TACC401 Report: Financial Analysis of Australian Company Liquidations

This report provides an in-depth analysis of the liquidations of ABC Learning, HIH Insurance, and One.Tel, focusing on the financial and ethical factors that led to their failures. The report examines ABC Learning's collapse due to financial misstatements, including the overvaluation of intangible assets and related-party transactions. It details the downfall of HIH Insurance, highlighting issues such as inadequate provisions for future claims, market misstatements, and the lack of corporate governance. The analysis extends to One.Tel, exploring the impact of wrong pricing policies, strategic mistakes, and poor corporate structure. The study emphasizes that liquidations stem from various causes, including breaches of ethics, legal violations, and ineffective corporate governance, with financial liabilities often being a consequence of these underlying issues. The report concludes by underscoring the importance of robust corporate governance and internal control systems to prevent fraud and ensure sustainable business growth, referencing Australian laws and regulations designed to protect stakeholder interests.

TACC401

TABLE OF CONTENTS
Introduction................................................................................................................................3
Main body..................................................................................................................................3
Liquidation of ABC Learning................................................................................................3
Liquidation of HIH insurance................................................................................................5
Liquidation of One.Tel Phone Company...............................................................................5
Conclusion..................................................................................................................................6
References..................................................................................................................................7

INTRODUCTION
Liquidation can be defined as a situation of winding up of business in which assets are
sold to pay off the remaining obligations. Liquidation can take place voluntarily or
compulsorily as per the conditions of business (Manganelli, Morano, and Tajani, 2014). The
present study is focused on the description of events that led up to liquidation of ABC
Learning, HIH Insurance and One.Tel Phone Company. The financial stress of cited
companies will be supported by the description of ethics and governance.
MAIN BODY
In liquidation, entity winds up, sold its assets and the profits from sales are given to
the creditors or entities having claims on the company. The procedure of liquidations is
mandatory if the wind up takes place as the consequence of an order of the court (Lessambo,
2014). Other are considered as voluntary when the owners or shareholders engaged in
operating the business choose to end operations. The universal reasons of liquidations are
legal problems, insufficient desire, and bankruptcy, between the individuals running the
business to be maintaining it as operating.
In past few years, several liquidations of multinational firms and strengthen business
entities have occurred in Australia. In accordance with the viewpoint of Foreman (2014),
court rules stated that liquidations differ all over the world, but these measures classically
begun by the business itself on behalf of their creditors or shareholders. The party desires to
start the proceeding while making a court filing describing the reason for choosing
liquidations and if the request is accepted by the judge, then the firm must end their
operations and supervisors and are generally agreed by the court to manage their assets sale
(Chow, 2017). Liquidation is not primarily due to financial obligations as it is supported by
various other reasons such as breach of ethical and legal aspects, frauds and inappropriate
business strategies.
Liquidation of ABC Learning
Companies suffer from failure primarily because of financial dispensaries. In
accordance with the ACCC (Australian competition and consumer commission)
representative, ABC’s collapse was not because of increasing competition, but it has been

due to financial misstatements such as high acquisitions and debts. Also, the failure was the
result of financial dispensaries offered by the company (Lewis, 2013).
ABC lost its loyalty and reputation among customers and public at the time of
financial crisis in 2008. The entire world had evidenced the story behind this collapse. The
crises of sub prime lead to self-awareness among various countries regarding the malpractices
been used by companies in the market. ABC’s financial information gave a severe picture
entirely.
The balance sheet of company assets side represented intangible assets of 72% to
81%. These intangible assets were inclusive of several operating licenses. Further, it was a
big concern for government, and they handled this matter to ASIC by setting up a
commission. The commission subjected ASIC failure in this concern to efficiently assess
company’s operating license (Marks, 2015). ABC asserted a big amount of the licenses which
were not even worth in the operating sense of the term. It is because; the high value of
operating licence was set in order to draw traders in the marketplace. The committee asked
ASIC to make consideration of the real value of the operating license and to determine
whether they add any value to the business. The consideration is still in progress, but ASIC
announces that the licences were not 'material to the company’.
The revaluation of operating license was legal in accordance with the accounting
standards in June 2005 for the year ended and after that the new standards of accounting will
be applied. Under the new standard of AASB 138 "Intangible Assets" enables the intangible
assets revaluation only in some situations (Gitman, Juchau and Flanagan, 2015). However,
these standards are only applicable when the treatment of accounting creates a materialistic
impact. ASIC illustrated that at the point of its investigation, the concerns of financial were
not material to the company.
The main component in the downfall of ABC was the existence of transactions of
related parties. Eddy Grooves was involved in the growth and development of the company.
The company was successful in a short term. However, it was stated that Mr Grooves failed
to manage the company (Lessons to be learnt from ABC Learning's collapse, 2009). The
company didn’t follow the framework of business governance rules during the supremacy of
Mr Grooves there were various related party transactions. In 2006, a broking firm named
Austock consisted significant shares by Grooves while entering in transactions with ABC
(Marley and Pedersen, 2015). ABC gave an amount of $27 million to Austock as

transactional fees. QMS (Queensland Maintenance Services) was underneath the directorship
of Frank Zullo, who was relative (brother-in-law) of Mr Grooves. The company had
compensated the loss of $74 million in exchange for their work centre of ABC. Grooves
owned the team of Brisbane Bullets Basketball team, and it was sponsored by ABC. ABC
declared that the transactions were not material and related to the company and contained no
interest also. However, there was the proof of the weak business measure of the company,
and this considerably weakens the confidence of company’s investors.
Liquidation of HIH insurance
The failure of HIH Insurance in March 2001 trembled the Australian business
community. HIH was world’s second largest employer and at the hindmost part of a major
achievement binge that had observed the company’s major purchases of insurance in New
Zealand, Argentina. In early 2001, the company was suffering from the unstable financial
position and later they suffered the biggest corporate failure in the history of Australia, with a
loss of more than $5bn (Damiani, Bourne and Foo, 2015). With the firm ongoing to act
purely in order to examine old claims without new business taken to abroad, financial
regulators of Australia were placed to identify the clear chain of measures that resulted in
HIH collapse.
There was a proper collapse in the operational area, and the level of the failure was so
high that the charges were taken against the company’s key members like Rodney Adler, Ray
Williams, William Howard and Geoffrey Cohen (Doyle, 2017). Especially, Rodney Adler
was charged on the basis of four particular claim which is fraudulence in the liberty of his
duties and purposely distribution of fake information and data. Adler was found guilty of
deliberately distributing financial data. However, separate calls were made regarding the
queries that the corporate governance systems of HIH were unsuccessful because Adler
misuses his powers and position. In a separate claim, Adler was blamed for influencing HIH
to make an investment of a $2m loan in Business Thinking Systems (BTS). In this
transaction, Adler had an interest in the cited company.
Another main weak point that resulted in the failure of HIH was the lack to offer
future claim in a proper manner, and other problem raised from this single issue. Covering of
future claim is considered to the most significant aspect of any insurance company. However,
by the end of the survival of HIH was in a situation in which just a negative shift of 1.7% will
be sufficient in leading the company into insolvency. The most important reason for this

collapse was misstatements in changing conditions of the market, which extremely enlarged
the liabilities of HIH. These aspects were not compensated by viable strategic planning due to
which changing conditions of markets lead to serious damage in the insurance companies, but
companies are known about these risks, and they do planning in order to reduce the risks.
Furthermore, HIH radically coverage itself was the part to be concerned with the
extreme expansion of the company. HIH got holding of several companies in their ending
year and was building a chief drive for the global expansion. These expansions was a strong
move for business, as it brings increased liabilities and HIH acted on the basis of its belief
that liabilities will be compensated to the expansion. The Company appear to have primarily
misinterpreted the level by which extra provisions were required to be considered as per
changing market conditions.
This was the primary mistake made by the company, as if it deals with at the same
time it could have been resolved. Namely, HIH board went evident while practising this
strategy; it demonstrated that there was downfall of corporate governance at HIH, without
real omission applicable to check either the strategy implemented was appropriate or
financial sustainable
With the collapse of HIH insurance, there were significant changes in regulations
made by Australian Securities and Investments Commission (ASIC) for prevention of similar
issues (Kehl, 2001). For this aspect, a new set of corporate governance rules has been
designed regarding expansion. The company could prevent liquidation if management were
more cautious about liabilities while expansion (Betta, 2016). They were in a position to
introduce cost cutting programs and ignoring decision taken by Rodney Adler of securing
investment on the basis of false statements. Further, they provided a lesson to have effective
market research prior to entering any new market to prevent issues related to
mismanagement.
Liquidation of One.Tel Phone Company
The collapse of One-Tel is considered to significant liquidation case in Australia in
2001 as it was fourth largest telecommunication company with a customer base of two
million in eight countries. The collision of the company was due to wrong pricing policy,
strategic mistakes and unbridled growth. The primary issue with the company was an
inappropriate corporate structure which causes ineffective communication (Adams, 2014).
Their centralization strategy of promoting Yes man by humiliating managers who were

showcasing problems had increased employee turnover. Management of company was too
autocratic, and opinions of employees were ignored which had raised the issue of
understaffing and consequently customers satisfaction was affected. These issues had wasted
technology and created financial issues for business.
Figure 1: Key performance indicators of One-Tel
By considering financial figures of commendable company growth in sales and
customers based can be noticed, but same has not been translated into increased profitability.
All financial issues primarily arise due to corporate governance issues such as inappropriate
managerial authorities; unclear allocation of responsibilities, ineffective internal control and
increasing work issues (Debbage and Dickinson, 2013). In One-Tel there was a major breach
of corporate governance such as non-compliance of law related to fiduciary duties of
directors. For example, Adler contravened directorial duties sec 181, 182 and 183 as loans
were raised without considering the interest of shareholders as it was not in good faith. Mark
Silberman fail to supervise business activities and misled the board in terms of actual cash
flow (Avison and Wilson, 2002).
Liquidation of the company shows that it is not sufficient for companies to attain large
scale customers until they made a contribution towards profitability of the firm. Further,
implementation of highly competitive price strategy merely to gain market share can cause
disastrous consequences, and sales revenues must be supported by cash collection strategies
else there will be a liquidity crisis.
CONCLUSION
By considering the present study, it can be concluded that primary reason of
liquidation is not financial liabilities as it is supported by various other reasons such as breach
of ethical and legal aspects, frauds and inappropriate business strategies. It is because,
financial obligations are a consequence of inappropriate business strategies, contravention of

ethical aspect and laws and ineffective corporate governance. To prevent this, laws of
Australia has been stricken to ensure corporate governance and protect the interest of
stakeholders. Further, companies have mandatory obligations to comply with developed laws
else they have to face severe adverse consequences such as penalties and compulsory
liquidation. However, the interest of stakeholders and economy will be cushioned by
imposing a penalty on individual who is liable for misconduct. The study also shows that for
sustainable growth and success it is essential to have effective corporate governance and
internal control system to prevent frauds in business. In addition to this, managerial
authorities should focus on long term sustainability instead of having short term profits.

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