Why this matters now
New Zealand has been through a hard few years for business. Company liquidations in 2025 were the highest in roughly fifteen years, and Inland Revenue has become far more active in pursuing overdue tax through the courts. In that environment, more directors are asking the same question: what am I supposed to do when the company can’t pay everyone?
This guide gives a plain-English overview. It isn’t legal advice. If your company’s solvency is in question, a lawyer who works in this area is worth every dollar.
The duties that matter most under pressure
The Companies Act 1993 sets out several duties. These are the ones that come into sharp focus when money is tight.
Act in good faith and in the company’s best interests (section 131)
Directors must act in good faith and in what they believe to be the company’s best interests. As a company approaches insolvency, the courts have made clear that the interests of creditors become an important part of that assessment.
Don’t trade recklessly (section 135)
A director must not agree to, cause or allow the company’s business to be carried on in a way likely to create a substantial risk of serious loss to its creditors. This isn’t a ban on trading while things are hard. It’s about whether continuing to trade, in the way you’re doing it, is creating a substantial risk of serious loss.
Don’t take on obligations the company can’t meet (section 136)
A director must not agree to the company incurring an obligation unless they believe, on reasonable grounds, that the company will be able to perform it when required. Taking a deposit for work you can’t complete, or ordering stock you know you can’t pay for, are classic examples of where this bites.
Exercise care, diligence and skill (section 137)
Directors must exercise the care, diligence and skill that a reasonable director would in the same circumstances. That includes keeping informed about the company’s financial position.
The Mainzeal decision
In 2023 the Supreme Court decided Yan v Mainzeal Property and Construction Ltd (in liquidation), one of the most significant cases on directors’ duties in New Zealand. The court found the directors of the construction company had breached their duties by allowing it to keep trading while insolvent, relying on support from a parent group that wasn’t legally committed. The directors were held personally liable for substantial sums.
The broad lesson for small business directors: hoping things will improve isn’t a plan. Continuing to trade needs a reasonable, evidence-based basis.
What responsible action looks like
| Situation | Responsible response |
|---|---|
| Cash is tight but the business is viable | Build a cash flow forecast; deal with IRD and creditors early; consider funding |
| IRD arrears are growing | Engage with IRD; arrange instalments or pay out; keep current tax paid |
| A statutory demand arrives | Act within the deadlines; pay, settle or dispute properly |
| Losses continue every month with no fix | Take professional advice about formal options |
| You’re unsure whether the company is solvent | Get legal and accounting advice promptly |
Where funding fits
Borrowing isn’t automatically risky from a duties point of view. A loan on sensible terms that clears IRD and pressing creditors, where there’s a reasonable basis to believe the company can meet the new repayments, can reduce the risk to creditors rather than increase it. Creditors get paid, penalties stop, and the business trades on with one manageable obligation.
What matters is the basis for the decision. That’s why lenders, and your own records, should show:
- what the money pays for;
- a 13-week cash flow forecast showing the loan fits;
- a realistic exit, such as a bank refinance or sale.
Property-secured business loans through our lending partners range from $20,000 to $1m and can pay IRD and creditors directly at settlement. Unsecured options exist for businesses with steady turnover.
Signs you should get advice now
- You’re choosing each week which creditor to pay.
- IRD has issued a deduction notice or court papers.
- A statutory demand has been served.
- You’re taking deposits to pay for older jobs.
- Your accountant has used the word “insolvent”.
None of these means the business is finished. They mean decisions need to be deliberate and documented.
Personal exposure beyond the duties
Directors can also be exposed through personal guarantees, which survive liquidation. Our guide on how personal guarantees work explains more.
A last word
Most directors who get into difficulty are honest people doing their best. The law generally recognises that business involves risk. What it expects is that directors face the problem, take advice, and make reasonable decisions. If a funding plan is part of that, start an enquiry and a lending specialist will talk it through.