Corporate Governance and Liquidation Cases

This assignment analyzes the liquidation of three unnamed companies, highlighting the role of poor corporate governance practices in their downfall. It delves into the failure to identify and manage risks, inadequate financial monitoring, and the lack of effective decision-making processes that ultimately led to these companies' collapse. The analysis emphasizes the importance of strong corporate governance for protecting stakeholder interests and ensuring long-term sustainability.

LIQUIDATION OF AUSTRALIAN COMPANIES – AN ANALYSIS
2017
HIH INSURANCE, ONE TEL PHONE AND ABC
LEARNING
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EXECUTIVE SUMMARY
There are many causes for the liquidation of companies that has happened across the globe.
Some liquidates due to inability to make payments, some fails due to poor management function
of the company or some fails due to market conditions. In this report the liquidation of the three
major companies has been detailed – HIH Insurance, One Tel Phone Company and ABC
Learning. All the three companies are from different industry but the basic cause for the failure
of three companies has been the bad corporate governance. Corporate Governance plays very
important role in the effective and efficient working of the company. The main objective of
preparing this report is to analyze what are the situations that have arisen over the years which
had lead to liquidation of the company. The second main aim is to comment upon the corporate
governance of all the three companies.
With these objectives, the analysis has been made through report with adequate headings.
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Contents
EXECUTIVE SUMMARY.................................................................................................................................2
INTRODUCTION...........................................................................................................................................4
BACKGROUND OF COMPANIES...................................................................................................................5
LIST OF EVENTS CONTRIBUTING TO THE LIQUIDATION AND THE FAILURE OF CORPORATE GOVERNANCE 6
ETHICS AND FINANCIAL STRESS...................................................................................................................8
LIABILITIES...................................................................................................................................................9
RECOMMENDATION..................................................................................................................................10
CONCLUSION.............................................................................................................................................10
REFERENCES..............................................................................................................................................12
INTRODUCTION
The company operates through its board of directors. Board of directors is regarded as the
management of the company. The board of directors has the power to take each and every
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decision for or on behalf of the company. The decision shall be taken with reference to the
interest of the stakeholders and the shareholders of the company. If the company fails to take an
effective and efficient decision then the company will not be able to survive in the future years.
The functioning of the company is commonly referred to as the Corporate Governance. The
functioning shall be done with reference to the principles, guidelines and the provisions of the
different statutes prevailing within the country.
If the company fails to function as per the guidelines, then it will be said that the company has
low corporate governance. The report has focused mainly on the corporate governance of the
three companies – HIH Insurance, ABC Learning and One Tel Phone Company and how the
same have lead to the liquidation of the company. Along with the corporate governance, ethics
have also been detailed as to how it has been followed throughout the companies and how the
same has led to the liquidation of the company.
BACKGROUND OF COMPANIES
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HIH Insurance –
The HIH Insurance Company was in the business of insurance and was named as the largest
insurance company in the Australia. Ray Williams and Miachel Payne had established CE Health
International in the year of nineteen hundred and sixty eight. In the year of 1971, it was acquired
by the CE Health PLC which is the British based company. In the year of 1980, Ray Williams
have been appointed on the board of CE Health. Thereafter, CE Health was acquired by CE
Health International Holdings Limited. In the year of 1992, the company has been floated and
listed on the Australian Stock Exchange. In the year of 1995, the company sells the stake to the
Switzerland based insurer – Winterthur to the tune of 51% and changed the name of the company
to HIH Winterthur (UK Essays, 2013).
After that in the two consecutive years of 1997 and 1998, the company has acquired large
number of companies operating in Australia and other countries. The most notable acquisition
was of the FAI Insurance company which was operating in Australia made in the year of 1998
and the Chief Executive Offices of the FAI Insurance company has become the Non executive
director of the HIH Winterthur and simultaneously Winterthur sells its stake of 51% to the public
and the company name was changed to HIH Insurance (Lipton,2013).
One Tel Phone –
One Tel Phone company was established in the year of 1995 in Australia. It is a
telecommunication company. The basic premise of the thought of the company was that the
company will have more focus on the deliverance of good service to the customer and wants
have such kind of country where even the person walking in the street shall have the access to
the telephone products and shall have all information about the telephone and that is why the
company has been regarded as the hundred percent company related to the telephone business.
Since then the company has basically provided three type of services – one is related to
communication through the fixed length wire system, second is the internet connection and the
third one is the telephone service. Within five year of its operations the company has expanded
its operations in seven countries and has formed the base of nineteen lacs customers all over the
locations.
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ABC Learning
In the earlier times, ABC Learning was regarded as the one of the largest company in the country
of Australia serving for education services for the children up to 4 years of age. It is like the
childcare institution where the children are guarded and educated about the eating habits and
related activities. The company was established in the year of 1988 in Queensland. Since then
the company has been able to establish 950 plus centre across the country of Australia and the
country of New Zealand by the year of 2006. After that the company has announced that the
company will acquire the largest child care in the United States – La Petite Academy and after
sometime the company has acquired the same and has got share in the market of the United
States also.
LIST OF EVENTS CONTRIBUTING TO THE LIQUIDATION AND THE
FAILURE OF CORPORATE GOVERNANCE
HIH Insurance –Following events have led the company to go for liquidation:
- The company has acquired the business of the FAI Insurance which is involved in the
more risky business of the insurance. The company has incurred the considerable damage
claims.
- Second risky area was the film financing which again have led the company to incur
losses of hundred million dollar over the year.
- Due to the insurance business in the field of natural disasters, the company has again
incurred the quantum loss from the typhoon which has come at Florida.
- Due to sudden change in the compensation claims to be paid to the workers working in
different industry of California, the company is required to incur big amount as losses.
- The acquisition of business of FAI Insurance Company has been made without
conducting the due diligence of the company and also without the consent of the board of
directors of the company (Mak, Deo and Cooper, 2005 and Mirshekary, Yaftian, and
Cross, 2005).
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One Tel Company – Due to the following the company has incurred the huge losses,
- The company has been reporting the higher revenue and deferring its expenses over the
next three years. This is against the accounting standards and the accounting policies
uniformly considered by every company across the globe.
- The company’s expansion in other ventures and the countries without having the due
diligence or the market survey whether the company will have profits from the ventures.
- Increase in the compensation paid to the key managerial personnel of the company
regardless of the fact that the company is entering into the losses and the stock price has
considerably fallen to sixteen cents.
- The company has charged one seventh of the purchase price from the customers in the
consideration that the company will be able to cover the cost of purchase in the future
periods to the maximum of seven months but the same have not happened as though by
the company. Instead of recovering the purchase cost the company was not even able to
run its daily expenses and thus led itself into the cash flow problem. In actual, the
company has purchased the product as the bundled service on the customer basis at
Australian dollar 350. The company has charged one seventh of purchase price which is
50 dollar and the company has significantly suffered cash problem and sooner has turned
into company with huge obligations.
- The audit firm employed by the company is very unethical in its professional conduct as
they are certifying the financial statements without considering the results of various
flaws like deferring of expenses, etc.
- Unethical conduct of the management of the company as no management member has
taken the stand to consider the cash problem and other unprofitable ventures. (Reza,
2011).
ABC Learning - Due to the following the company has incurred the huge losses:
- Wrong accounting of the Childcare Licenses and intangible assets like Goodwill. The
company has made the valuation by $2.4 billion of the licenses and other intangibles and
has booked the profit accordingly and has charged the impairment of only $8.4 million.
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The future cash flows taken for valuation of the intangibles were found wrong which has
resulted the company to run in losses as profits has been decreased by 42%.
- The company has the high debts of $1.8 billion which the company was unable to pay
due to employee cost and other related costs.
- It has been argued by the Community of Child Care of New South Wales that the
company has made the profits on the premise of the low staff wages and other cost
cutting which has resulted in the low quality of education and care to the children.
ETHICS AND FINANCIAL STRESS
HIH Insurance
- The company has acquired the FAI Insurance without the consent of the Board of
Directors and also immediately Winterthur has sold his shares and resigned from the
company. It shows that the company has bad corporate governance.
- The above phrase is also solicited from the fact that the company has begun entering into
the more risky areas like natural disasters, marine and the film financing insurances.
- The company has not carried out any due diligence before the acquisition and there has
been continuous change in the key managerial personnel (Jiangbo, 2003).
- Mr Ray Williams was held with three charges – one for not serving the duties and the
responsibilities of the directors, second for issuing the prospectus with material omission
and third for overstating the profits for the Financial Year 1998-99 in the Annual Report
of the company.
One Tel Company
- The company has violated the accounting rules and the accounting policies and thus it has
affected the ethics in compliance.
- The pricing strategy adopted by the company was very weak and none of the directors
have represented the fact that the company will soon fail because of the loss of the
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income and thus there will be liquidity problem. It depicts that the ethics in business has
also not been followed.
- In relation to the operation of the other companies, the management of the company has
not monitored the financial performance of the company and also has not addressed
which are the high risky areas for the companies (Brown and Caylor, 2009).
ABC Learning
- The accounting policy adopted for the accounting of intangibles was the major flaw and
has resulted in the accounting fraud. It depicts that the company’s ethics in the financial
accounting is very weak and can be easily modified and adapted according to the needs
of the business of the company (Morey, Gottesman, Baker and Godridge, 2009). Second
ethics is related to the deliverance of the services to the customers. The company has
been fighting against many suits that have been filed by the customers and the
government regarding the services provided.
LIABILITIES
Due to the bad working of the corporate governance, the companies have suffered huge losses.
The losses are not only in terms of the money terms but also in the terms of the management
failure. The losses are majorly the liabilities that the company has undertaken without proper
analysis and the due diligence. All the companies have made an effective decision whether it is
HIH Insurance while acquiring the business of Fai Insurance or One Tel Company while
acquiring licenses at increased price or ABC Learning while opening centre at United Kingdom.
RECOMMENDATION
It has been analysed that all the three companies have not went for liquidation suddenly; it has
been the year’s process which has been accumulating and after the saturation, the company has
been liquidated. The company has been working very negligently for many years. On the basis of
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the analysis, every company shall have proper management which can take decision in the
interest of the shareholders and the stakeholders of the company.
CONCLUSION
The three companies have gone for liquidation of the company. This has spread the wave across
the world in the banking industry and the insurance. The major cause for all the three companies
for liquidation is the poor corporate governance practices and the failure to identify the risk
before its occurrence and the failure to consider the financial position of the company on the
regular intervals. In order to conclude, the company shall strive for the stakeholders and the
shareholders of the company.
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REFERENCES
Avison, D. (2012): “IT Failure and the Collapse of One.Tel” in Traunmuller, R. (ed.):
Information Systems: The e-Business Challenge, Kluwer, pp 31-46.
Brown, L. and Caylor, M., 2009, ‘Corporate Governance and Firm Operating Performance’,
Review of Quantitative Finance and Accounting, 32, 2: 133-144.
Jiangbo X, (2003), “HIH Insurance Limited: Corporate Governance and Corporate Excesses”,
available at http://www.seiofbluemountain.com/upload /product/201010/2010jjfzh05a8.pdf
accessed on 31/08/2017.
Lipton P, (2013), “The Demise of HIH : Corporate Governance Lessons”, EY Journal, 27th, 273-
277.
Mak, T., Deo, H. and Cooper, K. 2005, ‘Australia’s Major Corporate Collapse: Health
International Holdings (HIH) Insurance ‘May the Force Be with You’, Journal of American
Academy of Business, 6, 2: 101-110.
Mirshekary, S., Yaftian, A. and Cross, D. (2005), ‘Australian Corporate Collapse: The Case of
HIH Insurance’, Journal of Financial Services Marketing, 9, 3: 249-58.
Morey, M., Gottesman, A., Baker, E., Godridge, B., 2009, ‘Does Better Corporate Governance
Result in Higher Valuations in Emerging Markets? Another Examination Using a New Data Set’,
Journal of Banking and Finance, 33, 2: 254-71.
Reza M, (2011), “The One Tel Collapse: Lessons for Corporate Governance”, Journal of
Australian Accounting Review, pp 1-28
UK Essays. (2013), “Collapse Of HIH Insurance” available at:
https://www.ukessays.com/essays/business/collapse-of-hih-insurance.php?cref=1 Accessed 31
August 2017
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