Company under financial pressure: what should directors do before taking on more debt?

If a New Zealand company is struggling to pay its debts, directors should obtain reliable financial information and prompt professional advice before taking on further commitments. Review cash flow, creditor exposure and the company’s ability to perform obligations. Document the decisions, but do not assume minutes alone make continued trading appropriate.

What signs should prompt a director to act?

Repeated missed payments, unresolved tax arrears and reliance on uncertain receipts deserve attention. A busy order book does not show whether cash will arrive in time to meet obligations. Ask what the company can actually fund and perform over the coming weeks.

This is a practical decision checklist, rather than a forecast of insolvency trends or an explanation of proposed reforms. The starting point is the company’s current position and the duties that apply now.

Which directors’ duties matter when finances deteriorate?

Companies Office guidance highlights the duties concerning serious creditor risk and incurring obligations without reasonable grounds to believe the company can perform them when required. Directors also need to exercise appropriate care and remain engaged in the company’s affairs.

A director should not simply rely on another owner’s reassurance or assume a passive role avoids responsibility. The assessment depends on the facts, the proposed commitments and the evidence available. The Financial Markets Authority’s director guide also stresses informed oversight and competent advice.

What information should the board gather immediately?

Gather a current financial picture that can be tested against realistic assumptions. Identify what is known, what is uncertain and when decisions must be made.

• A short-term cash-flow forecast and bank balances.
• Aged debtor and creditor lists, including disputed amounts.
• Tax, payroll, finance and lease commitments.
• Security, guarantee and funding documents.
• Significant orders, deposits and obligations not yet completed.
• Existing demands, enforcement notices and urgent deadlines.

For example, a major expected payment may depend on customer acceptance or a disputed variation. Show that uncertainty in the forecast instead of treating the invoice as cash already available.

What should you consider before accepting another order or loan?

Consider what the new obligation requires and whether there are reasonable grounds for believing it can be performed. A fresh deposit may bring an obligation to complete work as well as immediate cash. Borrowing may postpone a payment problem while increasing exposure.

Review lender terms and personal guarantees separately. An internal agreement between owners does not rewrite the bank’s documents. Our finance and guarantees advice can help clarify the obligations proposed.

Should you repay an owner or move assets out of the company?

Obtain specific advice before doing so when insolvency is a concern. Payments and asset transfers may be scrutinised, and the interests of related parties do not provide a safe shortcut through the company’s problems.

Keep the documents and explain the transaction fully. Avoid treating a change in legal ownership or a director’s resignation as a way to erase existing responsibilities. The proper approach needs to be assessed against the actual facts and applicable law.

What should early insolvency advice achieve?

It should help establish the financial position, immediate risks and available options. Depending on the circumstances, those options may involve funding, an agreed restructure or a formal insolvency process. None should be assumed suitable before the facts are assessed.

Canterbury Legal’s personal and commercial insolvency services can help assess the legal position alongside appropriate financial or licensed insolvency advice. Where owners disagree about the response, business-owner disputes advice may also be needed.

How should the board record and revisit its decisions?

Record the information considered, assumptions, advice and reasons for the decision. Set a review date and clear triggers for earlier action. Documentation supports a decision process; it does not turn an unsupported assumption into reasonable grounds.

Contact Canterbury Legal promptly with the current records and any urgent notice. Early discussion gives advisers a clearer opportunity to assess the position before another commitment is made.

What other questions do people ask?

Does using a company remove a director’s personal risk?

No. Directors’ duties, guarantees and conduct can create personal exposure. The company’s separate identity does not answer every liability question.

Is a positive sales forecast enough to justify new debt?

Not by itself. Assess realistic cash timing, existing obligations and the company’s ability to perform the proposed commitment.

Will keeping board minutes prevent a claim against directors?

No. Records can show the decision process, but the decision and conduct must still meet the applicable duties.

Which official sources explain these rules?

• Companies Office: what it means to be a director
• FMA: being an effective director
• Companies Act 1993
• Companies Office: licensed insolvency practitioner obligations

Information checked on 28 October 2026. This article provides general information about New Zealand law and is not a substitute for advice about your circumstances.