Phoenix Company Investigations

We were recently engaged by the liquidators of a security company to determine the value of goodwill transferred to a phoenix company.

What Is a Phoenix Company?

A phoenix company arises when the assets or operations of a failed company are transferred to a new entity, leaving behind debts owed to unsecured creditors, commonly including the Australian Taxation Office (ATO) and employees. While sometimes legally structured, phoenix activity can cross into illegal territory if designed to avoid liabilities.

This practice is especially common in industries such as construction and labour-hire services, where businesses can quickly recommence trading under a new name. Often, the new entity uses the same staff, premises, and customer base, while unsecured creditors, typically contractors and small suppliers, are left unpaid.

Challenges in Valuing a Phoenix Business

One consistent feature in phoenix company scenarios is the absence of complete or reliable financial records. Directors may not maintain proper accounts, or records may be intentionally obscured. In these cases, establishing the value of transferred business assets, particularly intangible assets like goodwill, requires forensic expertise.

Reconstructing Profitability from Sparse Records

Despite the limited information available, we were able to reconstruct a clear view of the company’s profitability. The business in question provided contracted security guards to licensed premises, such as hotels and clubs. The company charged clients on an hourly basis for guard services.

We analysed a short period of sales invoices and matched them to employee wage records. This allowed us to estimate gross profit margins based on the difference between invoiced income and payroll costs.

Using Industry Data to Confirm Profitability

We combined this analysis with external benchmarks and our forensic accounting experience in the security industry. This included typical cost structures, such as licensing, insurances, admin, supervision, and overheads, which allowed us to determine that the business was operating profitably.

Even with only a partial financial snapshot, we concluded that a significant intangible asset, namely, goodwill, had been transferred to the new company without fair market consideration.

Why This Matters

Valuations in phoenix company investigations are not just about numbers, they support legal action by liquidators, aid creditors in understanding their losses, and hold directors accountable when business failures are engineered.

At Dolman Bateman, we specialise in uncovering value where others see only incomplete records. Our forensic accounting team can assist in reconstructing earnings and identifying asset transfers in complex liquidation matters.

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Disclaimer:

The information provided in this article is general in nature and does not constitute personal financial, legal or tax advice. While every effort has been made to ensure the accuracy of this content at the time of publication, tax laws and regulations may change, and individual circumstances vary. Dolman Bateman accepts no responsibility or liability for any loss or damage incurred as a result of acting on or relying upon any of the information contained herein. You should seek professional advice tailored to your specific situation before making any financial or tax decision.