Liquidation of Companies and Related Reasons Assignment

Running head: LIQUIDATION OF COMPANIES AND RELATED REASONS
Liquidation of Companies and Related Reasons
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1LIQUIDATION OF COMPANIES AND RELATED REASONS
Table of Contents
Introduction......................................................................................................................................2
Events that Result in Liquidation of Companies.............................................................................2
ABC Learning..............................................................................................................................2
HIH Insurance..............................................................................................................................3
OneTel Phone Company..............................................................................................................4
Ethics and Governance in Explaining Financial Stress...................................................................5
Liabilities in Explaining the Liquidation of the Companies............................................................7
ABC Learning..............................................................................................................................7
HIH Insurance..............................................................................................................................7
OneTel Company.........................................................................................................................8
Conclusion.......................................................................................................................................8
References........................................................................................................................................9

2LIQUIDATION OF COMPANIES AND RELATED REASONS
Introduction
An organization has a primary objective of making profit or in other terms maximizing
the value of the company to increase shareholder’s wealth. An organization is a concern with
perpetual existence except certain factors which can shut its operations and the primary reason
for the same is liquidation. It is situation when a company does not have sufficient cash or assets
to pay for its obligations (Abdullah and Malik 2017). Irrespective of the business operations or
the size of an organization, if it gets liquidated then it is wiped out of existence. There are
various reasons for a company to get liquidated which includes lack of management as well as
corporate governance, negligence or misuse of resources etc. The main motive of this paper is to
highlight the fall of a few Australian organizations due to lack of governance and ethics.
Events that Result in Liquidation of Companies
The three companies which will be highlighted in this paper are those which enjoyed the
privilege of being highly valued companies of their times but due to their insolvency has to
liquidate their assets on poor governance and ethical grounds (Ahmed and Ndayisaba 2016).
These three companies are ABC Learnings, HIH Insurance, and One-Tel Phone Company which
paid the costs of taking a wrong path for value maximization.
ABC Learning
ABC Learning operated throughout Australia as well as other parts of the globe with a
service of early childhood education. Eddy Groves was the founder of the organization who
started it with a few centers but went on erratic acquisition quest as he believed in aggressive
growth strategy as well as wiping out competition in the market (Anderson 2016). Hence, his
prior motive was to acquire most of the rival organizations which posed threat to ABC

3LIQUIDATION OF COMPANIES AND RELATED REASONS
Learnings. During the quest to acquire majorly, the company used huge funds through investors
as well as took loans. With so much on plate, the company started registering decline in profits
from mid-2017 and eventually it was clear that the company was in no position to comply with
its liabilities and went into receivership.
The company’s management was dragged top court where it was alleged into
management of earnings by showing its positive image while hiding the true value. The
management was claimed to have overstated their profitability to reflect the bright side of the
company to the investor in order to keep them investing. Mr. Groves, the mastermind behind the
company’s fall has been the suspect who is claimed to have misguide the shareholders by not
presenting the actual financial position of the company (Lane 2016). Moreover, the finance team
also warned Mr. Groves of the consequences which he neglected. The debt of the company was
on rise with the constant acquisition process and financial statement also included the
government subsidy which is considered within the future profit. This was the factor which
overstated their profits in eyes of the stakeholders. Moreover, he used to implement his own
ideas in significant business decisions which not only liquidated the company but also effected
the shareholder’s confidence.
HIH Insurance
Ray Williams and Michael Payne are considered the founders of this organization in
1968 but at the time was named as M W Payne Underwriting Agency Pty Ltd. However, the
organization was acquired by another company named CE Health PLC with Ray Williams got
appointed as the member of the board and the company’s name was changed to HIH Winterthur
(Pearson 2016). Similar to the previous organization, this company also believed in growth
through aggressive acquisition and had acquired several rivals throughout Australia and various

4LIQUIDATION OF COMPANIES AND RELATED REASONS
parts of the globe. The biggest rival of HIH was FAI Insurance which is acquired in 1999.
Another partner of the company Winterthur Swiss, sold their majority of shares to public which
gave the company its name HIH Insurance.
Though considered as one of the most reliable company, HIH Insurance collapsed in Mar
2011. The company had a huge asset base but a further investigation revealed that its liabilities
were exceeding its assets largely resulting in its insolvency. The HIH Insurance is said to have
acquired various troublesome businesses at prices higher than their actual worth. Moreover, it is
also said that it served its customers at cheaper prices than other which finally concluded that it
entered a market which it did not fully understood. It was very much clear that HIH Insurance
compromised its ethics and governance in order to grow and hid its deficits by managing its
earnings. It used to overstate its asses and understate its liabilities and other debts which
deceived the stakeholders of the company.
OneTel Phone Company
OneTel was again a company of high value which started its operation in 1995 in
Australia by signing an agreement with Optus. According to this agreement, OneTel could use
the network service of Optus to serve its customers. However, in order to increase its customer
base, OneTel started offering service at cheap rates (Doyle 2017). This act of OneTel has created
its dispute with its service provider Optus. With its end of agreement with Optus, OneTel signed
another agreement with Global One and resumed its spree on growth and launched Global
Strategy to expand its wings outside Australian and make a global presence. In order to keep
pace with its competitors, OneTel purchased several spectrums in Australia so as to improve its
network. Following this, OneTel raised fund from some of the investors as they expect to get
benefitted from the same.

5LIQUIDATION OF COMPANIES AND RELATED REASONS
In this as well, it can be witnessed that OneTel spend a huge amount on making
acquisition as well as making agreement, while it offered service at low cost to maintain high
customer base. It is even said that OneTel paid ten times for its license and went into several
other agreements. As the consequence of the same, it started witnessing losses from the year
2000 and even reported low cash availability (Jayasekera 2017). Eventually in 1991, the
shareholders and the creditors voted in favor to liquidate the company.
Ethics and Governance in Explaining Financial Stress
One of the most important elements of the organization is its business ethics which
focuses on the norms as well as the guidelines that an entity needs to follow. It is actually the
code of conduct that a company needs to follow while dealing with its stakeholders. It is
considered as one of the main support of the governance system of a company which also
ensured its stability in long run. It mainly encourages the transparency within the system and also
monitoring of the financial movement (French, Vital and Minot 2015).
The personal view of the of a person could be considered as that individuals ethics but the
ethics of a corporation is guided by the views of people who holds importance in a corporation
and every member of that organizations bounds to the same. Though ethics varies from one
culture to another but a sound governance system is important for every profession. A poor
ethical background could be very much detrimental to the organization as it might lead to
unprofessionalism within the corporation resulting in fraudulent (Kumar 2017). The board
members and other important people to the organization may also indulge in some illegal
practices if the corporate governance is weak.

6LIQUIDATION OF COMPANIES AND RELATED REASONS
The ethical morals of an accountant are of utmost importance when it comes to financial
reporting as they are expected to reveal the fair value of the company to its stakeholders. The
financial position of the company is the factor on basis of which the investors make their
important decision and hence it needs to be reliable and so the accountant who prepared it.
Realistic financial figures are expected from the accountant who need to prepare it on an
unbiased and efficient basis. In other words, if an accountant lacks ethics, then the financial
reports prepared by that individual can present an unrealistic picture of the organization and
could harm the stakeholders both financially as well as mentally. The accounting standards
provide a guideline for the accountant to follow but that individual’s ethics issue could lead him
to manipulate the financial information and even may use the loopholes in the standard to
manage earnings. The accountant might do the same for personal profit or even might get
influenced by the management which are both against ethics but is commonly practiced
worldwide. The accountant can provide a quality report only if the person’s ethical values
incorporates with the characteristics which the person possesses.
The financial report prepared is not only important to the management or investor but
also others as it contributes to the country’s economy. The accountants are hence advised to
follow the ethical accounting standards which might be useful to them to create a better quality
of report while keeping the person aware of the material misstatement. With ethics given so
much important, when is implemented on a corporation creates a corporate governance which
sets rules for every member of the organization to follow (Tricker and Tricker 2015). A weak
corporate governance can lead to collapse of an organization. It is foundation which provides the
accountant a responsibility to protect the shareholder’s interest and keeping the investors from
unnecessary risk.

7LIQUIDATION OF COMPANIES AND RELATED REASONS
However, when the companies mentioned in the paper are referred, then none of the
business maintained their integrity as they were into ill practice of hiding their dark side and
manage their earnings. This practice eventually led to their downfall through the process of
liquidation.
Liabilities in Explaining the Liquidation of the Companies
An organization’s most imperative elements are its assets and its liabilities. Both of these
elements determine the financial position of a particular organization. However, in case of these
three companies, their liabilities were higher than that of their assets (Damiani, Bourne and Foo
2015).
ABC Learning
ABC Learning’s primary strategy to grow was aggressive acquisition and in the process
of the same, the organization invested a huge amount on acquiring its competitors as well as
getting new centers. In its spree to growth, it has not only acquired several companies in
Australia but also across the globe (Omar 2014). The liabilities of the company started escalating
with increasing credits and loans. However, to keep the shareholder’s confidence in itself, the
company manipulated the financial statements through managing its earnings. In first instance,
the company reflected asset of $4.5bn of worth and liabilities if $1.8bn of worth but on detailed
investigation it was found that the company’s net liability was $800mn above its net assets.
Moreover, it was also revealed that the company has shown most of its assets which were
intangible while its tangible assets were hardly worth $1bn in the market (Choi et al. 2017).

8LIQUIDATION OF COMPANIES AND RELATED REASONS
HIH Insurance
It is a company with a bright past but as its hunger to grow rapidly took over, the
company collapsed with huge debt outstanding. The market to which this company belonged to
was highly competitive and in such a situation it was not only spending huge amount to acquire
other firms but also provided its service as low cost. With its high rate of acquisition, the
company had more than 200 subsidiaries within a decade of its establishment. The company also
gambled when it bought FAI Insurance for $300mn while its actual worth in the market was
$100mn. During the end of the year 2000, the company liquidated with a loss of more nearly
$5bn (Bhadily and Hosie 2016).
OneTel Company
This company also followed a similar strategy of growth and finally met its
consequences. Even with an annual revenue of $653mn, the company failed to meet its
obligations as its profit was lower than expected (Betta 2016). The return for the company was
constantly going down and the company witnessed a cash crunch owing its aggressive
acquisition strategy. It is claimed that the company during its buying spree purchased various
firms at a price way above their market values. Hence, with such a situation, the company
became insolvent and the shareholders voted for its liquidation (Sheaff 2017).
Conclusion
A lack of ethical values and corporate governance resulted in failure of these companies.
The responsibility of the same totally lies with the management which kept the investors in dark
and revealed he positive side of financials which were manipulated. These companies followed a
strategy of aggressive growth which might be good for short-term but did not sustain for long.
The accountant of these companies could also be termed responsible as they were biased towards

9LIQUIDATION OF COMPANIES AND RELATED REASONS
the management and did not provide a true and fair value to the stakeholders of the company.
These three companies provide to be very good example of ethics and governance in an
organization and their importance.

10LIQUIDATION OF COMPANIES AND RELATED REASONS
References
Abdullah, N.D. and Malik, S.A., 2017. A Review of Business Failure Prediction Models Used on
Financial Distressed Companies. Advanced Science Letters, 23(11), pp.10497-10502.
Ahmed, A.D. and Ndayisaba, G.A., 2016. Effect of corporate governance on ceo pay-risk taking
association: empirical evidence from australian financial institutions. The Journal of Developing
Areas, 50(4), pp.309-344.
Anderson, H., 2016. An Introduction to Corporate Insolvency Law.
Betta, M., 2016. Three Case Studies: Australian HIH, American Enron, and Global Lehman
Brothers. In Ethicmentality-Ethics in Capitalist Economy, Business, and Society (pp. 79-97).
Springer, Dordrecht.
Bhadily, M.A. and Hosie, P., 2016. Australian employee entitlements in the event of insolvency:
Is an insurance scheme an effective protective measure. Adel. L. Rev., 37, p.247.
Choi, H., Sung, H., Cho, H., Lee, S., Son, H. and Kim, C., 2017. Comparison of Single Classifier
Models for Predicting Long-term Business Failure of Construction Companies Using Finance-
based Definition of the Failure. In ISARC. Proceedings of the International Symposium on
Automation and Robotics in Construction (Vol. 34). Vilnius Gediminas Technical University,
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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.

11LIQUIDATION OF COMPANIES AND RELATED REASONS
French, A., Vital, M. and Minot, D., 2015. Insurance and financial stability.
Jayasekera, R., 2017. Prediction of company failure: Past, present and promising directions for
the future. International Review of Financial Analysis.
Kumar, R., 2017. A hundred years of corporate responsibility. Something to Believe In: Creating
Trust and Hope in Organisations: Stories of Transparency, Accountability and Governance.
Lane, R.J., 2016. Unexpected corporate failures in Australia through the decades: commonality
of causes (Doctoral dissertation, James Cook University).
Omar, P.J., 2014. The revenue rule and cooperation under the model law: an Australian
perspective. ICR, 11, pp.17-24.
Pearson, G., 2016. Failure in corporate governance: financial planning and greed. Handbook on
Corporate Governance in Financial Institutions, p.185.
Sheaff, M., 2017. Constructing accounts of organisational failure: Policy, power and
concealment. Critical Social Policy, 37(4), pp.520-539.
Tricker, R.B. and Tricker, R.I., 2015. Corporate governance: Principles, policies, and practices.
Oxford University Press, USA.