Bankruptcy and Insolvency NZ, are they the same thing?

Jul 17, 2022Business, Finance0 comments

Bankruptcy and insolvency NZ, are they the same thing?

Whilst these terms are frequently used in respect of people in financial distress, they do not have exactly the same meaning.

Insolvency describes a situation where a person or entity, cannot pay their debts. They have more liabilities owed than the assets they own. This means they are no longer solvent and cannot continue in their current financial situation. This can be in a personal or commercial business situation.

An insolvent business may be operating under a business structure, such as a sole trader, partnership, or a company, in a business context formal actions are referred to as ‘insolvency’ or ‘liquidation’. Alternatively, for individual/s facing  personal insolvency, formal actions are referred to as ‘bankruptcy’ or being ‘declared bankrupt’

Let’s go ahead and break down the differences between bankruptcy and insolvency nz.


This may involve credit card and hire purchase debts, commonly a situation where people are enticed to purchase goods on a buy now pay later situation. When the interest free period ends, higher interest rates can mean the debt quickly escalates and it may become problematic to repay. If it is a “one off” situation, then a repayment plan may be able to be entered in to with the supplier.

If the individual/s financial situation is more serious than this and there are significant debts that cannot be repaid, there may be no alternative other than they:

  • Apply for bankruptcy
  • Or they are declared bankrupt by a third party they owe money to.

If bankruptcy is by election an individual/s makes a legal application to the Official Assignee. The Official Assignee would require full disclosure of the individual/s financial situation and the legal processes would be followed to formalise the bankruptcy.

If it involves a third party, they apply to the High Court for a judgment to have someone declared bankrupt. Again, they will be required to provide evidential documentation to show the debt is outstanding. It requires more than an unsupported claim before the High Court would make a formal judgment to declare person/s bankrupt.

Bankruptcy means a person/s hands over full control of their financial affairs to the Official Assignee. You may hear people say they aren’t worried about paying their debts and will opt for bankruptcy as they get to “walk away” from their debts, but this is not an ideal action to take.

The bankruptcy process lasts for a minimum of 3 years and creates significant ongoing issues. Borrowing money and losing all financial control are problematic and are not issues that go away in any hurry. It can affect the ability to purchase a home, or other property in the future where you want assistance with finance; perhaps a hire purchase or after pay, or even wanting to open a bank account or credit card.   It is unlikely to be overlooked even after the individual/s are released from bankruptcy and instead can be a dark and negative shadow that hangs over the individual/s. Consequently, being judged bankrupt is not something to be taken lightly and all alternative options should be considered before this occurs.

bankruptcy and insolvency nz continued…


A company cannot be declared bankrupt. If a company cannot pay their debts and there are more liabilities than assets, they are described as facing insolvency. This may involve an entity such as a retail or service business trading under a company and providing goods and services to the public. It may also involve a wholesale supplier or manufacturer who provides goods and services for others to sell.

In any situation where a company is struggling and business is becoming a concern, even a small niggle, the recommended course of action is to take stock and obtain professional advice. Continuing to trade hoping things get better is not helpful and in fact can complicate and lead to serious liabilities. This is because continuing to trade when a director/s knows the business is facing financial difficulties or is insolvent, constitutes a breach of directors’ duties and can result in directors facing obligations for the company’s debt and receiving court fines. It is not a defence for a director to pretend they weren’t aware or to wish the tough times away.

A licensed insolvency practitioner may need to be appointed to act as a liquidator or receiver. What is required will depend on the situation:

  • A company may elect to go into voluntary liquidation, or it may be put into liquidation by a third party
  • If a liquidator is appointed, they take stock of the company and determine whether it may continue trading. This may allow a liquidator to still take control of the company, but they will trade knowing they can recover funds from doing so, to be used towards repayment of debts
  • The liquidator will complete an in-depth analysis of the company and if they determine that continuing to trade will not assist the financial situation, or will make matters worse, the company may be wound up and cease trading immediately
  • Or a secured creditor such as a bank, lender, or secured supplier, may appoint a receiver to take over the company’s affairs.  Their role is to protect the secured creditor’s position and once they have done this to the best of their ability, then a liquidator may still be appointed to deal with the remainder of the company’s financial affairs.

Our advice is if you are having trouble paying your bills, stressing over finances, don’t leave it too late. Often insolvency can be dealt with by some practical changes and does not always result in the above outcomes.

Whether you are a business who is struggling or a creditor who is owed money by another business, the best approach is to engage professional help early. You can also refer to the insolvency register to determine whether a business you are trading with has been added through another means.

For more information on the differences between bankruptcy and insolvency nz, you can contact Fervor for an initial discussion. As a licensed insolvency practitioner, John will provide a reasoned and knowledgeable approach to matters and can then work with you to determine what is the best course of action.

Call or email John at Fervor 021 898029, or find us on facebook


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