The Accountant’s guide to advising clients on Safe Harbour

If a client’s business is experiencing financial difficulties, your job, as their accountant, is to go over the books and work out just how bad the situation is.

If it’s a short-term cash flow problem, you can start looking at alternative sources of funding. If it’s a deeper underlying issue, it’s time to refer them to a turnaround and insolvency expert who can further assess the situation and advise on the best course of action.

If saving the business is possible, your client can now take advantage of Safe Harbour. Here we outline what this involves and when and how it can help them.

Removing civil liability

In the past, companies facing insolvency often opted to put themselves into voluntary administration or liquidation. If they didn’t, directors risked facing civil penalties for insolvent trading, as well as compensation and criminal charges under the Corporations Act 2001.

Today, thanks to the introduction of the Safe Harbour bill in September last year – new section 588GA of the Act – liquidators are prevented from taking civil action against directors for as long as they are taking reasonable actions to turn things around.

Importantly, claims for personal guarantee debts, breaches of directors’ duties or criminal liability for insolvent trading can still be brought against them.

Entering safe harbour 

If turnaround for your client is possible, recommending they take advantage of the safe harbour is good advice. By doing so, they give themselves the space to take positive actions to improve their financial status, without fear of being personally pursued.

In order to benefit from the safe harbour, your client should take the following steps to ensure they are protected and to help their business return to profitability:

  • Get their accounts and records in order: This includes understanding where their debts are and how much debt they owe, as well as fulfilling legal obligations including tax and employee entitlements including super.
  • Seek expert advice: It’s recommended they appoint an appropriately qualified (ARITA) turnaround and insolvency expert to ensure they aren’t denied safe harbour protection.
  • Gauge financial feasibility: This means carefully assessing whether the options available to them for turnaround are ‘reasonably likely to lead to a better outcome for the company’ than voluntary administration or liquidation.
  • Develop a turnaround plan: This must be properly documented, though it needn’t be complex. This plan should not only serve as a useful checklist, but it can also show a future liquidator that sound intent was there if things do go south.

It’s crucial to make your client aware that the safe harbour only extends to debts incurred directly or indirectly to this plan, or its development.

Staying protected

While there is no set duration for how long a company can stay in the safe harbour, you should advise your client they will lose protection if:

  • They fail to implement the course of action developed in order to enter safe harbour
  • They cease implementing the specified course of action
  • The course of action ceases to lead to a better outcome
  • They fail to pay employee entitlements (eg. super) or fulfil their tax obligations (eg. lodge their tax returns and BAS).

Leaving safe harbour  

Best case scenario, safe harbour will end as a result of your client’s business regaining solvency.

Worst case, the company hits insolvency despite all efforts being made to turn things around. If this happens, a formal insolvency appointment – either voluntary administration or liquidation – is likely to be unavoidable.

At this point, your client’s turnaround expert cannot be engaged to help with the insolvency appointment. Instead, an independent registered liquidator must be brought in.

Safe to fail or succeed

Safe harbour is not a ‘fail safe’ for businesses to avoid insolvency. However, it provides them protection from civil liability while they work with their accountant and turnaround expert to turn the business around. It lets them take the kind of restructuring risks that will hopefully get them back on track.

To learn more about the Safe Harbour legislation, or to discuss our business turnaround and insolvency services, please contact us today. Also, for information about other legislative reforms and how they might impact you or your clients please read our blog articles.