Reckless trading in NZ: can you take a fast loan when the company is struggling to pay bills?

If the company is behind on bills and a fast loan looks like the way through, the question that matters isn’t “how fast?” It’s “can the company actually repay this, and can I show why I believed that?” That’s the heart of two sections of the Companies Act 1993, and it decides whether new borrowing protects the business or puts you personally in the firing line.

What do sections 135 and 136 actually say?

Two short provisions do the work.

Section 135 (reckless trading). A director must not agree to the business being carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors, and must not cause or allow it to be carried on that way.

Section 136 (obligations). A director must not agree to the company incurring an obligation unless they believe at that time, on reasonable grounds, that the company will be able to perform it when it is required to.

Read them together and you get a practical split. Section 135 asks “is the whole way we’re trading putting creditors at serious risk?” Section 136 asks “for this particular loan, lease or order, did I have reasonable grounds to think we could pay?” A new fast loan is a textbook section 136 moment. You’re agreeing to an obligation, today, with a repayment schedule that starts soon.

The full Act is on legislation.govt.nz, and the Companies Office summarises the duties on its director help page.

Does being short of cash mean you can’t borrow?

No. This is the part many directors get wrong in both directions.

Being short of cash is not, on its own, a breach of anything. Plenty of sound companies go through a tight patch: a big customer pays 60 days late, a seasonal dip hits, a machine fails. Borrowing to bridge a dated, explainable gap is ordinary business, and the law gives directors wide room for business judgement.

The risk comes from a different pattern: the company has no credible route back to paying its way, and a loan is used to keep the doors open one more month. That’s when “reasonable grounds” gets hard to show, because the honest answer to “how will we repay this?” is “with the next loan.”

Two things have changed the temperature recently:

• Insolvencies are high. A March 2026 analysis from the University of Auckland reported corporate insolvency numbers at their highest in 15 years, with thousands of firms entering liquidation or other formal processes in 2025. More liquidators means more scrutiny of what directors did in the months before.
• The law is under review. The Law Commission is reviewing directors’ duties, the first comprehensive look since the Act passed three decades ago, with a report due in 2027. Nothing has changed yet. Today’s rules are the ones above, so plan around them rather than around possible reform.

What does the court look at when a loan goes wrong?

Liquidators can apply to the court for an order that a director who breached their duties contribute to the company’s losses (the Act’s section 301 is the usual route). In practice they ask a handful of questions:

1. What did the company know about its position when it borrowed? Overdue creditors, ageing debtors, a failed forecast.
2. What was the plan? A written recovery plan with a date beats good intentions.
3. Did the borrowing improve or worsen creditors’ position? Money that paid wages for a contract that then delivered is different from money that paid one creditor to keep another quiet.
4. Who got paid? Large payments to related parties or to one creditor ahead of the rest draw attention.
5. Was advice taken? An accountant’s note or insolvency practitioner’s view helps.

One caution from the case law. In Debut Homes v Cooper (Supreme Court, 2020), the court noted that continuing to trade could breach section 135 even where it was sensible and might improve returns for some creditors. The point isn’t to panic. It’s to treat the decision to keep trading as one you document.

How do the fast options measure up against the repayment test?

Here’s the test to run on any fast option: will the cash this produces, or the cash already coming in, cover the repayments when they fall due, with room for one thing going wrong?

Option	Passes more easily when…	Gets hard to justify when…	What you’re putting at risk
Invoice finance	Invoices are real, approved and from reliable customers	The invoices are already disputed or very old	Receivables; cost rises if customers pay late
Short-term or working capital loan	A specific inflow (contract, season, debtor) will repay it	It’s covering a structural loss	Often a GSA and personal guarantee
Merchant cash advance	Takings are steady and margins can absorb the debit	Margins are thin; the debit eats the wages budget	Future takings, daily
Second mortgage / property-secured	There’s equity and a credible exit or refinance	The exit depends on a hoped-for sale	The property
Line of credit	Used for recurring gaps, with a limit set before trouble	Drawn to the limit just to pay older debts	Whatever security sits behind it

None of these is “safe” or “reckless” in itself. A fast loan that matches a dated inflow passes the test. A loan to cover a gap that keeps coming back usually fails it, which is why our guide on loan stacking is worth reading before you sign a second facility.

Illustrative example. A Hamilton building-supply company owes creditors about $90k. Three customers owe it $70k between them, all confirmed for payment within six weeks, but wages and a supplier are due this week. The director is weighing a $50k loan. Here the repayment can be traced to specific, confirmed receipts, so the s 136 belief is defensible. If instead the $70k were uncertain and the business had been losing money for a year, the same $50k loan would be borrowing against hope, and borrowing it would be much harder to defend.

What five questions should you answer in writing before you borrow?

Take 30 minutes and write down the answers. It sharpens your own thinking, and it’s the paper trail you’d want later.

1. What exactly is the money for, and what does it fix? “Pay Friday’s wages and bridge to the contract payment on the 20th” is a purpose. “Keep things going” isn’t.
2. Where does repayment come from? Name the receipts, the dates and the amounts.
3. What if the best inflow slips by three weeks? If the loan then fails, the plan is too thin.
4. What’s the total cost in dollars? Convert quotes using our worksheet for comparing fast loan quotes, then check repayments against the forecast.
5. Who have I asked? Your accountant, or an insolvency practitioner if you suspect the company can’t pay its debts. The Insolvency and Trustee Service is the government’s starting point for formal processes.

If those answers hold up, take the loan with a clear conscience. If you can’t answer question two honestly, the fast loan isn’t the problem. The problem is that the business needs something other than more debt: a restructure, an arrangement with creditors, or a formal process.

Is there a time to stop borrowing and get advice instead?

Yes. Warning signs worth treating as “stop and talk to someone” include:

• Paying some creditors while others are chased for months.
• Borrowing from one lender to make another’s repayment.
• Wages, GST or PAYE being paid late, or skipped.
• Directors lending the company money with no plan to be repaid.
• A forecast that only works if every optimistic assumption lands.

Taking advice early is also the best protection a director has. The earlier you move, the more options remain: negotiating terms, restructuring, selling an asset, or finding finance that fits. Our guide on covering payroll when the account’s short deals with the shortest-horizon version of this, and the secured vs unsecured comparison helps you see what you’d be putting on the line before you sign anything.

What can a fast-finance conversation add?

A good conversation about options tests the repayment question as well as the speed question. It asks what the money is for, what comes in to repay it, and what shape of repayment suits that cash. That’s where an unbiased line-up of choices helps, because the cheapest-looking option isn’t always the one a struggling company can safely service.

If you’re weighing a loan and want to see what fits, check your options. Enquiring takes about 60 seconds, and asking doesn’t involve a credit check, so your credit file stays untouched. We don’t pass your details around to a pile of lenders; a real person reads your situation and calls you to talk it through. We ask one thing: please fill the form in accurately, including what the company currently owes and when income is due, so the options we point you to are ones the company can genuinely carry.

See if you qualify →