We can't find the internet
Attempting to reconnect
Something went wrong!
Attempting to reconnect
Warning signs your business is in financial difficulty
Financial difficulty rarely arrives suddenly. There are almost always warning signs. The businesses that survive are the ones that recognise these signs early and act decisively.
When is a company insolvent?
New Zealand law recognises two tests for insolvency. Understanding these helps you assess your position objectively.
Cash Flow Test
Can you pay your debts as they fall due?
This is the primary test. It's not about whether assets exceed liabilities on paper. It's about whether you have the cash to pay bills when they're due. A profitable business can fail this test if it runs out of cash.
Regularly unable to pay suppliers, staff, or tax on time
Balance Sheet Test
Do liabilities exceed assets?
This test compares total liabilities against total assets. If you owe more than you own, you may be balance sheet insolvent. However, many businesses trade through this if cash flow is adequate.
Net asset deficiency on financial statements, declining equity
Financial warning signs
These are the clearest indicators of financial distress. If you are experiencing several of these, the situation requires immediate attention.
Count them: How many of these apply to your business right now? Three or more means you should seek advice today.
Delayed payments to suppliers
Routinely paying suppliers late, negotiating extensions, or prioritising which creditors to pay first. Suppliers may start demanding cash on delivery.
Increasing overdraft reliance
Overdraft permanently at or near the limit. Using short-term credit facilities to fund ongoing operations rather than true short-term needs.
Borrowing to pay existing debt
Taking new loans or credit to service existing debt. This is a dangerous spiral that compounds the problem rather than solving it.
Tax arrears (IRD, GST, PAYE)
Falling behind on GST, PAYE, or income tax. IRD is often the first creditor businesses stop paying. IRD has strong collection powers, and directors can face personal liability for unpaid PAYE.
Unable to pay staff on time
Delaying wages, asking staff to wait, or splitting pay runs. This is one of the most serious signs. Staff have priority claims in liquidation.
Creditors calling frequently
Regular calls from suppliers, utilities, or debt collectors chasing payment. Avoiding answering the phone or having difficult conversations about overdue accounts.
Bank declining further credit
Bank refusing overdraft extensions, declining new credit applications, or reducing existing facilities. Banks often see problems before business owners do.
Cash flow projections consistently wrong
Forecasts regularly miss the mark. Expected payments don't arrive. Costs exceed budgets. If you can't predict cash flow, you can't manage it.
Operational warning signs
Financial problems often show up first in operations. These signs may appear before the cash crisis hits.
Key staff leaving
Your best people often see problems first. Departures of key staff, especially in finance or operations, should prompt questions.
Customer concentration
Over-reliance on one or two major customers. If your biggest customer accounts for more than 30% of revenue, their loss could be fatal.
Margin erosion
Gross margins declining over time. Accepting work at lower prices just to keep cash flowing. Competing on price rather than value.
Declining sales/revenue
Revenue trending down over consecutive periods. Fewer new customers. Existing customers reducing orders or moving to competitors.
Inventory piling up
Stock levels increasing while sales decline. Cash tied up in inventory that isn't moving. Risk of obsolescence or write-downs.
Quality issues increasing
Rising complaints, returns, or warranty claims. Cutting corners to save costs often shows up as quality problems that further damage the business.
Legal warning signs
When creditors escalate to legal action, the situation is urgent. These signs indicate immediate professional advice is essential.
Statutory demand received
A formal demand for payment. If not paid or disputed within 15 working days, the creditor can apply to put your company into liquidation. This is a serious legal step, not just a demand letter.
Creditor pressure and legal threats
Letters from lawyers, threats of legal action, or notice that proceedings will be issued. These escalations signal creditors have lost patience with informal arrangements.
Default notices from lenders
Formal notices that loan covenants have been breached or payments missed. Banks may appoint receivers if the situation isn't addressed. Check your loan documents for default events.
Landlord pursuing rent arrears
Formal demands for overdue rent. Landlords can forfeit leases for persistent non-payment, potentially forcing closure of premises. Commercial leases often have strict remedies.
Personal guarantees being called
If you've personally guaranteed company debts, creditors may now pursue you personally. This means your personal assets, including your home, may be at risk.
Director duties when in difficulty
When a company is in financial difficulty, director duties become critical. Understanding these obligations can protect you from personal liability.
Reckless Trading
Directors must not agree to the business being carried on in a manner likely to create a substantial risk of serious loss to creditors.
When it applies: If you continue trading knowing the company can't pay its debts, you may be personally liable for the debts incurred from that point.
Incurring Obligations
Directors must not agree to the company incurring an obligation unless they believe on reasonable grounds the company will be able to perform that obligation.
When it applies: Taking on new orders, credit, or commitments when you know (or should know) the company can't fulfil them.
Duty of Care
Directors must exercise the care, diligence, and skill that a reasonable director would exercise in the same circumstances.
Standard expected: Stay informed. Attend board meetings. Review financials. Ask questions. Get professional advice when needed.
Safe Harbour Protection
The Companies Amendment Act 2020 provides protection for directors who take appropriate steps when the company may be unable to pay its debts.
Requirements: Obtain advice, take steps to reduce debts, and document decisions. Safe harbour is not unlimited but gives breathing room for genuine turnaround attempts.
Options at different stages
The earlier you act, the more options you have. As the situation deteriorates, choices narrow.
Most options open
Warning signs emerging but manageable
- Negotiate with creditors - Payment plans, extended terms
- Operational restructuring - Cut costs, renegotiate contracts
- Sell non-core assets - Generate cash without affecting operations
- Seek refinancing - New funding to bridge gaps
Options narrowing
Significant pressure, formal steps needed
- Formal restructuring - Professional turnaround assistance
- Creditor arrangements - Compromise agreements, Pt 14 arrangements
- Voluntary administration - Structured process while protected
- Business sale - Sell as going concern before forced sale
Limited options
Critical situation, controlled exit focus
- Voluntary liquidation - Directors choose to wind up
- Court liquidation - Creditor-initiated wind up
- Receivership - Secured creditor appoints receiver
Even at this stage, a controlled process usually preserves more value than uncontrolled collapse.
We understand local pressures
Hawke's Bay businesses have faced extraordinary challenges. Cyclone Gabrielle created pressures that many are still working through. Supply chain disruptions, infrastructure damage, and customer impacts have compounded for some businesses.
We understand these circumstances. Difficulty arising from events beyond your control is different from poor management. But regardless of the cause, the response matters. Acting early protects more options.
If your business is still dealing with post-cyclone challenges, we can help you assess your position and explore options. There's no judgement, just practical advice.
When to seek help
Sooner is always better
The earlier we talk, the more options exist. Don't wait until crisis point.
Three warning signs = act now
If three or more signs from this article apply, that's enough to warrant a confidential discussion.
Statutory demands are urgent
If you've received a statutory demand, you have 15 working days. Call immediately.
Key Takeaways
Warning signs appear before crisis. Recognise them early.
Three or more warning signs means you should seek advice now.
Directors have legal duties. Breaching them can mean personal liability.
Safe harbour provisions exist for directors who take appropriate steps.
Earlier intervention = more options. Later intervention = fewer choices.
Even in late stages, controlled processes preserve more value than collapse.
Continue Reading
Director duties and personal liability
The full guide to director obligations under the Companies Act 1993 and when directors face personal liability.
Business succession planning
Every business owner will eventually exit. A succession plan ensures your business survives the transition.
Insolvency & Restructuring
Our insolvency and restructuring service helps businesses navigate financial difficulty with practical, confidential advice.
Related Reading
Director duties and personal liability in New Zealand
Directors face personal liability when companies fail. Understand your duties and how to protect yourself.
Limitation Periods in New Zealand: Time Limits for Legal Claims
Understanding time limits for legal claims. Covers contract (6 years), tort (6 years), employment (90 days), and when time starts running.