One of the most powerful features of operating through a company is limited liability — the idea that you, as a director or shareholder, are not personally responsible for the company’s debts. But that protection is not absolute. Under New Zealand law, there are specific circumstances where the corporate veil lifts and directors can be held personally liable.
If your business is in financial difficulty, understanding when your personal liability begins is not optional — it is essential. The decisions you make in the next days or weeks can be the difference between walking away clean and facing personal claims that follow you for years.
The Starting Point: Limited Liability and Its Limits
When you incorporate a company in New Zealand, the company becomes a separate legal entity. In normal circumstances, it can incur debts and obligations in its own name, and you as a director are not personally responsible for them.
But New Zealand’s Companies Act 1993 contains a range of provisions that create personal liability for directors who breach their duties — particularly when a company is in financial distress. These are not obscure legal technicalities. They are actively enforced, and liquidators are required to investigate director conduct as part of every insolvency appointment.
When Can Directors Be Held Personally Liable?
1. Reckless trading
Under section 135 of the Companies Act 1993, directors must not agree to, cause or allow the company to carry on business in a manner that creates a substantial risk of serious loss to creditors.
In plain terms: if you continue trading when you knew (or should have known) the company could not pay its debts, and that trading causes loss to creditors, you can be held personally liable for those losses. This is one of the most common grounds on which liquidators pursue directors.
2. Incurring obligations the company cannot perform
Section 136 of the Companies Act 1993 provides that a director must not agree to the company incurring an obligation unless the director believes on reasonable grounds that the company will be able to perform the obligation when required.
If your company is already under financial pressure and you are signing new contracts, taking on new credit, or incurring further PAYE or GST obligations you know the business cannot meet — this provision is highly relevant to you.
3. Failing to keep proper accounting records
Directors have an obligation to ensure the company maintains proper accounting records. If a company goes into liquidation and adequate records do not exist, the liquidator can apply to the court to hold directors personally liable for the company’s debts. This is a strict liability provision — intent is not required.
4. Fraudulent trading
If a director has been knowingly party to the company’s business being carried on with intent to defraud creditors, they can face both civil liability and criminal prosecution. This is a high bar — but it is pursued in serious cases.
5. Insolvent transactions that are clawed back
A liquidator has the power to set aside transactions made when the company was insolvent — including payments to creditors (including related parties), asset transfers, and security interests granted in the two years before liquidation. If assets or money were moved out of the company in a way that preferred certain creditors over others, those transactions can be reversed.
Directors who arranged or benefited from such transactions may face personal claims.
6. Personal guarantees
Many directors sign personal guarantees for company debt — to a bank, a landlord, a major supplier, or a finance company. These are separate from the Companies Act provisions above. If you have signed a guarantee, that debt is already personal. A company liquidation does not extinguish your guarantee obligations.
The Critical Moment: When Does Your Duty to Creditors Begin?
Directors always owe duties to the company. But when a company is insolvent — or near insolvency — those duties expand to include the interests of creditors as a whole.
The trigger is not a formal legal event. It is the point at which the company cannot pay its debts as they fall due, or its liabilities exceed its assets. If you are at that point — or close to it — your obligations as a director have already shifted.
The most common mistake directors make is continuing to operate as normal while insolvency is already present. Every debt incurred after that point is potentially a personal liability.
What Should You Do If You Are Concerned About Personal Liability?
The single most important thing you can do is seek advice early. The earlier you act, the more options you have — and the better protected you are.
Specifically:
- Get a clear picture of your company’s financial position — assets, liabilities, cash flow, and whether you can pay debts as they fall due.
- Stop incurring new obligations the company cannot meet.
- Document your decision-making — directors who can show they took reasonable steps and sought advice are in a much better position than those who ignored the warning signs.
- Understand your options — whether that is a payment arrangement with IRD, a restructuring, voluntary administration, or an orderly voluntary liquidation.
- Do not transfer assets out of the company or pay related parties ahead of other creditors without specialist advice.
Frequently Asked Questions
I’ve been told the company is protected by limited liability — does that not apply?
Limited liability protects you from being automatically responsible for company debts simply because you are a director or shareholder. It does not protect you from personal liability arising from breach of your director duties. If you have breached sections 135 or 136 of the Companies Act, or if you have signed personal guarantees, limited liability does not help you.
Can IRD pursue me personally for unpaid PAYE?
In certain circumstances, yes. IRD has specific powers to pursue directors personally for unpaid PAYE — particularly if the company has failed to make deductions from employees’ wages and remit them to IRD. This is separate from the Companies Act provisions and is a significant personal exposure for directors of companies with PAYE arrears.
Will a liquidator automatically look at director conduct?
Yes. Every liquidator appointed in New Zealand is required to investigate the company’s affairs and report on any potential claims against directors. This is not discretionary. If there are grounds for a claim — reckless trading, insolvent transactions, failure to keep records — a liquidator is obligated to pursue them or refer them to the appropriate authority.
I want to wind up the company voluntarily — does that protect me?
A voluntary liquidation, initiated by shareholders before creditors force the issue, can significantly improve your position. You choose the liquidator, the process is more orderly, and you demonstrate good faith. However, it does not erase past conduct. A voluntary liquidator has the same investigative obligations as a court-appointed one. The best protection is ensuring your conduct as a director has been appropriate throughout.
Get Advice Before It Is Too Late
Director liability is one of the most consequential areas of New Zealand insolvency law — and one of the most commonly misunderstood. If your company is in financial difficulty, the time to understand your position is now, not after a liquidator has been appointed.
Fixity offers a free, confidential initial consultation. We will listen, assess your situation, and give you a straight answer about where you stand and what your options are.
Call 0800 FIXITY (0800 349 489) or email info@fixity.co.nz
We work with businesses across New Zealand, including Auckland, Wellington, Christchurch and nationwide.
Larissa Logan | Director, Fixity | Licensed Insolvency Practitioner | FCA
