Most business failures do not happen overnight. They build slowly — through a series of warning signs that are easy to explain away in the moment, but which, taken together, tell a clear story.
As a director, recognising those signs early is one of the most important things you can do — for your business, for your employees, and for your own protection. The Companies Act 1993 places significant obligations on directors once a company is insolvent, and those obligations apply regardless of whether you knew the company had crossed that line.
This guide explains what insolvency actually means in New Zealand, the warning signs that your business may be approaching it, and the steps to take when you see them.
What Does ‘Insolvent’ Actually Mean?
Under New Zealand law, a company is insolvent if it is unable to pay its debts as they fall due. This is known as the ‘cash flow’ test.
There is also a balance sheet test — where a company’s liabilities exceed its assets — but the cash flow test is the primary standard used by New Zealand courts. A company can be technically balance-sheet solvent but still be insolvent in law if it cannot meet payments when they come due.
Insolvency is not a formal declaration or a court finding. It is a factual state — and the moment your company crosses that line, your duties as a director change significantly.
10 Warning Signs Your Business May Be Insolvent
1. You are consistently late paying creditors
If your business regularly pays suppliers, contractors, or other creditors late — or negotiates extended terms because cash is tight — this is one of the clearest indicators of cash flow insolvency. Occasional delays are normal; a pattern is a warning sign.
2. You are using one loan to pay another
Rolling debt from one facility to another, drawing on overdrafts to make minimum payments, or using new credit to service old credit is a cycle that typically accelerates rather than resolves. It is a strong signal that the business cannot generate enough cash to service its obligations.
3. GST or PAYE is going unpaid
When a business starts missing GST or PAYE payments, it is often because the money has been used to fund operations or pay other creditors. This is particularly serious — these are preferential debts under the Companies Act, and directors can face personal liability for unpaid PAYE. It is also one of the first things a liquidator examines.
4. You are being chased by creditors
Receiving formal payment demands, solicitors’ letters, or calls from debt collectors indicates that your creditors have lost confidence in normal repayment and are taking steps to protect themselves. Once creditors start formal recovery action, the timeline to more serious consequences shortens.
5. You have received a statutory demand
A statutory demand is a formal legal step that precedes a winding-up application. Receiving one from IRD or any other creditor means the situation has become serious. You have 15 working days to respond. If you have received a statutory demand, contact Fixity immediately.
6. You cannot produce up-to-date financial information
If you do not know — with reasonable precision — what your business owes, what it is owed, and what its cash position is, that is a problem in its own right. Directors who cannot access accurate financial information are unable to fulfil their legal obligations. It also makes it harder to demonstrate good faith if a liquidator later scrutinises your conduct.
7. Your bank has tightened or withdrawn facilities
Banks monitor their customers’ financial health continuously. If your bank has reduced your overdraft, called in a loan, refused new lending, or asked for additional security, it is reacting to signals of financial distress. This is a serious development.
8. Key customers or contracts have been lost
A sudden loss of revenue — through a major customer leaving, a contract ending, or a market downturn — can quickly push a business from tight but viable to genuinely insolvent. If your revenue base has changed materially, your financial projections need to be revisited immediately.
9. You are personally funding the business
Directors who are putting their own money into the business to keep it running — or who have provided personal guarantees that are now being called upon — are often sustaining a business that the numbers alone would not support. This may delay the inevitable while also increasing personal exposure.
10. You are avoiding opening the mail
This one sounds simple, but it matters. When business owners begin avoiding correspondence, calls from creditors, or financial statements — the avoidance itself is a warning sign. It usually means the situation feels unmanageable. It is not. But it does require action.
What Should You Do If You Recognise These Signs?
The most important thing is to act — and to act early. Directors who engage with their situation promptly have significantly more options than those who wait until a creditor forces the issue.
Practically, this means:
- Get your financial position clear — understand exactly what you owe, what is owed to you, and what your cash flow looks like over the next 13 weeks.
- Stop incurring debts the business cannot pay — every new obligation taken on while insolvent is a potential personal liability.
- Seek specialist advice — not just from your accountant, but from someone with insolvency expertise who can assess your full range of options.
- Consider your options honestly — these may include a payment arrangement with IRD, operational restructuring, voluntary administration, or voluntary liquidation.
- Document your decision-making — keep a record of the advice you received and the steps you took.
The Earlier You Act, the More Options You Have
This is the single most important truth in business turnaround: time is the resource that matters most. A business that is struggling today, but which acts now, may have a genuine path to survival. A business that waits three months for the situation to resolve itself typically finds that its options have narrowed to one.
Fixity’s Director Larissa Logan has spent over 20 years working with businesses in financial distress — from early-stage turnaround engagements through to complex insolvency appointments. The conversations that have the best outcomes are always the ones that happen earliest.
Frequently Asked Questions
How do I know for certain if my company is insolvent?
There is no single moment of formal declaration. Insolvency is a factual test based on your company’s ability to pay its debts as they fall due. If you are regularly unable to do so — or if you can only do so by deferring other payments, using personal funds, or taking on new debt — your company is likely insolvent. A specialist can help you assess your position clearly.
Can a company recover from insolvency without being liquidated?
Yes — this is more common than many people realise. Options including turnaround advisory, informal creditor arrangements, IRD payment plans, and voluntary administration are all designed to give viable businesses a path back. The key factor is whether the underlying business has a future, and whether action is taken early enough.
What if I think the business is insolvent but my co-director disagrees?
Each director has individual duties under the Companies Act. You cannot rely on a co-director’s view as a shield — if the company is insolvent and you know it, your obligations apply regardless of what others think. Document your concerns, seek independent advice, and do not allow yourself to be pressured into continuing to trade if you believe the legal threshold has been crossed.
Talk to Fixity — Free and Confidential
If you have recognised any of these warning signs in your business, the right time to have a conversation is now — not after the situation has escalated.
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
