Financial Accounting: Analysis of Company Liquidation Processes

This report provides a comprehensive overview of financial accounting principles as they relate to company liquidation. It begins with an executive summary and an introduction that sets the stage for the analysis. The report examines events and factors that lead to liquidation, using case studies of ABC Learning, HIH Insurance, and One.Tel to illustrate key concepts. It explores the role of ethics and governance in preventing financial stress and the liabilities that contribute to liquidation. The analysis includes a discussion of the winding-up procedure and the distribution of assets. The report concludes with a summary of the findings and their implications for financial management. The report aims to provide a clear understanding of the liquidation process and its impact on stakeholders.

Financial accounting for the
liquidation of the Companies

Table of Contents
EXECUTIVE SUMMARY...........................................................................................................................3
Events and factors that have led to liquidation.....................................................................................3
INTRODUCTION..................................................................................................................................3
ABC LEARNING...............................................................................................................................3
HIH INSURANCE.............................................................................................................................3
ONE.TEL.........................................................................................................................................3
ROLE OF ETHICS AND GOVERNANCE.....................................................................................................3
DOES BAD ETHICS AND GOVERNANCE LEAD TO FINANCIAL STRESS?................................................3
LIBILITIES CONTRIBUTING TO LIQUIDATION..........................................................................................4
Conclusion.............................................................................................................................................4
References.............................................................................................................................................5

EXECUTIVE SUMMARY
With the changes in complex business condition and ramified changes in
environmental factors, there are several companies which have faced challenges in their
business due to the non-effective business functioning. The liquidation is the process which
takes company to the end. It distributes the available stocks and assets of the company firstly
to creditors and then to shareholders on their shareholding proportionate basis. In this report,
events that led to liquidation have been analysed after that implication of the role and ethics
governance have been done and liabilities contribution to liquidation have been done in
effective manner. In this report, proper factors that sought to find the role of the liquidation
of company to bring that on the edge of ending up the financial stress have been analysed.
Events and factors that have led to liquidation
INTRODUCTION
There are several companies that have faced issue of the liquidation due to the non-effective
strategic and financial program. It is the procedure or accompanied with the steps which takes
company into liquidation. It is ideally followed when company has been facing high amount
of loss and cannot continue with the same business. Government also intervene to push the
liquidation of the company as it does not want corporation to misuse the scarce resources
when they cannot add value to society. In this report, governance and ethical program and
negative impact on the society of the liquidation have been taken into consideration. The
ABC learning, One Tel Company and other organizations had faced issues due to the non-
effective strategic and financial program. The liquidation procedure is also called up winding
up procedure. It is analysed that when the business is closed all the liabilities of the company
and required payment will be made to creditors or lenders. After that if any amount remained
then the rest amount is given to shareholders on their shareholding proportionate basis (Jones,
2016).
Therefore in simple words, it could be defined as complete set of multiple days which
requires several approvals and work program. However, the liquidation is undertaken when
business owners or directors thinks that company can no longer work effectively and it’s
better to end up the operation of the business.

There are several other reasons which might result to liquidation of the companies such as
non-efficient business, less effective strategic program and increased business loss. It is also
analysed that some time liquidation process is undertaken when company meets its main and
ancillary objectives. In addition to this, company also goes in liquidation when it enters into
the strategic alliance with other organization such as merger, amalgamation and acquisition.
In order to get the proper idea about the liquidation process, it is required to evaluate the
different companies which had gone under the liquidation and ended up their business. All
the companies which have faced the liquidation are ABC learning, One Tel company and
HIH insurance. The main reason of failure of these all companies was based on the loss of its
business, high financial leverage and increased cost of capital (Jones, 2016).
ABC LEARNING
The ABC learning company was having highest market capitalization ($ 2.5billion) on the
Australian stock exchange. It had been the biggest the service provider in the early childhood
education for the children. Company had the strong brand image and followed the product
differentiation strategic program to win over the market. Over the years, company was doing
well in market but due to the high solvency risk and less effective financial leverage,
company had to face loss in its cost of capital and business at large. It was observed that the
financial situation of ABC learning company was not effective and due to the increased
charges on the profit, it failed to pay off its fixed interest payment. In context with the
strategic program, company followed the clients based business program with its employee’s
development program (Løkka, 2014). This level of strategic program increased the business
costing and resulted to less return on capital employed. This less effective strategic program
of ABC learning company was the main reason of failure of its business. IT failed to pay off
its external factors liabilities which eventually reduced the capital outcomes. All these events
led to the destruction of the business and resulted to the loss. Soon to that, ABC learning
company had to face drastic downfall in its share price. It damages the business functioning
of ABC learning company and resulted to the winding up of company at the will of its
creditors and owners. It was observed that the soon company had to face high trading loss in
its share price and capital value of company negatively impacted the operating functioning.
The company had to face volunteer winding up procedure due to the negative impact on the
business. It is observed that volunteer winding up procedure was the last resort which was

followed by the management of the ABC learning to pay off its long term and short term
debts (Maloka, and Muthugulu-Ugoda, 2016).
After analyzing the case, it could be inferred that ABC learning had to face liquidation due to
its high financial leverage and less effective strategic functioning. The liquidation of
volunteer winding up procedure resulted to the drastic loss to the promoters and key
stakeholders of the company (Marateo, 2017).
HIH INSURANCE
HIH Insurance was multination company which indulged in providing the financial and
insurance services. This company was the second largest insurance company in Australia
which was providing insurance benefits to people for the long run. However, due to its non-
effective strategic program and high employee turnover, company had to face drastic loss in
its business. It increased its cost of services and company had to run its operating program at
Break-Even Point in long run. At that time, HIH Insurance was having good financial
position but due to its non-effective strategies and financial structure program it had to face
high solvency risk. In spite of the strong financial position, company had to pay $ 133 million
to its external liabilities (Schultz, 2016). It resulted to the destruction of the business and HIH
Insurance had to sell its assets to pay off the debts. Nonetheless, the sales of the assets and
existing capital were not enough to pay off the required debt of the HIH Insurance. When
HIH Insurance failed to pay off its debts then it had to go into the volunteer winding up
procedure to save it from the negative business functioning (Kratz, and Schöneborn, 2015).
At that time, there were several managers who were indulged in the business management
functioning of the HIH insurance such as Ray Williams; Brad Cooper, a Sydney
businessman; and former chairman Geoffrey Cohen were allocated with criminal charges and
provided with imprisonment. Rodney Adler had to go on trial due to the non-payment of
company’s liabilities and ultimately punished with the 4 year imprisonment. It is observed
that the HIH insurance had to face the volunteer winding up procedure due to the non-
effective strategic program, high solvency risk and increased cost of capital. Company failed
to discharge its external liabilities which resulted to the volunteer winding up procedure to
end up the business process for the ultimate benefits of the creditors and shareholders
(Parker, 2015).
.

ONE.TEL
With the increased complexity of the One Tel Company, it had to face destruction of the
business as management of the company failed to infuse strong strategic management
program. One Tel Company was incorporated in 1995 with an objective to provide
telecommunications services to clients. It was the fourth largest telecommunication and
transmission company. The market capitalization of the company was also 1.2 billion which
was the 12th highest Market capitalization on the Australian stock exchange (Pinder, 2017).
The Company had to face destruction in its business due to the two main reasons that
company failed to align its business with the demand of the advance technologies and less
effective strategic program. The debt structure of company was also more than 40% which
reflected the highest financial leverage in the business. Company was indulged in providing
the services such as portable devices, cellular phones and wireless transmission. In addition
to this, company also notified the several cases of the fraud and insider trading program
which destructed the business output of the organization in long run. The high financial
leverage and less effective profitability of the business reflected that company had to face
destruction. At that time, Company was not having the transparent business and faced the
destruction of its business. The main reason was high debt portion, less transparent business
and less effective strategic program implemented by the organization (Feinstein, & El-Masri,
2017).
Now in the end, it could be inferred that One Tel Company accepted the last resort to
discharge its liabilities by accepting the volunteer winding up procedure due to the non-
effective strategic program, high solvency risk and increased cost of capital (Puranam, and
Vanneste, 2016).
ROLE OF ETHICS AND GOVERNANCE
DOES BAD ETHICS AND GOVERNANCE LEAD TO FINANCIAL STRESS?
The ethics and governance program put emphasis upon the strategic work functions and
effective business functions which company should undertake to increase the sustainability of
business. It asks company to comply with the legal and ethical compliance with a view to

render the best possible benefits to society. It is evaluated that if company could use proper
methods and work programs then it will increase the overall outcomes to the society at large.
It is observed that every organization needs to think for making the sustainable growth in its
business if it wants to win over the market. However, due to the negative impact on the
society, each and every organization needs to follow proper corporate governance program if
it wants to pay back what it has taken from the society. This kind of practice is covered under
the ethical work practice which could increase the overall outcomes and efficiency of the
business at large (Rana, 2016).
Every company needs to avoid manipulations, manifestations, greed, ignorance and
carelessness on part of the top management if it wants to increase the ethical corporate work
practice (Feinstein, 2017).
ABC learning had to face loss due to its less effective transparent business practice
(Saravanan, and Thakkar, 2018).
HIH insurance company had to face destruction in its business due to the falsification of the
corporate data which company had to face due to the negative business functioning.
One Tel company had to face this loss due to the “profoundly misled” by the company’s
management and destruction of the business (Parker,2015).
LIBILITIES CONTRIBUTING TO LIQUIDATION
Each and every company has objective to increase the overall return on capital employed and
increase the wealth maximization of the stakeholders at large. However, there should be
proper or optimum capital structure which depends upon the nature of business, risk
associated with the market and Beta determined of the company. If company fails to pay off
its short term and long term then it will result to liquidation of their own company
(Temesgen, and Ababa, 2017).
After liquidation of the company, company needs to pay back to its contributors such as
lenders, borrowers and other person who have debt to be paid by company to them. The right

of getting payment from the company is highly based on the basis of the pre-emptive rights.
These rights are given to each and every contributors on the basis of allocated rank. After
that, in the end, shareholders will be paid remaining amount on the proportionate basis (Stoll,
2016).
Conclusion
After analyzing all the details and case study of the different companies which have
faced liquidation or winding up in their business, it could be inferred that these all companies
have faced destruction in their business due to high debt portion, less transparent business
and less effective strategic program implemented by the organization. If these companies
would have taken effective work program and less solvency risk in their business then they
would have saved themselves from the winding up or liquidation.

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