Directors’ Duties When a Company Faces Insolvency

Tam Irvine | April 2, 2026

What New Zealand Directors Need to Know


Under the Companies Act 1993, company directors must balance the interests of shareholders and creditors. While this balance is straightforward when a company is solvent, it becomes more complex as financial pressure increases (particularly for parties who are both shareholders and directors as is often the case). Directors who fail to recognise and respond to this shift in circumstances risk personal liability.

Directors’ Duties When a Company Faces Insolvency

When Duties Begin to Shift


When a company can pay its debts as they fall due, directors’ duties are primarily owed to the company itself. However, as insolvency becomes a real possibility, directors must increasingly take creditors’ interests into account.


Early warning signs include cashflow pressure, difficulty paying debts on time, or reliance on short‑term measures to stay afloat. These issues often arise when customers delay payment, expenses rise unexpectedly, or the business is affected by higher interest rates, litigation costs, or major repairs.


Directors are expected to remain alert to these indicators and to constantly reassess the company’s position as circumstances change.


Heightened Scrutiny and Personal Risk


If a company later enters liquidation, directors’ decisions will be reviewed with hindsight. Liquidators routinely examine whether directors acted prudently, kept themselves properly informed, and avoided overly optimistic assumptions.


Where breaches of duty are identified – particularly reckless trading – directors may face personal liability. The question is not whether the business ultimately failed, but whether directors responded appropriately as financial risk increased.


Practical Steps for Directors


As financial pressure mounts, directors should adopt a more cautious and conservative approach. Key protective steps include:


  • Strengthening governance and records
    Decisions should be well‑documented, supported by up‑to‑date financial information, and clearly recorded in board minutes. Poor record‑keeping often attracts adverse scrutiny.
  • Exercising independent judgement
    Directors must not simply follow board consensus. Any concerns or dissent should be clearly expressed and recorded.
  • Seeking professional advice
    Where insolvency appears likely, independent advice from accountants, lawyers, or restructuring specialists can be critical. Reliance on properly documented advice demonstrates responsible decision‑making.
  • Tightening contracting practices
    Directors should prefer clear, written contracts with simple payment terms and avoid arrangements that expose the company to unnecessary risk.
  • Avoiding reliance on informal assurances
    If continued trading depends on financial support from shareholders or creditors, that support must be legally binding. Trading on informal promises may amount to reckless trading.
  • Reviewing insurance cover
    Directors should ensure that directors’ and officers’ insurance is appropriate for the company’s size, risk profile, and financial position.


Adopting a Cautious Approach to Decision Making


As the risk of insolvency increases, directors should respond with increasing caution. This approach should continue until the company either returns to financial stability or is placed into liquidation.


Early recognition of risk, disciplined decision‑making, and careful documentation remain the most effective ways for directors to protect both creditors and themselves.


Speak to us if you are uncertain about your obligations as a director, or need help understanding the dilemma of balancing your role as director and your rights as a shareholder.

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Important information


This article provides general information only and does not constitute legal advice. Every situation is different, and you should obtain legal advice specific to your circumstances before making any decisions or taking action based on this information.


In accordance with our obligations under the Lawyers and Conveyancers Act 2006, Smith and Partners cannot provide legal advice until you have become a client and received our Terms & Conditions of Engagement and Information for Clients.


Please note that we require a retainer to be paid before your first meeting and cannot assist with legal aid matters.

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