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

Cheng Yonghua kicked-off a new diplomatic mission to Tokyo this morning. The new Ambassador arrived on Sunday and will be busy from the beginning. Chinese Premier Wen Jiabao is planning on making an official state visit to Japan in the spring. The announcement of Cheng as Beijing's representative to Japan is expected, in some ways to bridge the divide between the two major economies of Asia.

Cheng is replacing previous Chinese Ambassador to Japan Cui Tiankai. Cheng is well versed in Japanese affairs, speaks the language fluently and has well-established business connections. He has spent nearly 15 years working for the diplomatic mission in Tokyo in the past. He was the deputy director-general of the department of Asian affairs at the Chinese Foreign Affairs Ministry and a Minister at the Embassy. His most recent posting was overseeing the Embassy in South Korea and prior to that was head of the Malaysian mission.

The appointment is being viewed as a step forward in relations with China and Japan, because Cheng is expected to build suitable relations with Hatoyama's government. The post-election statements made by the Japanese Prime Minister in the fall of 2009, signaled to Jiabao's Beijing, that the time was ripe to develop a closer relationship with Japan. As the two governments work towards common goals and move further from tense relationships of the past, they have to move with caution. The growing relationship with China will cause continued problems with Japanese- American relations.

As America continues to maintain a great interest in Japanese relations and views Japan as the cornerstone to American influence in the East Asia Pacific region, Japan is finding itself a popular piece of real estate. China is seeking to boost relations with Tokyo and America is seeking to maintain a historically close relationship. The move that Jiabao is sending to Hatoyama with the appointment of Cheng is that China got the message about increasing relations with Korea and China and that they are slowly implementing a program that will meet both countries stated objectives.

Is the current Japanese government ready to be an international player? Is a move towards increased relations with China the correct step for Japan at this point? Are Japan and China capable of working together in a meaningful and functional way, for the benefit of both?

Of course, these questions are yet to be answered. In regards to Hatoyama, and the current government's readiness to become a true international source of power, I think that the Japanese government is making the right initial steps, to make the nation a touch more dynamic and global. Japan cannot continue to ignore the realities of Asia and the accumulated power of Japan, Korea and China. The three, when working together on issues and counter-balancing each others independent power in favour of a consensus can accomplish great things in the region. As a condition to this, China is certainly going to have to put pressure on North Korea to give up ambitious weapons programs and to make steps in the direction of normalcy. Japan will have to open domestic markets and allow Korean and Chinese companies more inroads in Japan.

In regards to the question about the move towards a closer relationship with Tokyo and Beijing. The move is definitely coming at the right time. With the financial meltdown caused in large part by the sluggish American economy, the Japanese, and the rest of the world are second guessing American capitalism and the free flow of credit backed by international investors. The appointment of a Japanese- friendly Ambassador by China is a seemingly small step towards improving relations, but these seemingly small steps are starting to add up, and there is little doubt that relations between China and Japan are growing closer.

Yes, China and Japan are capable of working together. The Democratic Party of Japan has been welcoming the growing ties and the Chinese have a lot to gain by winning Japanese hearts and minds. As China grows closer to Japan over time, they will be increasingly seen as a legitimate power in global affairs and Asian affairs specifically. Japan has much to gain from balancing relationships with China and America, because being well placed in the middle of two giants has its advantages.

The appointment of Cheng as the representative of Beijing in Tokyo will be another positive step in the direction of Japanese-Chinese relations and the ultimate out-come of such moves will bring about a net benefit for both Japan and China.

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.

Police in Japan are remarkably reactive and don't spend much time or energy working on crime prevention. Besides stopping the occasional cyclist and verifying ownership of said bicycle, offering directions or taking a spin on their scooters, they remain very low-key, but they are a constant presence. The officers are largely relegated to their small community police boxes that are centrally located close to train stations all over the country. The policing approach has been one that is based on police officers maintaining a visible presence. “Patrols are the most important duty for community police officers in that the visible presence of police officers in their uniforms prevents crimes and gives community residents sense of security.” (1)

This type of policing is often a proactive approach, but the general disregard for blatant warning signs and growing unease has led to citizens in Japan, calling for an increased effort to stamp out the causes of crime.

The National Police Agency announced this week that they are enacting a set of regulations based on prevention of crime. The service is committing itself to the documentation of all tips, inquires and consultations. The move comes on the heals of public complaints over the way police officers handle tips from citizens. According to reports, the police had failed to follow-up on tips offered before crimes were committed.

“At present, some police officers do not leave documented records when people come in to report potential crimes, saying the reported incident didn't yet constitute a crime or that the matter was outside their jurisdiction.” (2)

This documentation initiative is a welcome step in community safety, and can only help one of the world's safest nations. If the strategy is adhered to and implemented effectively then the result will likely slightly lower an already low crime rate. It is a step in the right direction and should be followed with more moves towards an increased focus on crime prevention and a pro-active focus.

In many regards, the institution of policing in Japan is not focused on the study of criminology and addressing the underlying issues of crime. The nation is still under the guise of the evil foreigner committing all the crimes.

This is largely apparent in recent reporting on the hit-and-run case in Nagoya, involving suspects carrying Brazilian citizenship when headlines such as “3rd Brazilian arrested over fatal hit-and-run in Nagoya” and “Brazilian arrested over deadly hit-and-run in Nagoya,” (3) were splashed everywhere in the Japanese media. The fact that the suspects were Brazilian had little to do with the story, but soon became the central issue. Only the latest example, where crime perpetrated by foreign residents in Japan is held out as the norm and throughly reported by the Japanese media.

Until Japanese society can begin to wrap its collective head around the fact that Japanese citizens commit the majority of crimes and that foreign citizens commit, per capita less crime than the domestic population, there is no sense in studying crime prevention techniques. Occasionally a foreign citizen will be apprehended and convicted of a crime, allowing the domestic population to breathe easy; “Oh another foreigner convicted, the crime rate is rising due to their transgressions.”

Under the new system all interactions with officers will be documented, no matter how minor, and they will be passed on to the relevant section so that it can be handled in an appropriate manner. Police chiefs will be in charge of enforcing the new measure, and if Japanese bureaucratic systems are any example, the new regulations will be religiously followed in every regard. The fact that the National Police Agency is at least paying lip-service to the issue and making small steps in the right direction is to be commended.

(1) http://www.npa.go.jp/english/seisaku1/JapaneseCommunityPolice.pdf
(2) http://search.japantimes.co.jp/mail/nn20100219a2.html
(3) http://www.newsonjapan.com/html/newsdesk/article/79472.php
(4) http://www2.ttcn.ne.jp/honkawa/2788d.html