Let's Japan.org Debunking Eikaiwa and Ramblings in Japan

Thanks to a kind reader, I received a copy of Ernst & Young's report to creditors on the closure of GEOS Melbourne. Many comments have been made about how GEOS siphoned its Australia schools dry, and the report offers an explanation as to how that happened. I've summarized key parts of the report to illustrate why GEOS Melbourne suddenly went into voluntary administration.

First, let's deal with the question about ownership of the GEOS Australia schools. When GEOS Japan issued its "apology" in February, it tried to downplay the affair by saying that the schools were locally incorporated businesses, that the decision to close was made locally, and that none of this affected GEOS Japan. The first two reasons may technically be true, but when it comes to that last one, the Ernst & Young report leaves you wondering how the closure of GEOS Melbourne and all of the other GEOS schools in Australia can't have anything but a negative effect on GEOS Japan. As of February, 23, 2010, the date of the report, Appendix A on page 30 carries this organization chart (click for larger image):

The GEOS Australia schools may be locally incorporated, but they are be 100% owned by GEOS Japan. Furthermore, the report states that as of October 15, 1996, Tsuneo Kusunoki was one of GEOS Melbourne's directors and that:

GEOS Melbourne is a 100% owned by GEOS Corporation (Japan). GEOS Corporation owns all 100,000 fully paid $1 shares in the Company (p.6).

The sudden closure of the school is curious given its recent performance. The table shows that the school's revenues had been increasing since FY07 (p.6).

The report notes:

GEOS Melbourne has been operating profitably for the previous two financial years (FY07 and FY09) as well as for the 6 months to 31 December 2009. Steady growth in profits has been seen due to growth in revenue coupled with a decrease in marketing, teaching and administration expenses as a percentage of revenue. (p.7)

Melbourne was profitable for the past two and a half years right up until its closure. Here's GEOS Melbourne's balance sheet.

Of concern here are the Receivables - Loan GEOS Australia Holdings and Receivables- Loan related entities under Non-current assets, and Dividends Paid under Equity. It is the loans to GEOS Australia Holdings which are at the heart of why the school closed.

Receivables - Loan GEOS Australia Holdings

The Victorian Regulation and Qualification Authority (VQRA) stopped the Melbourne school from accepting new enrollments in December 2009 after investigating an accounting report prepared for it by GEOS Melbourne. The departure of senior management personnel and the change in student enrollment hurt the school's revenues in the first half of FY10. The report goes on to say:

During the same period, a umber of other entities in the GEOS Australia Group were experiencing financial difficulties. This led to the directors to begin to understand that the ability of all companies in the Group to repay outstanding intercompany loans may be compromised. Without the repayment of these loans, the Company could not cover future obligation. It was on this basis that the directors appointed the Administrators.

The majority of excess cash generated from the operations of GEOS Melbourne appears to have been used in one of three ways, payment of dividends, loans to related entities and retained in GEOS Melbourne's bank account (p.10).

This table shows that much of the money went to other GEOS-related entities (p.10).

The Ernst & Young report concludes:

The ability of the related parties to re-pay the loan amounts outstanding was crucial to the ability of GEOS Melbourne to continue to trade. Without the repayment of the above loan, or the ability to raise cash from other sources, GEOS Melbourne did not have sufficient funds to continue operations (p.11).

The dividends of $633,755 and $1 million were paid by Melbourne GEOS to GEOS Japan (p.10). They were not cash payments, but a reduction in the balance of the GEOS Australia Holdings loan (p.11).

Receivables - Loan related entities

As for money that went elsewhere within GEOS, the report lists the following amounts (p.13):

The Administrator's comment on the money:

On 4 February 2010 the Administrators issued a demand on GEOS Australia Holdings in relation to the debt payable to Melbourne. Given that GEOS Australia Holdings did not operate in its own capacity other than to act as a holding company for other members of the GEOS Australia group, the Administrators questioned the ability of GEOS Australia Holdings to repay the outstanding amounts. Further, it is also the Administrator's understanding that a large amount of the funds provided to GEOS Australia Holdings were further lent to other GEOS entities globally and as such may not be readily available for repayment.

A similar situation exists for the amount outstanding from GEOS Cairns Pty Ltd (administrators appointed). The Administrators were also appointed to this company on 29 January 2010.

As such, the Administrators have estimated the realizable value of these assets as nil (p.13).

According to the Administrators, a school that was profitable for the past two and half years was making loans to a GEOS holding company with no prospect of those loans ever being repaid. The money is gone, funneled back to Japan and to other parts of GEOS.

Another interesting tidbit in the report is that upon taking over GEOS Melbourne, the Administrators met with representatives of GEOS Japan and related entities in Australia to discuss whether money would be made available to the Administrators so they could reopen the school. GEOS Japan gave them no money. The Administrators were forced to announce the closure of GEOS Melbourne to staff and students on February 1. For whatever reason, GEOS Japan chose to not bail out a profitable school.

Investigations

Apart from trying to rehabilitate GEOS Melbourne, the Administrators also investigated the school's business to understand the circumstances of its failure and form an opinion as to how it would act in the interests of GEOS Melbourne's creditors. Under the Corporations Act, the Administrators identified seven offenses that warranted further investigation.

1. Failure to exercise reasonable degree of care and diligence
2. Failure to act in good faith
3. Making improper use of position to gain advantage
4. Making improper use of information to gain advantage
5. Reckless or intentional dishonesty in failing to exercise duties in good faith
6. Failure of director to disclose interest in contract with company
7. Being a director at the time when an insolvent company incurs a debt and there are reasonable grounds for suspecting the company to be insolvent. (p.18)

In examining the actions of the directors, the Administrators believe making loans to GEOS Australia Holdings to be a breach of good faith as GEOS Australia Holdings had no means to repay those loans (p.19). Those loans left GEOS Melbourne with insufficient funds to operate.

The Administrators identify $2,273,975 in uncommerical transactions, transactions that have no benefit or are detrimental to the company. Of that amount, $725,521 went to GEOS Australia Holdings and $1,144,500 to GEOS Japan, with the remainder going to other GEOS entities ($220,000) and a $1 million dividend. Here's a breakdown (p.21-22):

The Administrators concluded that GEOS Melbourne received no benefit from these transactions and that the loans left the school with no money to continue operations (p.22).

On the other hand, the Administrators found that GEOS Australia Holdings did benefit from the loans and may have become insolvent had it not received the money since it had no other means of generating income. The Administrators still do not understand the purpose of the loans but believe that "…in the past 18 months, approximately $1.36m was made available for the purposes of transfer from GEOS Australia Holdings to GEOS Corporation (Japan) or other GEOS entities (p.23)." Unfortunately, the Administrators feel that recovering the money from GEOS Japan is unlikely due to the cost involved, but think that going after the related companies may be worthwhile. However, without funding from creditors it doesn't appear that the money will ever be recovered.

Unreasonable director-related transactions (UDRT)

The report notes that some transactions between with GEOS Australia Holdings may be UDRTs as the directors of GEOS Melbourne are also directors of GEOS Australia Holdings, and one director of GEOS Melbourne is director and chairman of GEOS Japan (p.23).

Insolvent trading

The Administrators ask two questions:

• How likely were the loans made to GEOS Australia Holdings to be paid back?
• Is it reasonable to assume that GEOS Australia Holdings was insolvent? (p.24)

This matters because GEOS Australia Holdings' net assets over the past three years was negative. If it was trading while insolvent, the actual date the loans was considered unrecoverable needs to be determined in order to take action against the directors (p.25).

However, the directors did place GEOS Melbourne into voluntary administration when they were aware that the money from GEOS Australia Holdings would not be recovered, so they may have a valid defense against any recovery action. Although it appears that GEOS Australia Holdings was insolvent for some time, further investigation is required to determine the point it became insolvent .

The dividend

As already noted, a dividend of $1 million was paid to GEOS Melbourne's shareholder, GEOS Japan in the form of a reduction of the outstanding loan from GEOS Australia Holdings (p.25). Since no cash was involved, there is nothing to be recovered. The Administrators also note that by law, dividends may only be paid out of profits and that statutory and common law principles have to be applied in assessing whether or not the dividend complied with the law.

Recommendations

The Administrators are of the opinion that their appointment should be terminated, that GEOS Melbourne is insolvent, and that it should be wound up by the Court. They recommend that it is in the interest of creditors to place GEOS Melbourne into liquidation (p.26). However, as of this report, the Administrators believe that there will be insufficient funds to pay any unsecured creditors (p.27).

That's the bulk of the report. The money funneled off the Japan will likely never be seen again and GEOS Melbourne doesn't have any assets of value with which to pay off any creditors.

A few readers asked for a separate thread for discussion about GEOS Oceania given recent developments. Good idea. Use this thread for discussing GEOS Oceania.

If you haven't heard by now, the Immigration Bureau has officially deleted Guideline 8 and replaced it with:

"In order to promote signing up for social insurance, we will ask (foreign residents) to present their health insurance card starting April 1. We will not reject renewal or change of visa status for failing to present the card."

In other words, if you aren't enrolled in shakai hoken or kokumin kenko hoken when you go to renew your visa this year, your application will not be refused nor will they try and boot you out of the country.

The headline to The Japan Times article--Foreigners get nod to skip social insurance-- is misleading because the deletion of Guideline 8 has nothing to do with being able to opt out of social insurance. While the Free Choice Foundation is celebrating this as a victory, the law of land still obligates you to enroll in a national health insurance plan. While you'll get your visa, Immigration is still going to ask to see your health insurance card anyway.

For more, Hoofin has been all over this issue (and Ronald Kessler's case) and his latest is worth a read.

The Fukuoka General Union has a long read titled The ALT Scam that points out the problems with BOEs outsourcing ALT jobs.

The main points are:

1. ALT jobs have been deemed a "service" so local governments can save money and avoid the management of foreign employees.
2. It is illegal for sub-contracted ALT teachers to work at public schools
3. ALTs/Dispatch companies don't know if they will get the next job/contract
4. Most ALT jobs advertised will not eventuate because they do not exsist and nobody knows if they will eventuate
5. Dispatch companies take big margins and the more they squeeze the ALT the more profit they make
6. Sub-contract ALTs are in reality double taxed losing 5% to consumption tax
7. Dispatch companies make profits from not enrolling ALTs in SH
8. A sub-contract ALT has practically no recourse if the school deems them sub-standard
9. BOEs ignore the Ministry of Education directive to employ ALTs directly
10. The BOE has no way of knowing if the dispatch company is breaking labour laws

Get a cup of your favorite beverage and read it all...

h/t Mogura

Since there are more than 300 comments in the GEOS Rumours thread, I've decided to close the thread and start a fresh one here.

This is going to leave a mark:

China's Education Ministry on Sunday warned students considering studying overseas against Australian schools run by the GEOS group after more than 40 Chinese students were left stranded with the group's collapse.

More than 2,300 students in GEOS group schools across Australia were affected after the college closures. The schools were scattered across Sydney, Melbourne, Brisbane, Perth and Cairns.

GEOS is a Japanese company which owns hundreds of colleges around the world. The GEOS group has run out of money for its Australian colleges,according to Australian media reports.

Chinese embassies and consulates in Australia are negotiating with local authorities to settle the issue to safeguard students' legitimate rights.

The Education Ministry has drawn up a recommendation list of nearly 15,000 schools in 33 countries worldwide on its website. The recommended schools are relatively trustworthy and reliable.

Australia has been a preferred destination for overseas education for Indian and Chinese students.

The Australian Bureau of Statistics said the number of Chinese student enrollments was 146,000 by June 2009, up an average annual 16 percent over the past six years.

Remember, Kusunoki has told us that everything is just fine with GEOS.

Forget about the popularity of eikaiwa online, it's iPods for everyone!

An elementary school in Wakayama has recently had an open English-language lesson using iPod Touch, with students watching video images of a native speaker on the small display of the digital handset.

The city plans to distribute 850 of the gadgets to local schools by mid-March, as part of projects backed by the Internal Affairs and Communications Ministry.

During the English lesson at Isao Elementary School on Wednesday, an American teacher shown on the touch-screen urged students to repeat useful phrases.

Because talking to a real live person would be a waste of perfectly good technology.

It took the Consumer Affairs Agency long enough. From the Yomiuri Shimbun:

The Consumer Affairs Agency and the Tokyo metropolitan government on Thursday ordered a Tokyo-based English-language conversation school chain operator to suspend operations due to its coercive method of selling its services to university students and others.

Fortress Japan talked customers into signing contracts for the purchase of English-learning programs, often telling students, "You'll never be able to find work with your current English-language abilities."

The authorities issued the order based on the Specified Commercial Transactions Law.

A consumer organization certified by the prime minister filed a lawsuit last year arguing that Fortress Japan's way of soliciting customers was against the law. Last March, the plaintiff and the company reached the first settlement of its kind in the nation.

There are seven consumer organizations across the nation certified by the prime minister to file lawsuits against companies over aggressive sales schemes. The certifications were introduced to discourage dubious or illegal sales schemes before damages proliferate.

But the authorities said Fortress Japan continued to use unlawful sales practices after the settlement, leading to the stricter punishment by the agency.

According to the news brief released by the Consumer Affairs Agency [PDF], Fortress Japan has been ordered to cease operations for 6 months from February 19 until August 18. During that time, they are not allowed to solicit new contracts, accept applications for lessons, or conclude any contracts.

I previously wrote about Fortress Japan breaking its promise not to be evil, but they just couldn't help themselves. The article offers this example:

Last April, a man in the Kansai region who was then a third-year university student was approached by a female employee of Fortress Japan in front of his university campus. She asked him to fill out a simple survey about English conversation and job-hunting activities.

He wrote his name and phone number on the sheet, and was frequently called about attending an introduction meeting.

He finally agreed to attend a meeting, but ended up being confined in a small room together with a male employee of the company for three hours and was cajoled into signing a contract for lessons.

When the student tried to refuse, the employee looked down at him and demanded he sign the contract, telling him, "You'll never survive in the business world with such a carefree attitude."

Unbelievable. While it's good that the Consumer Affairs Agency put an end to Fortress Japan, consumers need to wise up and grow a backbone.

As scheduled, GEOS announced the measures it will take for its students affected by the closure of the schools in Australia: free English lessons.

More specifically, if you had a contract with GEOS Australia slated to start from February 2, 2010 or had made an application before January 29, GEOS will offer you 6 months of "Active lessons" at at any GEOS school in Japan at no charge. Students wishing to accept the offer have to provide GEOS with their details no later than December 29, 2010.

What a joke. Why would an international student go to Japan to to study English for 6 months? The offer only makes sense if you're Japanese. If you happen to be Vladimir Anelekov from Russia, Marcio Alves from Brazil, Pascal Fux from Switzerland, Mario Galindo from Colombia, or Filippo Zilio from Italy, you'd have to be insane to go to a non-English-speaking country to study English.

When Kusunoki says 6 months of free lessons, he means just the lessons. You can bet that any non-Japanese student interested in the lessons will have to arrange visas and accommodations on their own. You can also bet that Kusunoki is counting on a large portion of the students not taking up GEOS's offer.

The bare minimum from GEOS would have been a refund of unused tuition and a profound apology. But since Kusunoki has stated that the Australia schools weren't really part of GEOS he doesn't have to. The money siphoned from them is probably gone, too. Instead, students who traveled from around to world to Australia only to find their schools shut down receive a terse one-page memo (in Japanese no less!) posted on the GEOS website.

What an insult.

UPDATE I: Willy Wanka in comments nails it:

Haha, active lessons are the cheapest that Geos has. Up to 8 students per class. Another head costs them zero... the teacher is already there, classmates are already there, before they start they'll probably have to drop 10,000 on textbook set, and by the end of it all, they'll probably get hit up by the manager to "renew" the active contract.

GEOS's announcement of free lessons is worse than a half measure: It costs them nothing while it will cost any non-Japanese student taking up GEOS's offer everything. They will have to pay for their flight to Japan, arrange a visa and accommodations on their own, and probably have to find a part-time job, too. Since these students probably don't speak Japanese and their visas may not allow it, finding a job will be difficult if not impossible. Moreover, why would they want to work in a job that will require them to interact in Japanese? It's also not clear how many hours a week they will be studying. One or two classes a week will do nothing to improve their language skills. GEOS's offer is really no offer at all. At best, it's a way for GEOS to look like it's acting in good faith when it really isn't.

Part II of my interview on My TEFL Journey.

Where do you see the English teaching industry in Japan heading?

I think it will continue to contract largely because the aftershock of Nova’s collapse still resonates with consumers. A lot of schools still don’t seem to have learned from the lessons of Nova and continue to abuse and rip-off their customers. Students, on the other hand, are voting with their feet and seeking out other venues such as Skype-based lessons, which are incredibly cheap.

There’s also Japan’s rapidly graying population to consider. The market for students is shrinking. All of this is putting downward pressure on the job itself. Salaries may remain depressed, but eikaiwa will trundle on with a steady supply of instructors willing to work for low pay thanks to the popularity of cosplay, manga, and anime abroad. That said, it would not surprise me if one of the large eikiwas failed in the near future.