By now, most accountants are likely to have heard about, and perhaps have some familiarity with, the new “safe harbour” laws. But for those accountants who still feel unsure about their knowledge of these new provisions, the following article will help you get your head around what safe harbour means for your accounting practice.
How safe harbour fits into the existing law
At law, a company is insolvent at the time that it becomes unable to pay its debts as and when they fall due. The law gives some allowance for a short term as opposed to endemic cashflow deficiency, but for the most part a company that is unable to pay trade creditors, employees, financiers or to service other regular cash liabilities as and when they fall due should come onto an accountant’s radar as being potentially insolvent.
While the current law relating to the basis on which a liquidator may make a claim against a director for insolvent trading has not changed, the safe harbour reforms introduce a new defence that may be available to a director who – broadly speaking - continues to trade a company while it is insolvent but who does so while undertaking a reasonably informed and appropriate restructure. It is important to note that it does not matter whether the proposed restructure actually works in the end. Instead, what matters is that in the circumstances that existed at the time, the turnaround strategy was a reasonable one.
The laws have been brought in primarily to encourage a better business culture of turnaround innovation and pre-insolvency intervention into companies in distress.
What safe harbour is
To successfully rely on the safe harbour defence, a director must demonstrate that the turnaround strategy the company was undertaking while it was trading insolvently was reasonably likely to lead to a better outcome to creditors than the immediate appointment of an external administrator. Clearly, the question of whether a turnaround strategy was reasonable in this context may be complex because one would need to consider various matters in assessing various possible scenarios. For example, the question requires one to give thought to what current and future liabilities could have been stemmed by the moratorium on claims that voluntary administration and liquidation affords a company, and to compare this with the expected fruits of the proposed turnaround strategy? Because of the complexity of such issues, any director wishing to ‘enter’ safe harbour should get legal and financial advice at the earliest opportunity once insolvency is suspected.
It is also worth noting that some insurers may now refuse to grant indemnity under Director and Officer policies if a director could have taken steps to ‘enter’ safe harbour so as to mitigate the otherwise insurable loss, but did not.
What accountants need to know and do
Since accountants are generally there throughout the life of a company, are privy to its financials, and have the benefit of seeing trends in the company’s financial cycles, accountants are well placed to assist with early intervention into companies that are or may soon become insolvent. By accountants taking a proactive role in this way, their client directors could greatly benefit from the protection of safe harbour.
However, a professional advisor who is ‘well placed’ to do something, is naturally at risk of – in some circumstances - being obliged to do something (that is, in the sense of having a duty of care). As accountants, it is a good idea to consider:
- Identifying the risk of ‘inadvertently’ giving safe harbour advice. This could occur even though a director may not be using those words and you may never expressly agree to give ‘Safe Harbour’ advice. It is conceivable that a director may, some years later, claim that you dispensed safe harbour advice, when that’s not what you intended to be doing.
- Reviewing your current procedures. Consider the wording of your retainers to tackle the above risk head-on, and consider how your staff training can help your staff to identify these risks. Talk to a lawyer about reviewing your retainers and current staff training procedures.
- Flagging and referring when it is appropriate to do so. If you suspect that a client director/s may be trading an insolvent company, flag to him/her that safe harbour may be available to them and refer them to an appropriately qualified professional (such as an insolvency practitioner or lawyer).
- Making a call to a lawyer if you are unsure. If you think your client company’s director is at risk of being held liable for insolvent trading, and you want to know your risks as a practitioner, talk to a lawyer.
For further advice or assistance, please contact Bonnie Scovell.