Overview of Liquidation Process

Question:

Discuss About The Considered As The Process Of Closing Down?

Liquidation is considered as the process of closing down the company’s activities where all the assets are sold to repay the amount of the debt. Generally, this situation is considered to be unfavorable for the business and can be regarded as adverse also. The ultimate reason due to which any company reaches to liquidation stage is that when it becomes impossible to recover all the major expeneses (Young & Thyil 2014). Many reasons of liquidation are present such as high amount of debt burden, ineffective corporate governance, ineffective ethical activities, etc. Sometimes boards of directors of the business are not able to focus on the key activities due to which company has to shut down its operations. The present study carried out is based on the liquidation case of HIH insurance, OneTel company and ABC learning which all these companies have to shut down their operations due to a large number of reasons and they have been discussed in the report. Apart from this corporate governance, ethics and other form of activities of the companies have been undertaken.

The concept of liquidation arises when an organization is not able to conduct its operations and due to this reason situation of shutting down the operations arises. Overall debt burden is considered to be one of the main reasons where company obtains a large amount of funds from the bank and in turn they are able to repay the amount back (Weil, Schipper & Francis 2013). The concept of liquidation and bankruptcy differs from each other where it has been identified that any organization which is liquidated is not necessarily bankrupt. The possible reasons behind liquidation can be the high level of debt, high competition in the market, an absence of profit planning control, unethical activities carried out within the business etc. So, these events are totally unfavorable for the business.

In case of Australia, many companies have gone into liquidation. Companies such as ABC learning, HIH insurance and OneTel company have gone through this stage. Further, company like HIH insurance was liquidated with the loss that lies in the range of AU$3.6 billion to AU$5.3 billion. In case of OneTel organization which was one of the fastest telecommunication enterprise where the business has suffered loss of AU$291 million in the year 2000. Such losses directly lead to the event of liquidation and other form of issues were also faced by the businesses that involves poor auditing, ineffective financial planning, weak corporate governance etc (Purves, Niblock & Sloan 2016).

Reasons behind Liquidation of Companies

Large numbers of valid reasons are present due to which companies such as HIH insurance, OneTel Company and ABC learning are not able to manage their operations, and they reached into liquidation stage. Further, organizations such as OneTel company and HIH insurance has ineffective corporate governance activities (Pearson 2016). The main challenge identified was the passion for chasing low yield enterprise and adequate amount of capital is not present so as to smoothly carry out overall operations. Poor financial planning was present where board of directors was not able to monitor all the crucial tasks of the business.

Liquidation of HIH insurance was one of the biggest failures in the Australian market where it has been identified that internal systems of the enterprise were not proper such as poor planning, lack of monitoring etc. Further, the HIH group was wide that was comprised of FAI general insurance, HIH casualty, General insurance limited etc. Directors of the HIH insurance breached their duty and due to this reason they were not at all part of the crucial activities (Mullinova 2016). Apart from this, the corporate culture of the business was quite conservative and glaring governance deficiency was the main reason for the downfall of the business. Shareholders of the HIH insurance have to incur heavy loss and due to this reason HIH insurance collapsed. In March 2001, the estimated value of the organization identified by liquidator was between $3.6 billion and $5.3 billion. Before six months the organization has to shut down its operations at that time HIH insurance was the second biggest insurer. The main cause of liquidation was inability of the organization to pay claim of insurance policy holder along with the poor cash position of entity (Mitrione, Tanewski & Birt 2014). The report published by HIH royal commission highlights the underwriting loss of $73 million against a net earned premium of $1550 million in 30^th June 1999.

In case of OneTel company ineffective corporate governance lead to liquidation. The two CEO’s of the organization have high influence on the business practice. Conflict of interest took place and this was directly compromised with the reason non audit services of the entity. Other valid reasons were present due to which OneTel company has to shut down its operations and it involves strategic mistake, wrong pricing policy, unbridled growth etc (Magnan 2015). Further, weak corporate governance was the main challenge which involves poor management communication with the board, inappropriate audit control.

Liquidation Cases of HIH Insurance, OneTel Company, and ABC Learning

In case of ABC learning where company offered childhood education services in the Australian marketing but was unable to carry out major operations. Organization was not able to manage its overall expenses such as advertising cost, staff salary and other form of expenses that reduced profitability level. In November 2008 the organization incurred loss of $1.78 billion. Top executives of the enterprise were not able to manage overall operations and poor financial planning acted as hurdle (LaChance 2013). In the year 2008, ABC learning faced cash problem and due to this reason overall expenses were not recovered by the enterprise. It is a well known fact that top executives of the enterprise holds main responsibility to prepare strategic plans for the business linked with finance etc. But in case of ABC learning it was not possible for top management to manage overall performance of the business and it directly acted as hurdle. So, finally organization has to shut down its operations in the market and the overall result was in the form of heavy losses which company has to bear (Kim & Partington 2015).

In the modern era, effective corporate governance practices and ethics are essential for long term growth and sustainability of businesses (Barth 2015). Furthermore, the practices of corporate governance assist in carrying out the smooth flow of all operations and activities. At the same time, these practices provide companies with an appropriate direction to accomplish their business objectives. The above carried out analysis of three Australian companies indicates that ethics and inappropriate corporate governance practices are the primary reason behind the financial failure (Jones 2016). For instance, in case of HIH insurance company, it has been found that The Corporation Act was breached by the directors and such kind of practices cannot be considered as ethical. The result of this was that director was not encouraged and allowed to take part in the operational activities of the insurance company. The business also got liquidated, and there were different reasons behind the same. For example, the corporate culture which was developed and implemented by HIH insurance company was quite conservative. In addition to this, the company also failed to carry out effective management of all its practices and operations (Jones & Peat 2014).

The strategies adopted by CEO without seeking opinions and suggestions from other members have also resulted in the financial failure of the selected business enterprise. Another unethical practice which has been carried out HIH insurance company is that the corporation presented wrong financial information in front of investors. It can be stated that such kind of practices may provide short term benefit to companies but in the long run, all financial operations are adversely affected by such practices (Chapple, Clout & Tan 2014).

Impact of Ineffective Corporate Governance Practices

Considering the case of ABC learning centre, it has been analysed that lack of adequate corporate governance practices was one of the primary cause behind in liquidation in the marketplace (Arqawi, Bertin & Prather 2014). Effective corporate governance practices which contribute to long term growth and development of companies were entirely missing in the case of ABC learning centre. The result of this was that the organization failed to generate adequate cash flow which is essential for every business operating in the market. It becomes almost impossible for companies to manage their day to day operations in the desired manner without having a deficit of cash flow. At the same time, leading banks of Australia has provided money to ABC learning centre for carrying out the smooth flow of all its operations and activities (Edwards 2013). However, it can be critically argued that the organization failed to manage this money and in the end, it got liquidated in the marketplace. 

Another case of One Tel can be taken into consideration to develop insight into the impact of ethics and ineffective corporate governance practices. The decision making within the enterprise was dominated by two CEO’s, and it resulted developing the higher degree of dissatisfaction among other staff members in top management. In addition to this, it has also been witnessed that the monitoring of company was not carried out efficiently by the people by an executive board of directors. It can be argued that during its initial stage, One Tel Company has witnessed a rapid growth in the marketplace.

However, in the long run, the company was not able to maintain the growth rate, and after one point of time, it reached the stage of liquidation (Henderson et al. 2015). For instance, in the year 2000, $291 million was the net operating loss recorded by the company. It was the time when leading banks and investors started perceiving that very soon; One Tel will be running out of the cash. Again in the year 2001, the company suffered from a loss of A$132 million (Monem & Reza 2011). The reason behind these financial failures is also considered as the excessive control of company’s CEO which has adversely affected the overall business activities and performance (Bushman 2014). Apart from this, conflicts within the interest of auditors present in the company are also considered as another reason behind the failure of One Tel Company.;

Based on the information collected by three different organizations, it has been analyzed that liability cannot be considered as the key reason behind liquidation. Furthermore, the cause of settlement can be termed as ineffective practices linked with ethics and corporate governance. Nowadays, proper and adequate financial planning is mandatory for long term growth and sustainability of a business enterprise (Carnegie & O’Connell 2014). In addition to this, companies are also required to ensure that adequate cash flow is generated to manage its overall flow of operations and day to day activities. Even companies such as HIH insurance, One Tel, and ABC learning failed to meet their expenses in the long run, and such kind of situations is the significant threat to any business. The burden of finances was constantly increasing and in the end resulted in the liquidation of the mentioned above three companies (Chapple, Clout & Tan 2014).

Importance of Effective Corporate Governance Practices and Ethics

Considering the case of HIH which was an insurance company, the financial report reflected that the corporation was in the stage of insolvency because of significant outstanding liabilities and debts. At the same time, it has experienced a loss of $5bn which resulted in affecting all its operations and practices in a negative sense (Chan, Watson & Woodliff 2014). In the case of One Tel Company, ineffective corporate governance practices, lack of quality auditing and control over internal operations are considered as the primary reasons which resulted in liquidation (Beatty & Liao 2014).

Conclusion

From the above carried out research report, it can be concluded that it is essential for companies to carry out ethical and effective corporate governance practices in the long run. Furthermore, lack of methods mentioned above can make the entire satiation worst and can also result in the liquidation of the business. Organizations are also required to emphasize on carrying out appropriate financial planning so that smooth flow of all operations of activity can be managed easily in the long run. Companies such as HIH insurance, One Tel and ABC learning witnessed liquidation because the corporate governance practices were not satisfactory and adequate

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