Understanding Liquidation

In recent years a number of companies have gone into liquidation (been ‘wound up’) because they have not been able to meet their liabilities when they fell due. In Australia, there are some well-publicised examples such as ABC Learning, HIH Insurance and One.Tel phone company.

Liquidation is a state when the company is insolvent and not able to pay off all its obligation as per the terms and condition. In this situation company bound to sell all all its investment and property to discharge all its liability. There are numerous reason because of which company may need to liquidated. It marks the end of the fundamental assumptoion that is going concern assumption of company (Alexander, 2016). After completing all the procedure of liquidation the company is closed permanently and lost its existence. Sometime when the company is not able to fullfill its obligation on time the director or member of the company call for liquidation of company that is called voluntary liquidation or member liquidation or sometimes on the order of court company need to close down all its opration that is called compulsory liquidation. There are many persons who have power to lodge petition for the compulsory liquidation of company are creditors, contributories, official receiver, company itself, state’s secretary or many other parties. The whole procedure of liquidation is handled by official liquidator (Bizfluent, 2017). The major duty of liquidatior is safeguard the assets and property in the interest of company and sell off investment and property of the company only to repay the liabilities of company. Sometimes directors’ and partners’ personal assets may also sell off to repay the liabilities of company.

There are large number of reasons because of which company migh get liquidated like company not able to start its business within the given time limit, even after the registration of company, trading certificate has not been issued, company not able to pay its debts, the objective for which company formed get fulfilled and many more. These are the vital factor because of which company get liquidated (Bromwich & Scapens, 2016). Infringement of rules and regulation and involvement in illegal practices also leads to liquidation of company. The same is explained via example of there well known companies of Australia.

ABC learning

ABC Learing was one of the well known companies in the Australia for providing childhood education service. The company is working as profit making sector all across Australia and making immense profit from its primary & secondary centres (Belton, 2017). Australian Stock exchange listed this company with capitalization worth 2.5 billion dollars in the year 2006 and at the same time new auditor of the company got appointed. But after few year it was noticed that the company indulged in many malpractices like non-compliance of accounting policy,rules and regulation. Here the company was borrowed large amount of money and at the time of payment company don’t have money to repay the loan. Because of this the interested parties like stakeholder, investor went into exhaustive loss (Bae, 2017). There are so many irregularities and accounting issues in the financial statement of the company on which the auditor need to give their opinion and discuss the sustaintial matters with management. However, here in the given case the auditors was not gave their opinion with professional care and due diligence. Because of those reasons the company was liquidated in 2008. Later on in December 2009, Goodyear Early Learning, having more than 650 education centres in Australia taken over this company completely (Goldmann, 2016).

Reasons for Company Liquidation

The Company get liquidated because the company was not able to pay off its long term debt. There are so many untrue information in financial statement that were affect the financial decision of one who relies on the statement over the last few year hence the auditor refuse to give the sign off the financial statement and suggested for repreparation of financial statement. Till 2000s childcare was expended overall Australia. 2300 centres of this company all across the Australia. The company also acquiring 1% stake in US Market (Chron, 2017). The company was also associated in many other substantial acquisition because of this major acqisitions profit deviated from 15-20% in 2004-2005. Even of profit the company is not able to pay off all its obligations because of all this element in the year 2007 the share price of the company fall in by more than 40%. Hence the company get liquidated and company name was removed from Australian Stock exchange (Choy, 2018).

ABC Learning got liquidated due to inadequacy of comporate governance, weakness in internal control sytem, un-adherence of rule and regulation, non disclosure of price sensitive information to the shareholders and the market players. The company also lacked the quality management staff who could perform a due diligence in the case of acquisitions and work out the actual consideration to be paid. In lieu of acquisition of companies and properties the company had paid extra consideration to the tune of multi million dollars (Visinescu, et al., 2017). It is thus, a cconclusive evidence that the company did not measured the acquisitions in terms of the synergies that were being created by the taken over entities but was merely involved in the paper stamping activity by the concerned authorities. Ideally, the company should have had aninvestment reviewing committee but instead of the same, it had a management group approval procedure which again was a mere stamping activity without proper due diligence. One of the examples of the same is one entity for which the actual value should have been $ 30 Mn based on the future economic gains but the company actually paid nearly $ 70 Mn, which shows how the funds were being eroded (Vieira, et al., 2017)

One Tel Phone company

The second company which has been considered for the discussion here on liquidation is One Tel phone company which was known in Australia for its telecommunication and media services. It offered broadband and internet services, information system and other marketing services as well. Due to the agility of its services, the company had built a huge market reputation and was enjoying the customer base of more than 2 million customers spread across 8 countries. However, later on it was discovered that the company was involved in a number of accounting malpractices and being non compliant with corporate governance and business ethics (Sithole, et al., 2017). The management was also found to be involved in fraudulent accounting practices and reporting incorrect figures in the financial statements. The incompetent management was responsible for floating wrong information in the market and doing incorrect and inflated projections of the sales and the profits in the books based on the past years’ performance. The company had been on the growth path in the past years from 1997 to 2000 where the sales growth ranged from 40% to 127% year on year and based on this, the company gave an estimation of 10 times increase in sales which was never a realistic figure and thereby the share prices of the company crashed in the market to as low as $ 1. Furthermore, the rising debts and liabilities and inappropriate decision making by the management like purchase of the spectrum licenses even though the same was not required resulted in increasing the burden of debt (Trieu, 2017). These were government and public funds which were being misutilised and finally in the year 2007, the company suffered one of the heaviest losses amounting to $ 291 Mn. Despite all these losses, the company gave its directors huge amounts in the form of bonuses and salaries amounting in million dollars. The cash flow went negative and debt increased several times, all of which forced the company to sell off all it assets and properties and finally wind up the operations in 2001. The major observations in this company’s downfall were its financial statements never showed the true and fair view and the corporate governance was not being complied with. Besides that, sales, profits and receivables were shown generally inflated in the financial statements which forced the auditor to give a qualified report (Heminway, 2017)

Examples of Liquidated Companies in Australia

HIH Insurance Company

The 3^rd company which has been considered for analysis is HIH Insurance company which was known in Australia for its insurance services being provided. It was the 2^nd largest insurer in Australia at that point of time post which the company had to liquidate on account of the massive losses being incurred by the company (Linden & Freeman, 2017). The loss incurred was to the tune of $ 5.3 billion and is still considered to be one of the biggest losses of all time. The primary reason behind the downfall of the company was incorrect valuation of the taken over entities, one of them being FAI where wrong pricing tehniques and aggressive accounting techniques were being applied. Amidst all the losses and falling fortunes, the company also paid huge amount in the form of the severance bonus to the company’s chied executive officer who left the company one year before the liquidation of the company (Kuhn & Morris, 2016). The company was majorly involved in the property insurance and underwriting services and its downfall impacted the entire industry. The company was also involved in the malicious act of disclosing wrong financial information and wrong acquisition values of CE Health International and the liabilities and reserves were shown to be low in the balance sheet. All these factors cumulkatively led to the winding up of the company. The major issue found again was the acquisition of the companies without proper due diligence and then the same not being contested by the auditors or brought to the notice of the management (Kangarluie & Aalizadeh, 2017). The overall loss being suffered by the company on this account was $ 100 – $ 300 Mn. Thus, it can be said that the non compliance with the corporate governance coupled with accounting inefficiencies led to the liquidation of the company.

Conclusion

There are many conclusions which can be derived from the above three examples of liquidation of Australian companies. It can be concluded that it is not only the inability of the company to pay off the debts that leads to liquidation of the companies, but there can be several other reasons as well. Some of them are inappropriate valuation techniques and aggressive accounting techniques leading to increase in liabilities, no proper due diligence at the time of acquisition which may lead to increase company’s payables, incompetent management who is not able to highlight the major issues at the right time and doing window dressing of the acocunts. Besides all this, the auditors who are supposed to highlight the key issues in accounting to the management and the investrs nad stakeholders also missed out the same in all the three companies and did not perform their respective activities with responsibility. The weak internal control and fraudulent accounting activities cumulatively led to the liquidation of the above three companies. It is for all the above reasons that the government has come up with strict laws and regulations to regulate the process of liquidation and the official liquidator is the person who should be involved in the entire process.

Lessons from Liquidated Companies

Recommendation

There are many recommendations and learnings which can be derived from the above case studies. The companies and the management firstly needs to understand that the impact of liquidation is manifold, it not only impact the investors and shareholders adversely, but also the employees who are left unemployed and the economy as a whole. The shareholders do the investment in the companies on the basis of the annual report issued by the auditors as it gives reasonable assurance regarding the status of affairs of the company but in case the same is not made properly and auditors are also involved in the malpractices, then the purpose of the audit is not fulfilled. Therefore, the need of the hour is that the management of the company as well as the auditors assume their responsibility properly and give the true and fair view of financial statements to the stakeholders to enable informed decision making. Also, even though the government has framed certain rules and regulations on the process of liquidation, but it is the company which needs to be compliant of the laws and regulations, corporate governance, etc. This will help in the overall development of the reporting and economy.

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