Reasons for Liquidation of HIH Insurance, Stellar Homes, and Aluminium Boats Australia
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This report analyzes the reasons for the liquidation of three Australian companies - HIH Insurance, Stellar Homes, and Aluminium Boats Australia. It provides a description of these companies, identifies the reasons for their collapse, discusses corporate governance issues, and examines the role of liabilities in their liquidation.
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Running head: FINANCIAL ACCOUNTING Financial Accounting Name of the Student Name of the University Author’s Note
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1FINANCIAL ACCOUNTING Executive Summary The aim of this report is the analysis of the reasons of the liquidation of three Australian companies; they are HIH Insurance, Stellar Homes and Aluminium Boats Australia (ABA). This report provides description of these three companies. After that, this report involves in identifying the reasons for the collapse of these three companies. After that, this report shows the corporate governance issues in these three companies. Lastly, this report shows the role of liabilities in the collapse of these companies.
2FINANCIAL ACCOUNTING Table of Contents Introduction............................................................................................................................................3 Company Background...........................................................................................................................3 Reasons for Liquidation.........................................................................................................................3 Code of Ethics.......................................................................................................................................4 Corporate Governance Issues...............................................................................................................4 Types of Liquidation...............................................................................................................................4 Role of Liabilities....................................................................................................................................5 Conclusion.............................................................................................................................................5 References............................................................................................................................................6
3FINANCIAL ACCOUNTING Introduction In the recent years, it can be seen that many renowned business organizations had to go into liquidation in the presence of various reasons. The liquidation process of the companies is also considered as the winding up process. It is needed for the business organizations to go through different steps under the liquidation process (Coad 2014). More specifically, a person is responsible for conducting the liquidation process of the company and the person is called the Liquidator. The main responsibility of the liquidators is to recognize the main assets of the companies along with the liabilities and claim of the creditors so that they can be settled down in the proper manner. The main aim of this report is the analysis and evaluation of various dimensions of the liquidation of three famous companies; they are HIH Insurance, Stellar House and Aluminium Boats Australia. More specifically, this report takes into consideration the identification as well as analysis of the major reasons that led to the liquidation of these three companies. Company Background HIH Insurance:HIH Insurance was regarded as the largest insurance company in Australia and the presence of this company’s operation could be seen in different regions of Australia. Between the years 1997 to 1998, the company made major global expansion. The company was enlisted in Australian Securities Exchange (ASX). HIH Insurance sold one major portion of their business to a company of Switzerland. Due to some of the specific reasons, the company went to liquidation and the company had to incur a loss of $5.3 billion in the process of liquidation (Carnegie and O’Connell, 2014). Stellar Homes:Stellar Homes was one of the leading South Florida-based real estate development company. The company reshaped Miami-Dade, Broward and Palm Beach countries with stellar quality, environment friendly and healthy communities. Since the year 2009, Stellar Homes has been investing in the residential as well as real estate sectors. The main aim of the company could be seen in considering as well as analysing impact of each of their project on the community as well as on the environment. The company was well recognized all over the world for their ongoing passion as well as dedication for maintaining a Florida Green standard throughout their communities (stellarhomes.ca, 2018). Aluminium Boats Australia (ABA):ABA was considered as one of the largest multi-disciplinary shipyard delivering new constructions, refit, repair, support and technical advice to the highest of international standards, quality, safety and efficiency. Speciality of the company can be seen in high performancecommercial,militaryandluxuryvesselsinadvancedcompositesandaluminium constructions. In addition, the company delivers a complete solution to some of their largest operators in the country. The company was founded in the year 1999 and the mission of the company was the delivery of quality as well as performance every time. ABA has developed a reputation to exceed specification and expectations on their every project (aba-global.com, 2018). Reasons for Liquidation HIH Insurance:Certain reasons led to collapse of HIH Insurance. In order to acquire FAI Insurance, the management of the company invested a large amount that was risky for the insurance companies. This wrong decision was one of the reasons for the collapse of HIH Insurance. After that, the company decided to invest into the business to finance the films and due to this decision, the company had to incur a loss of more than hundred million dollars. In addition, the natural calamity of Florida can also be regarded as one of the major reasons for the collapse of this company as this natural calamity led to huge amount of debts to the company (Junaid, 2013). This huge amount of debt contributed towards a major loss for the company. The presence of faults in the accounting policies is another major reason for the collapse of HIH Insurance. For the employees of California, the company changed the accounting policies for payment to the employees and the failure in the change of accounting policies did not work for HIH Insurance and led to liquidation. At the time of the liquidation process, it was seen that the company did incur a loss of $800 million within six months in the presence of various reasons like change in accounting policies, quick business expansion and others. The combination of all these reasons led to the liquidation of HIH Insurance (smh.com.au, 2018). Stellar Homes:Another major case of liquidation is the liquidation of stellar Homes Pty Ltd (stellar Homes). The company was placed into administration on 20thOctober 2014; and the administrators arePIMacksandIWBurfordofMacksAdvisory.Accordingtotheinvestigationofthese
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4FINANCIAL ACCOUNTING administrators, the main reason for the collapse of stellar Homes was the massive decline in sales that contributed to major cash flow issues. In this context, it needs to be mentioned that the company constructed over 500 homes throughout Adelaide in the past ten years. The administrators mentioned that the difficult economic condition of South Australia contributed towards the decline in the sales of the company that resulted in cash flow issues. The unexpected collapse of the company left the trail of many incomplete homes across Adelaide. Moreover, according to the reports of the administrators, there are 36 homes in different stages of being incomplete. As a part of the jobs, the administrators have made an assessment of the victims so that they can be refinanced with the aim to complete their house (news.com.au, 2018). Aluminium Boats Australia (ABA):On 4thNovember 2014, ABA went into voluntary liquidation after losing one of their navy vessels. The appointed administrators for the liquidation process are Kelly- Anne Trenfield and John Park from FTI Consulting. According to the report of the liquidators, the main reason for the liquidation of the company was the fire that demolished their HMAS Bundaberg in the month of August. It needs to be mentioned that all the employees of the company were removed from their positions. The fire destroyed a $45 million Australian Navy patrol boat and it has been regarded as one of the major reasons for the collapse of the company. Due to the effect of this fire, ABA lost their contract of providing services and maintenance to the Australian Navy vessels and it also led to a job cut of 90. After that, the administrators sacked another 70 staffs at the time of the assessment of the whole situation. In this context, it needs to be mentioned that the management of the company was expecting good performance of the company in the same year as they were planning for 25 per cent increase in the staffs of the company (couriermail.com.au, 2018). Code of Ethics APES 110: APES 110 Code of Ethics for Professional Accountantsis considered as a crucial document for the professionals due to the fact that it provides the needed ethical code of conduct that the professional are needed to comply with. According to APES 110, there are five ethical codes that need to be adhered to (Martinov-Bennie and Mladenovic, 2015).Integrityis the first ethical code that puts the obligation on the professionals to be straightforward and honest in all of their business and professional relationship.Objectivityis the next ethical code and it puts the obligation on the accounting professionals not to be bias and there should not be any conflict of interest as well as influence in the professional judgements.Professional Competence and Due Careis considered as the third ethical code and it states that the professional are needed to maintain required skills and professional knowledge for ensuring effective delivery of competent professional services on the basis of the recent developments in accounting profession (apesb.org.au, 2018). Confidentialityis the fourth ethical code and this code states that the professional are restricted to disclose the confidential business information of their clients to any third party in the absence of the consent of the clients.Professional Behaviouris the last ethical code and it states that the professionals are needed to adhere to the required laws and regulations in order to avoid professional misconduct (apesb.org.au, 2018). Corporate Governance Issues The presence of certain corporate governance related issues can be seen in the collapse of these three companies. In case of HIH Insurance, the management of HIH Insurance did not obtain the required approval prior to the acquisition of FAI Insurance. It shows the presence of lack of corporate governance (Armstrong et al., 2015). At the same time, there was a poor decision from the company to enter into the film industry. In addition, the involvement of the company can be seen in the unethical business practice as they did not pay attention in maintaining due diligence as well as ethical business practices. Apart from this, the management of HIH Insurance was involved in unethical business activities as they issued improper business prospectus that involved material omissions; and they were also involved in the overstatement of profit (Tricker and Tricker, 2015). In this context, it also needs to be mentioned that there is not any issued related to corporate governance in the collapse of Stellar Homes and ABA as they were collapsed due to natural reasons. Bad economic condition of South Australia led to the decrease in sales and cash flow related issues in Stellar Homes where fire in HMAS was the reason for the collapse of ABA. Types of Liquidation In case of HIH Insurance, on 27thAugust 2001, the court placed order to HIH Insurance to go into official liquidation after the understating review of the financial statements of the company by
5FINANCIAL ACCOUNTING KPMG, the auditors. Thus, the liquidation of HIH Insurance is the court liquidation (Bauer and Toborek-Mazur, 2014). In both the cases of Stellar Homes and ABA, the type of liquidation was voluntary liquidation. In the cases of both of these companies, the liquidation permission was passed with accordance to paragraph 446A(1)(a) special resolution under s491 (insolvencynotices.asic.gov.au 2018). Under the processofvoluntaryliquidation,thedirectorsofthecompaniesclosesthecompanieswith accumulated reserves. Thus, the creditors are needed to be paid full and the remaining funds need to be transferred to the directors (insolvencynotices.asic.gov.au 2018). Role of Liabilities Increasing amount of liabilities is considered as one of the major reasons for the collapse of the companies. It can be seen in case of HIH Insurance that that management of the company had to face high amount of debts as the company was highly leveraged in the presence of term loans from banks and other financial institutes. Apart from this, the company incurred high amount of debt at the time of the acquisition of FAI Insurance for an amount of $300 million while the actual price was $100 million. Same kind of situation can be seen in case of Stellar Homes as the owners of the unfinished homes owed almost $1.5 million from the company. According to the calculations of the administrator, the company owed over $3.4 million to the secured creditors and $1.5 million to the unsecured creditors; and the staffs entitlements were nor finalized. There was not any significance role of liabilities in case of the collapse of ABA. Conclusion The above discussion indicates towards the fact that some specific reasons have contributed towards the liquidation of these three companies. In case of HIH Insurance, manmade reasons are responsible for the collapse of the company such as wrong management’s decision, investment into wrong business, manipulation in accounting policies and others. However, manmade reasons cannot be held responsible for the collapse of other two companies; they are Stellar Homes and ABA. The reasons are decline in sales due to economic downturn and fire in the facility. In case of the collapse of HIH Insurance, ineffective corporate governance can be considered as another reason for the collapse of the company. However, there is not ant corporate governance issues in the collapse of Stellar Homes and ABA. Lastly, increasing amount of liabilities can be seen in the cases of HIH insuranceandStellarHomesastheseliabilitieswerereasonsforthecollapseofthesetwo companies.
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