Financial Analysis: Liquidation of ABC Learning, HIH, One Tel

This report examines the liquidation of three Australian companies: ABC Learning, HIH Insurance, and One Tel. It explores the reasons behind their financial failures, including financial stress, unethical practices, and poor governance. ABC Learning, a childcare provider, faced liquidation due to accounting manipulation and unsustainable business practices. HIH Insurance collapsed because of falsified information and ethical breaches, leading to criminal charges against its directors. One Tel, a telecommunications company, suffered from poor services and a flawed governance structure, ultimately leading to its downfall. The report concludes that the adoption of unethical behavior and poor governance are the key factors contributing to liquidation and provides recommendations for companies to adopt ethical behavior, adhere to accounting standards, and implement strategic planning to avoid financial distress.

LIQUIDATION OF A COMPANY

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
Main Body.......................................................................................................................................1
ABC learning...............................................................................................................................1
HH insurance...............................................................................................................................3
One Tel case................................................................................................................................4
CONCLUSION................................................................................................................................5
RECOMMENDATIONS.................................................................................................................5
REFERENCES................................................................................................................................6
.........................................................................................................................................................6

INTRODUCTION
Liquidation is an event that take place when the company become bankrupt. It do not
have enough money with it in order to pay its obligations. There are various reason that clan
bring the company in the state of liquidation. It includes, increase in creditors, decrease in
revenues, decrease in brand value etc. The report discusses the case of liquidation with respect to
the three major companies of Australia, it includes, ABC Learning, HIH Insurance and One Tel
phone company. Several reasons for their liquidation will be pondered on the report such as,
financial stress, adoption of unethical practices, legal actions by other entities, false
representation of facts etc. In the end, the report discuses various recommendation that are
provided to the existing company regarding adoption of ethical behaviour and opt for the
accounting concept of going concern diligently.
Main Body
There are various reasons that can led a company to liquidation. It includes, a high degree
of financial stress, lack of planning, failure in strategic directions, inflexibility in business model
etc. The entities have to opt for better strategic techniques so that they can continue with its
functionality without its closure (Assaf, 2013).
ABC learning
ABC learning was an Australian company involved in providing childhood education
services. It came into existence in 1988 and went into liquidation in 2010.
The company was performing good till 2006 where its market capitalisation went to A$2.5
billion. The company then went into receivership after its fallout in sub-prime mortgage crisis.
The company went into debt and didn't able to generate revenues for repayment. An expected
drop in the profits by 42% was experienced in the second quarter of 2007 leaving the gains to
$37.1 million.
ABC was involved in various unethical practices as well. It used to provide low wages to
the workers in order to practice cost cutting which made the employee turnover ratio high in the
company. In order to generate higher profits the company also went on cost cutting by degrading
education and child care facilities provided by it. It made the business model unsustainable.
The questionable accounting practices of the company where company tend to show in its
financial reports that it is earning about 30% to 40% profits of the revenues. It kept window
dressing its accounts and showing profits even if the company was running in losses since years.
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The company also has to sold 45 of its child care centres by July 2007 in order to overcome with
the cost. It led to reduction its presence in Australia (Hargovan, 2017).
Another reason for the fall of ABC was that there was an increase in the number of child
care centres in Australia. It led to people not choosing the company as a first preference for their
child. It resulted in degradation of the profits of the company.
During the sub prime crisis, the financial situation of ABC learning was brought into
speculation by the media. Various indicators of downfall of the company was found intensifying
the financial circumstances of the entity. There was an increase in their tangible assets which
ranged between 71% to 81%. It also included the valuation of operating license as well. When
the bad accounting practices in financial statements came into the light, the share price of the
company went down (McCormack and Hargovan, 2015). It showed that the company is losing
hefty amount of money through the decrease in share prices.
The brand value of the company degraded due to its accounting malpractices and
adoption of unethical activities in financial reporting. The two co founders left the company in
2008 with the threats of coming into scrutiny due to malpractices. A new CEO for the company
was appointed after the departure of co founders. However, no important actions were taken by
the management in order to continue the business as it was going through the tough phase. They
did not even publish there financial statement of 2nd Quater in 2008. The company ultimately got
collapsed in 2010 due to non recovery of losses it was facing and bringing the brand value back
for the entity.
The only financial support that come to child care was through government. The
government committee was not able to decide the policies with respect to child care centres.
These inputs by the government are in the form of Child care benefit payments. The short
payments made by them are not able to make the facilities provided at these centres, effective as
it requires matching with the quality standards issued as well (Anderson and et.al., 2015). Hence,
the services that were provided by the government is required to meet all the compliances of the
child care centres. It led to increase in the cost of ABC learning which ultimately resulted in
lowering down of profits. It provoked the company to indulge into window dressing and opt for
unethical activities. When there was a lift of corporate veil, it led to decrease in share price and
brand value of the company. It forces the company to opt for liquidation (ABC Learning: ASIC
probe ends; founder Eddie Groves exits bankruptcy, 2016.).
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HH insurance
HIH insurance company was second largest company of Australia. In 2001 firm get
liquidated as it was bankrupted. It is remembered as big corporate failure in the mentioned
nation. This failure was result of number of ethical and governance of the firm. Any business
firm overnight does not get liquidated. This is because there are many steps that can be taken by
top management to handle a situation on time. Firms does not behave ethically and due to this
reason they get liquidated. HIH insurance conceal lots of facts from its stakeholders and due to
this reason case was filed against mentioned firm. Former HIH Director Rodney Adler was
sentenced to prison on 14th April 2005 for four and half years (Gaylord, 2001). There were
atlease four charged that were imposed on it. One of them was that information was
disseminating a false facts and figures which are related to the firm financial statements. Second
charge was related to giving false statements to the stakeholders about condition of business firm
and its policies. Mentioned individual was found to be dishonest and failed to perform its duties
due to which such kind of cases comes in existance. It can be said that ethical and governance
factor both pave a way for liquidation of business firm. Lack of performance of ethics is one of
the main area where Directors make mistake and this lead to financial stress.
If in annual general meeting firm would clearly communicate its employees and
shareholders about its poor performance then in that case there was chance that firm receive
useful ideas from stakeholders. By following that ideas it was possible to improve performance.
Good governance is essential for the firm because it ensure that all things are gone well and good
in the firm. HIH insurance top layer of governance was not working well and they even know
about the fact that firm is not in good condition does not make perfect attempt to improve firm
performance. Executive committee that works under Board of Directors also does not do
anything good (HIH insurance group collapse, 2001). They failed to analyze business
environment in proper manner due to which Board of Directors failed to make appropriate
decisions on time. Thus, situation get worsen right strategy was not followed and wrong facts
presented before stakeholders.
Situation get out of control and in this way ethical and governance factor lead to increase
in financial stress on business firm. It can be said that firms must also ensure that there is good
governance at the workplace and all rules as well as regulations are followed tightly. At same
time it must be ensured that all Board of Directors have equal powers so that if one is making
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misuse of its rights then there will be another individual person who can control it. By doing it
can be ascertained that such kind of liquidation will not happened again.
One Tel case
One Tel was fourth largest telecommunication company of Australia. Mentioned
company liquidated in year 2001. There were lots of issues that were associated with the
mentioned firm. one of them was that its network was not good and mobile subscribers face large
number of problems in calling due to which they were not satisfied. When people make a phone
all to call center of company they does not receive proper answer. As per facts when investors
visit call centers every things presented in such a manner in front of them that everything is
perfect and good servcies are provided to customers. Chaos was not revealed at call centers in
presence of investors (Askew and Hughes, 2001). Thus, it can be said that condition was already
worse and this happened because firm governance structue was not good. Basically, governance
refers to the rules and regulations that each and every employee must follow at workplace in
order to ensure that everything is performed in appropriate manner. If top leadership is not doing
well then in that case employees that are working at middle and lower level can not be expected
to perform well at workplace. Same thing happened in case of business firm. Owners of business
were overvconfident about firm growth and investors have common belief that owers have all
capabilities that are required to run company. When liquidation comes in existance investors
state that they were mislead about firm future by Directors.
It was unethical act firm applied for obtaining licence for spectrum in order to build its
own 3G network. By communicating such information to Directors messsage was given to them
that firm is in good condition. At same time services were poor and customers were not treated
properly. These conditions were not communicated to investors. Due to this reason they state that
they were mislead. Finally, company liquidation takes place because wrong strategy was
followed in business. This entire case reflect that it was poor governance strcuture and lack of
ethics which lead to liquidation of company (Sharwood, 2017). If Directors perform their job
rightly and give good governance to employees then in that case it was possible to give better
services to customers. If firm will follow ethics then it will communicate right information to
investors. It was possible that investor give right guidance to Directors and firm may change its
decision to buy spectrum. If same thing would be done then in that case it was possible for firm
to improve its position and earn profit in next years. But due importance was not given to
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governance and ethical factor and firm become liquidate even it had good number of customer
base in its business.
CONCLUSION
Based on the above report, it can be concluded that, adoption of unethical behaviour is
the key aspect of liquidation. It decreases the brand value as well share price of the entity. ABC
learning, a child care, wound up as it adopted manipulation of the financial statements and did
not display the true condition of the company. HIH Insurance went into liquidation due to
falsified information provided to the customers, manipulation in the stock market. Moreover, it
intentionally acted this way which led stuck the management in criminal charges are well.
However, in case of One Tel phone company, the main reason of its winding up was, their bad
services to their customers leading to decrease in revenues.
RECOMMENDATIONS
Based on the above report, it can be recommend that
 The companies need to opt for all accounting policies which are issued by the concerned
authority while opting for financial reporting.
 True and fair representation of the facts.
 Adoption of strategic planning so that the company can earn profits and reduce the losses
(if any) to the minimum.
 To create a flexible business model that can be moulded as peer the prevailing market
conditions.
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REFERENCES
Books and Journals
Anderson, H. L. and et.al., 2015. The Productivity Commission, Corporate Insolvency and
Phoenix Companies.
Assaf, F., 2013. Unsecured creditors under the Model Law. Australian Insolvency Journal, 25(3),
p.20.
Hargovan, A., 2017. Corporate law: Judicial guidance on de facto director liability for insolvent
trading. Governance Directions. 69(2). p.111.
McCormack, G. and Hargovan, A., 2015. Australia and the international insolvency
paradigm. Sydney L. Rev.. 37. p.389.
Online
ABC Learning: ASIC probe ends; founder Eddie Groves exits bankruptcy. 2016. [Online].
Available through <http://www.abc.net.au/news/2016-02-23/abc-learning-probe-ends-
as-founder-eddie-groves-exits-bankruptcy/7192952>. [Accessed on 14th September
2017].
Askew, K and Hughes, A., 2001. [Online]. HIH insurance in liquidation. Available through:<
http://www.smh.com.au/articles/2002/06/20/1023864470977.html>. [Accessed on 14th
September 2017].
Gaylord, B., 2001. [Online]. Liquidation of One.Tel of Australia Is Outlined. Available through:<
http://www.nytimes.com/2001/06/06/business/liquidation-of-onetel-of-australia-is-
outlined.html>. [Accessed on 14th September 2017].
HIH insurance group collapse, 2001. [Online]. Available through:<
http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_L
ibrary/Publications_Archive/archive/hihinsurance>. [Accessed on 14th September
2017].
Sharwood, S., 2017. [Online]. One.Tel to finally die in November, 16 years after collapse.
Availablethrough:<https://www.theregister.co.uk/2017/08/01/onetel_liquidation_ending
_after_16_years/>. [Accessed on 14th September 2017].
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