PAYE, GST and personal risk: Why tax arrears are a governance issue

Over the past two to three years, New Zealand has moved from an unusually quiet insolvency environment to one characterised by sustained pressure across multiple sectors.

The shift has not been sudden. Rather, it reflects a delayed adjustment following the pandemic period, combined with tighter financial conditions and more assertive creditor enforcement. The lesson is not simply that insolvencies are up, but that the risk profile for directors intensifies earlier than many expect.

The current wave of insolvencies is best understood as a post-pandemic catch-up. During 2020-21, corporate insolvencies fell to historically low levels, supported by government relief measures and a temporary “safe harbour” approach to director liability. As those supports were withdrawn, the underlying financial stress in many businesses surfaced later rather than sooner. Liquidation nation: A governance wake-up for directors highlighted this artificial lull, followed by a sharp rise when economic conditions tightened and relief ended.  

By 2024-25, formal insolvency appointments (liquidations, receiverships and voluntary administrations) had climbed to levels comparable with earlier downturns. External analysis describes this as a period of sustained pressure rather than a short-lived spike, with the final quarter of 2025 particularly elevated. The key governance point is that insolvency is a lagging indicator: by the time formal appointments rise, the decisions that determine outcomes for creditors, employees and directors have usually already been made. 

Enforcement and arrears as accelerants

Another defining feature of the past few years has been the role of creditor enforcement, particularly by Inland Revenue. Tax arrears – especially PAYE and GST – have increasingly triggered winding-up applications. The IoD’s own work on this emphasises that tax arrears are not merely a cash-flow issue; they raise direct questions about directors’ duties once solvency becomes uncertain. The Inland Revenue Department has ramped up its focus on tax governance and has a current focus on measures, including with governance, to collect significant tax debt.

This environment matters for boards because enforcement often escalates quickly. Once arrears accumulate, the window for informal resolution narrows, and directors’ decisions are later examined with hindsight by liquidators or receivers.

Sector concentration, not universality

While insolvency pressure has broadened, it has not been evenly distributed. Construction, hospitality, retail and other sectors reliant on discretionary spending have been disproportionately affected. The Reserve Bank has noted that businesses exposed to weak domestic demand face particularly challenging conditions, and that business failures have increased even though stress is not uniform across the economy.  

For directors, sector exposure should shape governance focus. Thin margins, long payment chains and project-based risk increase the likelihood that solvency issues emerge gradually, rather than through a single shock.

Liquidation dominates; restructuring remains underused

A recurring observation in recent commentary is that liquidation remains the dominant endpoint for distressed companies in New Zealand. Voluntary administration, while available as a restructuring tool, continues to be used sparingly compared with overseas jurisdictions. The IoD’s article on insolvency noted that voluntary administration accounts for only a small proportion of formal appointments, despite its potential to preserve value in viable businesses.  

From a governance perspective, this raises a critical question: are boards considering restructuring pathways early enough, or are options narrowing by the time advisers are engaged?

Three key insights for boards and directors

1. Insolvency risk emerges well before insolvency itself 

Directors’ obligations around solvency are ongoing, not episodic. IoD course and CDC materials emphasise that directors must continually assess solvency, not just when making distributions. Boards that rely solely on historical financial statements risk missing early warning signs, such as deteriorating cash flow, covenant pressure or growing tax arrears.  

Governance implication: Boards should insist on forward-looking information – particularly cash-flow forecasts – and agree in advance what triggers heightened oversight.

2. Once solvency is in doubt, creditors matter more

If a company trades while insolvent or incurs obligations it cannot perform, directors face personal exposure. Administrators routinely review directors’ decisions, contracts and payments in the period leading up to insolvency. IoD materials make clear that liquidators will scrutinise whether directors breached duties under the Companies Act, including reckless trading provisions.  

Governance implication: When solvency is uncertain, boards should explicitly consider creditors’ interests, seek independent advice and ensure decisions – and their rationale – are carefully minuted.

3. The ‘grey zone’ is where boards add most value

Between normal trading and formal insolvency lies a grey zone where governance quality matters most. Early engagement with lenders, advisers and (where appropriate) restructuring options can materially change outcomes. Internal IoD commentary highlights that voluntary administration and other restructuring tools remain underutilised, suggesting missed opportunities for value preservation.  

Governance implication: Boards should treat distress planning as part of good governance, not as a last-minute legal exercise.

What questions should directors ask?

• What are our leading indicators of solvency stress, and how often does the board see them?  Directors should also complete the IoD Solvency Checklist
• At what point do we formally shift our focus to creditors’ interests, and how will that be recorded? 
  Do we have a clear protocol for obtaining independent advice and considering restructuring options if conditions deteriorate?

The bottom line?

The recent pattern of insolvency in New Zealand reinforces a longstanding governance truth: directors are judged less on the fact of insolvency and more on how they governed in the period before it. Boards that engage early, document carefully and understand their duties are far better placed to protect both their organisations and themselves.