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If your New Zealand business cannot pay its debts or owes more money than it currently owns, you may have to close down. However, there are other options available. These options will depend on what kind of business structure that your business operates in. This article will outline the options available for a:

Sole Trader Debt

A sole trader business structure is when you, as an individual, run your own business. 

Under a sole trader model, you are personally responsible for all of the debts of your business. If you cannot afford to pay these debts, you will have to consider your personal insolvency options. To be insolvent means that you have:

  • debts that cannot be paid when they are due; or
  • a total debt greater than the value of your assets.

Debt Repayment Order

A Debt Repayment Order (DRO) is a formal debt repayment plan that you enter into with the individuals or businesses that you owe money to. These individuals or businesses are known as your creditors. After you apply for a DRO, you will sign up with a supervisor who will work with you, a government official (the Official Assignee) and your creditors to arrange how this payment plan is to work.

Under the DRO you will have more time than you otherwise would have had to pay some, or all, of the debts you owe your creditors. A DRO will usually be for three years. 

A DRO is the preferred personal insolvency option if;

  • you owe less than $50,000 to your creditors;
  • this debt is unsecured. A debt will be unsecured if it is not backed by a specific asset. A secured debt is backed by an asset or ‘collateral’. For example, a car loan is a secured debt, as the collateral is the car itself. If an individual failures to make a payment for their loan, the lender can seize their car; and
  • you are still able to make some repayments on your debts.

No Asset Procedures

When you enter into the No-Asset Procedure (NAP), the debts you owe to your creditors are cleared. A NAP is the preferred personal insolvency option if:

  • you owe less than $50,000 to your creditors;
  • this debt does not include student loans, court fines or reparations;
  • you have no assets. Under a NAP, you can keep certain assets, such as tools that are necessary for your work and a vehicle up to the value of $6,500;
  • you have not completed a NAP before; and
  • you have no extra money to repay your creditors. Here, you are entitled to have a maximum of $1,300. 

You should be wary of entering into a NAP as this will have a long-term effect in your credit report and could impact your employment prospects.


If you enter into bankruptcy, the Official Assignee (a government official who is a part of the New Zealand Insolvency and Trustee service) is entitled to take control over everything you own and sell it to pay off of your debts. This will exclude certain property, such as your clothing and some household appliances. 

Bankruptcy is the only available personal insolvency option if:

  • you owe more than $50,000; or
  • you have had a NAP before.

Ultimately, the most well-suited option for you will depend on:

  • the amount of debt owed to your creditors;
  • what these debts are;
  • the overall value of any assets you have; and
  • whether you have used any of these insolvency options before.

Partnership Debt

Your business will be a partnership if it is run by two or more individuals. If this is the case, you, alongside your partners, are equally responsible for the debts of your business.

If one of the partners cannot pay these debts, the responsibility for the amount owed will shift onto the remaining partners. When this is not possible, you and the partners will each have to consider one of the above personal insolvency options.

Company Debt

If your business is a registered company, the company itself is responsible for the debts owed. There is a range of options available for company debt. 


If your company cannot pay off of its debts, it can be placed into liquidation. The company may voluntarily choose to go into liquidation or be placed into liquidation by the shareholders or by a court order.

Once in liquidation, a qualified and independent liquidator (usually a specialist accountancy firm) will be appointed. It is the job of the liquidator to:

  • investigate the company and its financial affairs;
  • determine why the company failed; and 
  • identify any potential offences that were committed.

After this is completed, the liquidator will take control of, freeze and sell any of the company’s unsecured assets to help repay the debt owed to the creditors. The liquidator may also have to repay unpaid shareholders or employees of the company.

At the end of this process, the liquidator will prepare a report on the activities and outcome of the liquidation. Once the liquidation is complete, your business will be removed from the Companies Register. 


If your company cannot pay its debts that it owes to a secured creditor, it may have to go into receivership. 

A secured creditor is an individual that has loaned you money, on the basis that the loan is backed by an asset or ‘collateral’. The creditor has a right to repossess and sell this asset, such as a house or car if you fail to provide the debt repayments. This is the process of receivership. The creditor will appoint an individual, the receiver, to collect and sell the asset or assets to repay the debt. You can think of the receiver as a debt collector on behalf of the secured creditor.

Your business will no longer be in receivership once this debt has been repaid and the receiver has notified the New Zealand Companies Register.

Personal Guarantee

If you, as the company director, have made a personal guarantee for the company’s debts, you will be responsible for repaying them. If you cannot do so, then you will have to consider one of the above personal insolvency options.

Before engaging in these options, you should first:

  • evaluate the total debt that the company owes;
  • determine whether any secured creditors are owed; and
  • get advice from a professional, such as an accountant, lawyer or budgeting advisor.

Key Takeaways

Being unable to repay debts is an extremely difficult position for a business to be in. However, this does not mean that your business has to close down. There are other ways to repay your creditors. What option you choose will depend on whether your business operates under a sole trader, partnership or company model. Depending on the structure, you will either have to consider personal insolvency options or put your company in liquidation or receivership. If you have any questions about this matter, contact LegalVision’s disputes lawyers on 0800 005 570 or complete the form on this page.


What happens when a company cannot pay its debts?

If a company cannot pay its debts, it will either be placed into liquidation or receivership, depending on the type of debt owed. If one of the directors of the company took on personal liability for any debt owed, they would be obligated to repay this amount owed.

What happens if a business can’t pay its debts?

If a business cannot pay its debts, the owner will have to consider personal insolvency options or (if it is a company) it will have to go into liquidation or receivership.

What can you do if you cannot afford your debt?

If you cannot afford your debts, you will have to consider your personal insolvency options. These options are a Debt Repayment Order, a No-Asset Procedure or bankruptcy.

Who is responsible for a business’s debt?

Who is responsible for a business’s debt will depend on the business structure. If the business operates under a sole trader model, that individual will be responsible. If the business is a partnership, the partners will be responsible. Alternatively, if the business is registered as a company, the company itself will be responsible for the debt. 

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