Introduction to Liquidation

Discuss about the Liquidation and Winding up of Companies for Corporate Accounting.

Liquidation could be determined as process which is used by the busienss organizations to take the company to its end and distribute its assets to discharge its corporate legal liabilities. It is usually done when the company is insolvent; means it cannot pay it is unable to pay its legal debts. As company operations end, the remaining assets are distributed to shareholders and creditors. It is almost similar to the term “winding up”. Liquidation is an initial stage of ending of a company’s existence and the winding up means to “finish up”. Liquidation is not a one day process. It is a complete series of several events and procedures. The business does not continue to process if it the liquidation process is done.

Businesses can liquidate their assets for any number of reasons, but the main two reasons are the company is failing and restructuring or investors want to leave the business. It is far more common in bankruptcies and situations where the business is closing because it can’t support itself with revenues than any other instance. In a bankruptcy, the court generally takes control of the assets in order to sell them at auction to pay off the outstanding liabilities (Khan, & Williamson, 2016).

Liquidation does not arise only after when company is unable to pay its debt. In some many cases, it arises when company. Apart from that the inadequate working capital, weak financial skills, lack of planning, poor marketing and inflexible business model also some of the factors which brought the company to an end. Further sometimes the companies are liquidated because the business purpose with which company was incorporated was done or the time for which it was incorporated is completed. The object with which company was incorporated is considered as illegal now or the company is not able to commence its business after its incorporation can also be a reason of liquidation.

It would be better to study some prominent cases, to get a clear view regarding the different events and factors which results into the winding up of company. The cases that we named in our above discussion are well known corporates, which experienced a good track record before facing such process of winding up (Parker, 2015).  These all three companies have shown that if company does not comply with the legal and ethical issues then it will eventually increase the overall outcomes and efficiency of the busienss. It is observed that these main three companies had to suffer destruction of is business due to failure to manage the business.

Reasons for Liquidation

ABC was co-founded in 1988 as a childcare centre. Back then, in Australia children care centres were non-profit organisations supported by government subsidies. In 1997, the government of Australia gave the subsidy direct to the families, which created the potential for evolution in the sector. Over the years, ABC was consistently giving the benefits to children for their benefits. This company was listed on the Australian Stock Exchange and had market capitalization of A$25 million, which becomes A$2.5 billion in year 2006 (Butler, & Connelly, 2016).

ABC Learning had become the world’s largest service provider and was well known for its quality of services and soon attracted core service provider in its area of service. Being a monopolist, the company started avoiding the child safety policies and litigations for false behavior filled against it and it was held guilty when the allegations got proved. All these events marked adverse for the share prices and after that it all went pear-shaped. ABC was overwhelmed by debt repayments and had to sell 60 per cent of its US subsidiary and its entire UK subsidiary. It was then delisted from ASX and went into receivership. In 2009, the company was voluntarily liquidated and bought by Good start Limited in 2009 (Haider, 2016).

HIH Insurance was the second largest insurance companies of Australia (Swart, & Lombard, 2015).  It was an eminent insurance company with $8 billion in assets and it was considered one of Australia’s largest insurance firms. After a time it suffered from an adverse series of downfall and the management of company was held liable for the same. However, offsetting of the debts with the potential amounts, HIH was left, on paper, with net assets of only $133 million. The company was in the state of marginal insolvency which can be converted into assets deficiency from a small movement in the value of assets. That could cause the company to become an insolvent. Although the company was still have a stable financial condition but it was just left with $133 million against the liabilities, even when it sold its assets off. The proceeds by sale of assets couldn’t help the company to establish and this lead to bring the company into provisional liquidation. It is well observed that, HIH was wound up not because of the financial stress but because of the unethical counts on the management’s part. (Merler, 2018).

Factors Contributing to Liquidation

One Tel is Australian Company which was indulged in telecommunication services. One Tel initially started as a reseller of OPTUS services. The company had very clear market strategies and was much focused on the young generation. The company was mainly deals in the portable devices, cellular phones and wireless transmission. When this company was collapsed, it was having good amount of clients. This One-Tel’s collapse was collapsed due to the failure of classic case of failed expectations, strategic mistakes, wrong pricing policy, and unbridled growth. The company was a severe case of management fraud instead of being unable to pay off the debts on sale of assets (Chitimira, 2017). For the personal benefits, out of the company’s management, Jode Rich, who was the co-chief of the company was claimed to have made manipulations in the books. When OPTUS ended the business with One Tel, the company started facing more problems. Hence, transparency was lacking in the concern, which ended its business relationships and even led to company’s ultimate winding up process (Rana, 2016).

Businesses do not function in segregation, but in immediate social & public connection. It cannot think for its own profit without considering the social factor. As per the corporate government policies and social development theory, the management of the company should perform ethically and in the interest of the society. Any personal benefit against the cost of the social benefit is unethical. The management of company should always consider the public factor as well as the profit factor in its code of conduct. A company is sought to be functioning adequately without any plan of closure, it must think for the long time operation run in the market. Anything done to gain the benefit at the cost of ethics is unaccepted and may lead to ruin the whole empire (Mucha, 2018).

In the prior discussed cases, the major factors were manipulation, greediness, avoidance and carelessness of the management, which brings the company to the end. In case of ABC Learning, the ignorance and misuse of financial status was the reason of company’s winding up (Silva, 2016). The provided subsidies by government were being misused, low budgeted labour was engaged and cheap techniques were used for cost cutting. Therefore, it could be inferred that each and every company should take proper ethical and legal program to increase the overall ethical compliance of company. If these companies work ethically then it will eventually decrease the overall problems and issues of the business. If these problems are managed effectively or there is not corporate dilemma which could be faced by company then the ethical compliance will eventually increase the sustainability of the business at large (Goldschmidt, and Amoateng, 2014).

Cases of ABC Learning, HIH Insurance and One Tel

Every running concern needs the finance to meet its daily requirements and to fulfill the goal of wealth maximization. Finance is needed to pay the obligation for the easy running of the business. It is the debt amount which needs to be paid by company.  It can be for long run or for short period of time. When the liability of the company exceeds to its assets and the company is unable to meet its obligations. It can be the question mark for its financial strength (Evans, 2016).

When the financial stability of a company comes in question, all stakeholders who have any interest in the company want their money back out of the falling business. This results into the liquidation of the company. The end of the liquidation process is called winding up. After paying off all the interested parties the company results into the winding up and the existence of the company ends here. From all the discussion we get to know that the liabilities are a major factor that contributing in the liquidation. In many companies that go into liquidation, liabilities play a significant role. It has shown that all the companies firstly responsible towards the creditors and then the rest of the liquidated amount will be distributed to shareholders (McIntyre, 2014).

HIH Insurance was led to winding up due to the unethical behavior of its management. Its top management was in fault as they performed for their personal gain and presents the false information knowing it to be false to mislead the investors. IF they would have followed the proper legal compliance and kept their business transparent then it would have saved company from the destruction (Calabretta, and May, 2016).

One.Tel’s liquidation was a non-expected event for the whole management of the company. It was also caused because of the management fraud. The major part of shareholders of the company was misled by the management of the company. However, the company claimed to have maintained transparency and fairness in all its operations, but no one was aware of the real situation.

Each and every company should endeavor toward compliance with the legal and ethical program if they want to keep their business sustainable in long run (Evans, McGarry, and Smith, 2015).

If these given companies have used proper strategic program and effective busienss plans then they would have ignored the possible issues and winding up in effective manner.

Importance of Legal and Ethical Compliance for Business Sustainability

Conclusion

After analysis all the data of the liquidated company and case study of these all companies, it could be inferred that if company implement proper legal compliance program then it will eventually increase the overall outcomes and efficiency of the business. In addition to this, it also helps company to overcome the issues and problems in determined approach. Now in the end, it could be inferred that if these programs are handled in effective manner then it will increase the brand image and will save the company from the possible destruction at large. The liquidation and winding up happened due to the negative business output and failure to manage the business in determined approach.

References

Butler, D., & Connelly, A. 2016. Practicalities of winding up trusts and realising trust assets. Australian Restructuring Insolvency & Turnaround Association Journal, 28(3), 24.

Calabretta, S. and May, B., 2016. Winding-up companies in a partnership. Australian Restructuring Insolvency & Turnaround Association Journal, 28(4), p.30.

Chitimira, H., 2017. Some thoughts on the meaning and application of commercial insolvency in winding-up proceedings involving contingent creditors–Absa Bank v Hammerle Group 2015 (5) SA 215 (SCA). Obiter, 38(2), pp.446-456.

Evans, A., 2016. Legal Infrastructure of the DIFC Courts. In Global Insolvency and Bankruptcy Practice for Sustainable Economic Development (pp. 233-242). Palgrave Macmillan, London.

Evans, J., McGarry, K. and Smith, P., 2015. Investigating the rate of company compulsory liquidation in the UK via Bayesian inference and frequentist statistical methods. Journal of Business & Economic Policy, 2(1).

Goldschmidt, A. and Amoateng, M., 2014. Reading (in) between the lines: winding up close corporations: company law. Without Prejudice, 14(2), pp.24-25.

Haider, N. A. 2016. Winding up of Companies on Just and Equitable Grounds.

Khan, A., & Williamson, S. (2016). The liquidation of foreign companies in Australia. Australian Restructuring Insolvency & Turnaround Association Journal, 28(2), 38.

McIntyre, W.D., 2014. Winding Up the British Empire in the Pacific Islands. OUP Oxford.

Merler, S., 2018. Bank liquidation in the European Union: clarification needed. Bruegel Policy Contribution Issue n? 01| January 2018.

Mucha, A., 2018. Corporate mobility in Europe: new hand in corporate shopping after the judgment of the Court of Justice in Polbud-Wykonastwo (C-106/16).

Parker, M. (2015). Division 7A and winding up structures. Taxation in Australia, 50(6), 312.

Rana, S., 2016. Compulsory winding up of companies a study of legislature and judicial aspects.

Silva, A.R.E., 2016. Interpretation of ‘liquidation proceedings’ in terms of Section 131 (6) of the Companies Act: a case analysis of Richter v ABSA Bank Limited (Doctoral dissertation, University of Johannesburg).

Swart, C. W., & Lombard, M. (2015). Winding Up of Companies–Back to Basics: Boschpoort Ondernemings (Pty) Ltd v. ABSA Bank Ltd.