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Nova: Road to Destruction

JPN-Journal.com
October 28, 2007

In the autumn of 2004, executives of Nova Corp., Japan's largest English-language school chain, gathered at the company's general headquarters in a high-rise building near JR Namba Station, to hear Nova's cofounder and president, Nozomu Sahashi's strategy for overcoming the problems the company faced.

Sahashi is said to have told the executives, "We'll get through this crisis by rapidly increasing the number of schools." Within a year, the number of Nova schools rose from a little more than 600 nationwide to more than 900. But Nova still struggled financially and in March 2006 fell into a loss position for the first time since it went public.

Nova achieved its rapid growth due to its accounting practice: booking as sales 45 percent of the advance payments received from students for future lessons. Unlike the country's other five major language school chain operators, Nova failed to separate the deposited money from its own assets, and did not keep these advance payments separate in a financial institution. As a result, the company was essentially opening new schools on the basis of future revenues.

It should have been clear that if the number of new students signing up declined, the firm's financial situation would deteriorate rapidly. However, that did not deter Nova from pursuing its aggressive expansion plan.

Nova's dramatic growth soon became unsustainable and the company began to fall apart. Shortage of instructors made it extremely difficult for students to book lessons. Consumer consultation centers across the country received more and more complaints from Nova students about the language chain.

In the wake of rising consumer complaints, an investigation by the Ministry of Economy, Trade and Industry revealed Nova's violations of as many as 18 regulatory codes under the Specified Commercial Transaction Law, and on June 19, 2007, the ministry ordered the language chain to partially suspend its business.

The ministry imposed a six-month ban on new contracts of more than one year or more than 70 hours of lessons with customers. Investigations uncovered illegal businesses to be practiced by Nova Corp. as a whole and not by a few school chains.

In an effort to expand the number of its schools from the 900 some in June 2007 to 1,000, coupled with suffering two straight years of consolidated loss amounting to 2.4 billion yen, Nova engaged in aggressive and illegal sales tactics.


Shortages of English Instructors

The school lured students by distributing pamphlets advertising that students could book lessons at any time and at any Nova school, when in fact it was difficult to keep the promise due to shortages of teachers. To make up for the shortages, Nova was aggressive in hiring in time of need and then firing when overstaffed, lowering morals of teachers and compromising quality of lessons.

Teacher shortages stem from high turnover: Nova teachers are recruited overseas but only stick around for about eight months as they become tired of teaching under poor teaching standards.

On June 19, the same day as the Ministry of Economy, Trade and Industry's imposition of a six-month ban on new contracts, instructors and employees in Nova's Tokyo offices criticized the company of its poor working conditions and demanded to provide better working conditions.

For over three years Nova's labor union has been fighting to secure a stable working environment where instructors can contract for indefinite or long-term employment periods instead of the custom annual renewals, and to allow instructors to enroll in health insurance and pension programs.

According to the union, negotiations began in 2004, right about the time when Nova began its dramatic expansion plan. However, when talks hit dead-ends in the following year, the union began organizing strikes and protests. In 2006, the case was brought to the Tokyo Labor Relations Board by the union.


Illegal Sales Tactics

Nova also ran ads stating that the admission fee was exempted "only for now" when the fee had always been exempted. When students canceled contracts, Nova refunded smaller than promised amounts or deducted an amount equivalent to the admission fee, despite the fact that the fee had been exempted.

Further, Nova misled some students to believe that their contract "cooling-off" period, a period during which contracts may be cancelled by the consumer without penalty, had expired and prevented them from canceling their contracts. Nova headquarters distributed manuals on how to deal with complaints regarding contracts to Nova offices across the country. These manuals instructed illegal ways of dealing with such complaints.


Missed Salary Payments

Speculations about Nova's ability to continue as a going concern rose when it failed to make salary payments at the end of July and signs that the language chain was strapped for cash surfaced.


Quarterly Sales Plunge

On Aug 24, 2007, Nova reported its sales for the April-June period plunged 31.9 percent to 9.3 billion yen, reflecting the difficulty the troubled firm was experiencing in luring new students after the firm's image took a beating in June when the Ministry of Economy, Trade and Industry imposed a partial suspension of business for lying about its services and cancellation policy when soliciting prospective students.

Initially scheduled for Aug. 10, Nova announced that the release of Nova's financial report for the three months to June was postponed to Aug. 24 because more time was needed to calculate how much had to be set aside to pay refunds for cancellations. In the financial statement, the company said it set aside 1.6 billion yen.


Branch Closures

On Sept. 20, sources close to the language chain revealed Nova's plans to close at least 200 of its 900 or so schools by the end of September to turn around its struggling operations. Some of the 200 branches were closed for failure to pay rent. Nova had already closed 12 school branches since March.

Defaults on rent payments, in addition to employee salary payments, raised further suspicion on Nova's liquidity.


Class Suit over Refund

On September 26, four former students of Nova filed a group suit with the district court in Kyoto seeking the return of 2.45 million yen in prepaid tuition for unattended classes.

When the plaintiffs asked Nova to cancel their contracts after August 2006, the language school either made no refund or did not refund in full amount. The plaintiffs claimed that Nova's refund policy violates the law governing specified commercial transactions. It was the first group suit filed regarding the company's refund rules. Another group of 10 former students also filed a suit with the court the same day for swift repayment of 4.1 million yen.


Defaults on Salary Payments Continue

Numerous complaints by Nova employees across the nation were filed with labor inspection offices around the nation. In the wake of the event, the Osaka Central Labor Standards Inspection Office with jurisdiction over Osaka-based Nova, instructed, in accordance with the Labor Standards Law, the English-conversation school several times after the end of July - when the firm's salary payment delays first began - to pay its workers.

However, many employees remained unpaid. Nova delayed July and August salary payments to about 2,000 Japanese employees for several days. Salaries for 5,000 foreign teachers, which were supposed to have been paid on Sep. 14, were also delayed, and some teachers had not been paid their salaries as of end of September.


Bankruptcy

Nova's three board members, excluding cofounder Nozomu Sahashi, decided at an extraordinary meeting on the night of October 26 to dismiss Sahashi, as president and to seek bankruptcy protection under the Corporate Rehabilitation Law and suspended the operation of all its schools to avoid confusion and protect its assets from creditors.

Under the Corporate Rehabilitation Law, repayment of prepaid tuition is ranked below payment of unpaid salary and loans from financial institutions. Therefore, many former students may not be fully reimbursed.


Nova was cofounded in 1981 in Shinsaibashi, Osaka, by Sahashi and his two non-Japanese business partners. Nova succeeded in drastically boosting the number of its schools by promoting itself through TV commercials that emphasized its schools' convenient locations close to stations, and its corporate mascot Nova Usagi (Nova rabbit).

In 1996, Nova was listed on what is now the Jasdaq Securities Exchange. In 2005, Nova boasted 977 schools and about 500,000 students nationwide, accounting for about 50 percent of the English-language school market in the country.