A company is seen as a going concern since the day it gets incorporated and commences its business. By going concern we mean that the company is going to carry on business for forever, it has got no intention to disrupt functioning in near future. But economy has got its own run and goes through different phases of recession, depression, boom etc. It’s impossible to predict the with certainty the future of any ongoing business. When situations flip in unfavourable direction, any entity tries to fix up the scenario with everything that’s under its control. But sometimes the eventual result is closing off the economic activity and that’s what liquidation means in a common man’s language. It refers to shutting off the occupation by selling off all the assets and disposing away the liabilities. And any balance if left over after the liabilities are discharged gets distributed among shareholders, but that happens too often.
Different companies carry on different kind of businesses and have different chains of suppliers, manufacturers, buyers etc. As they are ringing different works, their market share and market area geographically is completely distinct. The issues relating to every company bang them at times and makes it difficult for them to endure. To understand different events that can lead to liquidation of companies, its needed to explore case studies in relation to a few companies that were wound up in near past. Its not necessary that a company who was booming in past will flourish at the same rate in future too. Some of the case studies of well celebrated companies that unfortunately were wound up are elaborated in the coming sections.
HIH Insurance was brought into existence by Ray Williams and Michael Payne and used to be Australia’s second largest insurance company. Usually when insurance business is talked about, its assumed that this line of tertiary sector never falls out of activity. As from anything to everything is insured nowadays, but sometimes failure to act as desired brings unfortune. HIH Insurance started crumpling when its administrative level indulged itself into unethical and illegal practices. Fundamentally the concern was on strong footing both financially and administratively, but soon profits started wiping out because the management was much interested in fulfilling selfish motives rather than working in the best interest of the occupation they are in. The company earlier had acquired FAI Insurance and because of that Rodney Adler became HIH’s director. He was proved to have indulged in criminal offence which defamed the financial stability of the company’s business and that resulted in a deficit asset balance. Provisional liquidation was called, and the company was unable to pay all the liabilities even after selling the assets and the company demised with a total loss of $5.3 billion (approx.).
ABC Learning was a listed company under Australian Security Exchange with a leading business management of providing early childhood education services. Lured by profits, ABC Learning started following the practice of cost and wage cutting. This took a crucial direction in the long run. Agitation raised and soon the profits smeared. Being a monopoly player in the area of childcare, the company became liberal in its governance which resulted in escaping of a few children. As an obvious result, the company started facing challenges and was even claimed inn court of law. Being financially potent, it used its finances to overwhelm the claims but was in due course held guilty. Due to the above circumstances the share prices dropped, and profits faded. There arose a situation when the share trading of the concern was suspended and finally the company got delisted from Australian Security Exchange. The creditors who were not getting their repayment voted up for liquidation and soon the company was voluntary wound up (Jack, 2018).
With a consumer base of over two million and flourishing activity in around eight countries, One.Tel used to be the fourth largest telecommunication company in Australia. The prime strategy of this company was to aim at the youth who were certainly more attracted towards the ever-improving communication facility that the company was providing, main attractions being wireless and portable communication devices (Athanasiou, 2015). The company attained heights in its promising age. One.Tel started doing business with Optus which held 28.5 % of shares of One.Tel. Optus provided it with network services, SIM cards and customer call details for which it charged monthly access fee and call charges for each consumer who subscribed. But due to some unforeseen circumstances the partnership sort between Optus and One.Tel concluded. Further financial cruxes ascended when the financial books were window dressed by Jodee Rich, One.Tel’s co-chief executive. Lachlan Murdoch (News Corporation) and James Packer (Publishing & Broadcasting Ltd) epitomized as main shareholders and held 41% of shares. Even such large holding kept them away from actual financial state of concern and they were devastated to know about the financial stress. The consumers had huge expectations from this company but it all get traumatized. The IT strategies of the entity became a blunder and destroyed the whole of company’s policies. Even the pricing policy wasn’t up to mark and that paved the way for losses (Jones, 2016).
As per the legitimacy theory every company which runs in a society must follow the norms set up by that society. Its activities need to be in par with the rules and regulations and are required to be legitimate in the eyes of public and law. Anything which is done at the cost of society is illegitimate and unaccepted. Companies must face legal troubles if they fell short of the expectations and perform underrated. If anything is done wrong proper disclosures are to be made and good is to be done as a cost. That’s were CORPORATE SOCIAL RESPONSIBILTY comes in frame (Clarke, and Dean, 2014). As per good Corporate Governance, the management has the responsibility to perform in the best interest of concern and are assumed to be leading in a good faith. The resources are to be utilised wisely and results are to be achieved. When the governing body of any entity start to involve in the unethical and unlawful activities, the company is on the verge of undergoing financial stress and the reputation of the business is even at stake. Sometimes everything fits perfect in the picture when it comes about financial strength of a business, but some illicit acts on part of employees, basically higher level of management ruins everything (Hasslinger, Olbrich, and Rapp, 2017).
Same was seen in the case of above mentioned companies. (Maloka, and Muthugulu-Ugoda, 2016). All three used to be financially strong in the beginning but as the profits started banging, greed lured, and ethics eroded. HIH Insurance’s former director Rodney Adler was criminally charged and imprisoned for, abusing customers by manipulating them to invest by providing false information knowing it to be false and acting dishonestly for selfish motives and personal gain. Many other top involvers in the company were accused for unethical practices and too were sentenced.
If the case of ABC Learning is observed, it was found that the governance was super liberated which costed the company’s existence. Profit greed went too high that subsidies were misused, labourers were underpaid, and quality was compromised. Even the motive of childcare was ignored when the children were found escaped. All this showed a poor governance (Marateo, 2017).
One.Tel was a serious IT collapse. No transparency was observed when even the 41% shareholders (News Corporation; Publishing & Broadcasting Limited) were found surprised and down casted by the deteriorating state of liquidation. Leave aside the shareholders, even the company’s co-chief executive, Jodee Rich lacked accountability and heard commenting that, everything always appeared fine in the business. The whole system of governance shook with this kind of functioning (Graham, 2014).
There is no vague statement if we sum up liquidation as a function of liabilities. The very concept of liquidation stresses upon the fact that, the entity is out of funds to discharge its creditors and pay off other liabilities and obligations which it had committed or is bound to bear. The whole scenario revolves around payment of liabilities. Inability to discharge liabilities tend to be CAUSE AND EFFECT of liquidation. If there were no liabilities, there would have been no obligation and hence there would be no need to sell the assets to make payments and ultimately there would be no closing or shutting of business i.e. no liquidation (Hart, 2016).
But exceptions are always there. There may be certain reasons too when a company is liquidated, where liabilities are not the reasons for the same (Schultz, 2016).
There might be a business that is set up for a purpose and that purpose is either attained or is no longer needed to be attained, then the business may be shut down or could be inferred that the time for which a business can continue operation has ended. Else there might be a situation that a company carries on a certain business and that business is no longer a legal or legitimate business, then too liquidation can take place. In a nutshell, liabilities are not a sole reason for liquidation.
Athanasiou, A. 2015. Informal liquidations. Taxation in Australia, 49(8), 486.
Clarke, F., and Dean, G. 2014. Corporate Collapse: Regulatory, Accounting and Ethical Failure. In Accounting and Regulation(pp. 9-29). Springer, New York, NY.
Graham, H., 2014. When the company causes harm: Effective corporate sentencing in a justice system based on individual fault.
Hart, P., 2016. Thomas Francis Long: a businessman who prospected at Te Aroha.
Hasslinger, M., Olbrich, M. and Rapp, D., 2017. Concerned about Going Concern: When do Entities in Liquidation have to be Considered a Non-Going Concern According to IFRS?. Financial reporting.
Jack, J., 2018. A Missing Variable: The Impact of Cross-Border Insolvency Laws on Foreign Direct Investment. Minn. J. Int'l L., 27, p.313.
Jones, S. 2016. A Cash Flow Based Model of Corporate Bankruptcy in Australia. Journal of Applied Management Accounting Research, 14(1), 23.
Maloka, T.C. and Muthugulu-Ugoda, S., 2016. The Deadlock Principle as a Ground for the Just and Equitable Winding Up of a Solvent Company: Thunder Cats Investments 92 (Pty) Ltd ν Nkonjane Economic Prospecting investment (Pty) Ltd 2014 5 SA 1 (SCA). PER: Potchefstroomse Elektroniese Regsblad, 19(1), pp.1-23.
Marateo, D., 2017. An Effective Priority for the Commissioner of Taxation in Liquidation: Bell Group NV (In Liq) v. Western Australia (2016) 331 ALR 408. Adel. L. Rev., 38, p.223.Schultz, A. (2016). Finding the Right Remedy in Minority Shareholder Oppression Law: A Transnational Analysis of Solutions in Closely Held Corporations. Transnat'l L. & Contemp. Pro
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