ACC701 Financial Report: Liquidation Analysis of Three Companies

This report provides a detailed analysis of the liquidation of three companies: ABC Learning Center, HIH Insurance, and One-Tel. It examines the events that led to each company's financial distress and eventual liquidation, including issues with intangible assets, debt refinancing, and breaches of financial covenants for ABC Learning; claims liabilities and regulatory concerns for HIH Insurance; and rapid expansion, high expenses, and cash flow problems for One-Tel. The report also explores the ethical and governance aspects of these collapses, defining corporate governance and examining its role in these failures. Furthermore, it addresses the significance of liabilities as a contributing factor to the liquidation of each company. The analysis draws on financial data and academic references to provide a comprehensive understanding of the factors leading to these corporate failures and the role of financial management.

Accounting Financial ACC701
Contents:
1. Events that led up to the liquidation
2. Ethics And Governance
3. Was liabilities a major factor contributing to the liquidation of the company?
4. Academic References

1. Events that led up to the liquidation:
i) ABC Learning Center
ABC’s acquisitions resulted in the recognition of the licences and goodwill of operating
the childcare centres– both of which are intangible assets. These were recorded at fair
value on its balance sheet. Goodwill has been increased to A$271 million and licences to
A$2.4 billion by the end of FY2007/8. However, the impairment charges are very less for
these intangibles. They were only A$2 million for goodwill and A$8.4 million for
childcare licences over the two financial years. Intangible assets often become valueless
when a company runs into trouble.
Between June and December 2007, ABC’s total liabilities remained relatively constant.
However, in December 2007, around A$1.1 billion of borrowings was reclassified from
current to non-current liabilities, due to refinancing.
ABC has taken loan from several leading banks. On June 13, 2007, ABC finalised a
syndicated multi option bank facility for A$1.48 billion. In the first half of FY2007/8,
due to one-off charges, profit fell 42 per cent, and covenants for debts amounting to
A$1.2 billion were breached. As it headed into trouble, ABC tried to renegotiate a loan
agreement with its bankers. A turnaround plan was rejected by the banking syndicate.
ABC neither have enough operating cash flow nor able to generate operating cash flow to
pay interest, suppliers, salaries and dividends. It emerged that the Groves and some of the
other ABC directors had pledged their shares to borrow money. As the share price went
down, they were forced to sell shares equivalent to 5.6 per cent of the company to satisfy
margin calls. Due to this, number of shares came to market which results in further
decrease in share price of ABC.
All the above mentioned factors leads to the liquidation of the Company.
ii) HIH Insurance:
HIH is comprised of several separate government–licensed insurance companies,
including HIH Casualty and General Insurance Limited, FAI General Insurance
Company Limited (FAI), CIC Insurance Limited (CIC) and World Marine and General
Insurances Limited (WMG).
HIH wrote many types of insurance in Australia, the USA, and the UK. In Australia, this
includes compulsory insurance (such as workers’ compensation and compulsory third
party motor vehicle) and non–compulsory insurance (such as home contents and travel
insurance).

A brief recent history of HIH is provided below.
Date Event
Jun 4 1992 British insurance broker CE Heath floats off 45 per cent of its
under–performing subsidiary CE Heath International Holdings Ltd
(HIH) on the stock exchange. HIH in 1991 had net assets of
$A39.7 million.
April 1995 HIH Insurance Ltd acquires CIC Insurance
Jun 6 1996 HIH acquires Utilities Insurance
Jan 8 1997 HIH becomes Australia's largest underwriter of bancassurance
business after acquiring Colonial Mutual General Insurance.
Sep 1998 HIH blacklists stockbroking analysts who disputed its assessment
of the company
January 1999 HIH wins a $300-million takeover bid for FAI Insurance
3 March 1999 HIH posts a 39 per cent fall in 1998 net profit to $37.6 million,
blaming damage claims
19 Nov 1999 HIH admits it paid more than it expected for FAI.
June 2000 Analysts are concerned about HIH after the Australian Prudential
Regulatory Authority's (APRA) proposes to increase capital
adequacy requirements for insurers
13 Sept 2000 HIH sells part of its domestic personal lines business to German
insurance giant Allianz for nearly $500 million
14 Sept 2000 HIH shares tumble to an all-time low after a lower than expected
profit result and criticism of the Allianz deal
14 March 2001 NRMA Insurance buys HIH's workers' compensation portfolio.
15 March 2001 HIH Insurance goes into provisional liquidation with losses of
$800 million
16 March 2001 APRA says HIH's woes stem largely from a reassessment of
claims liabilities
11 April 2001 Provisional liquidator warns it could take up to 10 years before
some creditors are paid.
16 May 2001 Australian Securities and Investments Commission launches its
biggest ever investigation, seizing HIH documents
21 May 2001 The federal government announces a royal commission into what
is Australia's biggest corporate collapse.
iii) One Tel phone Company:
One-Tel was launched on 1 May 1995. Under an agreement with Optus which was the
second largest telecommunications company in Australia, One-Tel received SIM cards,
customer call details, and network service from Optus. One-Tel had to pay Optus for the call
charges and a monthly access fee for each of its subscribers.

The company grew very rapidly in its early years. Its sales revenue was A$148 million in
1996-97 with an operating profit after tax of A$3.7 million. However, disputes developed
between Optus and One-Tel since July 1996 on two issues:
In July 1997, One-Tel signed an agreement with Global One, which enabled One-Tel to
provide discounted national and international calls to its customers carried on Global One’s
network. On 13 November 1997, One-Tel was listed on the Australian Stock Exchange
(ASX) at an issue price of A$2 (The Australian 14 November 1997: 24).
In September 1998, One-Tel acquired 2.5 MHz of spectrum in both Sydney and Melbourne
and 5 MHz of spectrum in each city of Brisbane, Adelaide and Perth for a total amount of
A$9.5 million (ASIC v. Rich [2009], NSWSC 1229). Since January 1998, One-Tel’s share
price continually increased to reach A$9.8 on 14 February 1999.
On 15 February 1999, News Ltd and PBL, through a series of complex arrangements, agreed
to invest A$430 million each immediately and another A$280 million in future in exchange
of 40 per cent of the shares. The idea was for News Ltd and PBL to work together to build
the leading mobile phone network in Australia with two million subscribers by December
2004 (ASIC v. Rich [2009], NSWSC 1229, p. 504). Investors responded positively to the 15
February deal. The share price had increased from A$9.8 on 14 February 1999 to A$12.63 in
two days. The strategy to build the leading mobile phone network involved developing One-
Tel’s ‘Next Generation’ mobile network, expanding One-Tel’s Internet business.
One-Tel was ranked as the 30th largest listed company in Australia with a market
capitalisation of A$3.8 billion (Barry 2002). On 26 November 1999, One-Tel shares hit a
new record of A$2.84 making the company worth A$5.3 billion (Barry 2002). To keep pace
with its ambitious growth plan, One-Tel’s expenses for employees and suppliers grew
phenomenally: A$98.71 million in 1996-97, A$193.35 million in 1997-98, A$328.11 million
in 1998-99, and A$648.80 million in 1999-2000. At the same time, One- Tel’s cash outlay
for acquiring non-current assets was A$4.9 million in 1996-97, A$10.86 million in 1997-98,
A$32.2 million in 1998-99, and A$614.9 million in 1999-2000. The 1999-2000 expenditures
included A$523 million for purchasing telecommunication licences in March 2000. This
amount was ten times of what Optus, Vodafone, and Telstra had paid for acquiring similar
licences in the immediate past (Barry 2002).
In August 2000, the company announced a record operating loss of A$291 million for the
1999-2000 fiscal year despite the doubling of sales revenue from the previous year to A$654
million. In October 2000, the merchant bank Merrill Lynch warned that One-Tel was in
danger of running out of cash. By January 2001, One-Tel’s Next Generation network was
90% completed in all State capitals except Melbourne, where it was 54% complete. Around
this time, One-Tel’s customer acquisition cost (comprising marketing costs, handset subsidy
and dealer commission) per customer on the Next Generation network was A$350 and
monthly gross margin per customer was A$50 (ASIC v. Rich [2009], NSWSC 1229, p. 506).
Thus, it required approximately seven months from signing up of a customer just to recover
the customer acquisition cost.

In February 2001, the company revealed that it lost A$132 million over July- December
2000, and Merrill Lynch forecasted that One-Tel would run out of cash by April 2001. By
March 2001, its cash reserves fell to A$35 million. On 19 April 2001, the company’s cash
balance dropped to A$25 million. On 16 May 2001, the two joint-CEOs Jodee Rich and Brad
Keeling agreed to resign. On 18 May 2001, Rodney Adler, one of the non-executive
directors, sold his six million shares in One-Tel for A$1.21 million. This sale was in addition
to five million shares he had sold in February 2001. One-Tel’s cash crisis deepened with the
unwillingness of News Ltd and PBL, its two largest shareholders, to provide any additional
capital. On 29 May 2001, One-Tel’s auditor Ernst and Young estimated that the company
needed another A$240 to A$370 million to stay afloat for the next six months. The company
went into receivership on 30 May 2001. Meanwhile, on 25 May 2001, the last trading day for
One-Tel, its shares closed at Australian 16 cents. In fact, One-Tel’s share price had continued
to slide downward from the November 1999’s record high until the last trading day. Later on
24 July 2001, the creditors of the company voted to wind up its operations (Owen, 2001).
2. Ethics And Governance
To understand the role of One-Tel’s corporate governance in its collapse, one needs to define
corporate governance and the standards of measuring the quality of governance. Shleifer and
Vishny (1997: 737) define corporate governance as ‘the ways in which suppliers of finance
to corporations assure themselves of getting a return on their investment’. Effective corporate
governance requires an environment in which ‘authority is exercised with absolute probity’
(Clark and Dean 2007: 64). It requires directors, executive and non-executive, to ask
awkward questions and for the board chair to ensure a proper flow of information to the
board of directors (Clarke and Dean 2007).
O’Shea (2005) observes that good governance has six universally accepted practices,
implicitly or explicitly:
(1) a balance of executive and non-executive directors;
(2) a clear division of responsibilities between the board chair and the chief executive officer;
(3) provision of timely and quality information to the board;
(4) formal and transparent procedures for the appointment of new directors;
(5) balanced and understandable financial reporting; and
(6) maintenance of a sound internal control system.
According to ASX CGC (2003), good corporate governance requires
(1) establishing clear roles of management and the board;
(2) balancing between skills, experience and board independence;
(3) integrity of and responsible decision-making by senior managers;
(4) integrity of company reporting;
(5) timely and balanced picture of all material events;
(6) recognition of shareholder rights;
(7) managing risk through oversight and internal control;
(8) formal mechanisms to encourage board and management effectiveness;
(9) remunerating management fairly and responsibly; and

(10) recognising the legitimate interests of stakeholders.
3. Was liabilities a major factor contributing to the liquidation of the company?
Yes Liabilities a major factor for liquidation of Companies but not the sole factor
contributing to liquidation. In all above liquidation of 3 Companies, they liquidated because
they have not enough cash flow to meet their statutory requirement and the time their debt
due they were not in position to Pay their Debt on time. So the creditworthiness of the
company going worse day by day So they were not able to find any financer for their
business. The Main issue in all above 3 cases is that they have not enough quick asset to pay
their current Liabilities So the creditor demands liquidation of the company so they can
receive their Money Back.
From the above Cases if we see financial data we can easily say they were fail to develop
good finance structure for their business. And not able to manage liabilities as per their
financial strength to pay them.
4. Academic References
1. www.aph.gov.au/~/media/wopapub/senate/committee/eet_ctte/.../c02_pdf.ashx
2. www.tai.org.au/sites/defualt/files/DP87_8.pdf
3. https://www.cela.org.au/wp-content/uploads/2017/06/AttachmentChildcareMarkets.pdf
4. GD Carnegie, BT O'Connell - Critical Perspectives on Accounting, 2014 – Elsevier
5. S Beeton - Current Issues in Tourism, 2002 - Taylor & Francis
6. K Coghill - 2003 - cbr.cam.ac.uk
7. ME Clarkson - Academy of management review, 1995 - amr.aom.org
8. PGW Keen - 1980 - aisel.aisnet.org