumBoatsAustralia|ShipbuildersBrisbane,Australia.2019.AluminiumBoats Australia|ShipbuildersBrisbane,Australia.[online]Availableat:https://www.aba- global.com/ [Accessed 3 Jan. 2019]. Anderson, H., 2018. Insolvency—It's all about the Money.Federal Law Review,46(2), pp.287-312. Apesb.org.au.2019.[online]Availableat: https://www.apesb.org.au/uploads/standards/apesb_standards/standard1.pdf [Accessed 3 Jan. 2019]. Ballantyne, S., 2015. Receivers, liquidators and undertakers.Ausmarine,37(3), p.10. Biddle, T. and Macpherson, H., 2017. Marketing class actions: A new frontier.Governance Directions,69(8), p.480. Chan, T.K. and Martek, I., 2017, January. Profitability of Large Commercial Construction Companies in Australia. InAUBEA 2017: Transforming built environment education and practice: leveraging industry partnerships: Proceedings of the 41st Australasian Universities Building Education Association Conference(pp. 139-146). EasyChair. Damiani, C., Bourne, N. and Foo, M., 2015. The HIH claims support scheme.Economic Round-up, (1), p.37. Doyle, M., 2017. Market-based indirect causation after HIH.Australian Resources and Energy Law Journal,35(3), p.205. Du Plessis, J.J., Hargovan, A. and Harris, J., 2018.Principles of contemporary corporate governance. Cambridge University Press. French, A., Vital, M. and Minot, D., 2015. Insurance and financial stability. Hih.com.au. 2019.HIH Insurance. [online] Available at: http://www.hih.com.au/ [Accessed 3 Jan. 2019]. Kashyap, A.K., Jaswani, U., Bhandari,A. and Dixit, Y.S., 2019. An Introductionto Corporate Insolvency Law and Reforms in Australia. InCorporate Insolvency Law and Bankruptcy Reforms in the Global Economy(pp. 107-131). IGI Global. Sivathaasan, N., 2016. Corporate governance and leverage in Australia: A pitch.Accounting and Management Information Systems,15(4), p.819. Steller.2019.Home|Steller|WeMakePlaces.[online]Availableat: http://www.steller.com.au/ [Accessed 3 Jan. 2019]. Tricker, R.B. and Tricker, R.I., 2015.Corporate governance: Principles, policies, and practices. Oxford University Press, USA. Weekes, J., 2017. Boomer Constructions Collapses After Voting Against Liquidation.