Managing insolvency for sole traders and partnerships

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As a sole trader you run a higher risk when doing business, regardless of whether you work independently or in a partnership with other sole traders, because unlike company directors and shareholders, you’re responsible for all of your business’s debts.

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This makes insolvency a personal matter. While companies can opt for voluntary administration or liquidation to manage insolvency, sole traders must look at personal insolvency procedures such as bankruptcy.

Insolvency procedures can be applied for in court or to government officials known as Official Assignees. They are responsible for administering bankruptcies and work through the  Insolvency and Trustee Service.  Applications can also be made online.

Where to start

To be insolvent means one of two things. Either you can’t pay your debts when they’re due or you owe more than you own in assets.
If you do become insolvent, the road back to solvency can seem a long and hard one. There are, however, a number of support services and actions you can take that will make the task much less daunting.

Measure your debt

Before you do anything, you must clearly define the size of your overall debt. It’s very important that you do this first because:

  • The size of your debt will help you estimate how long it will take you to return to profitability.
  • The size of your debt limits the insolvency options available to you.
  • If you seek advice, your advisers will need to know this figure before they can help you.

Gather together all your financial documents to attain as accurate a debt figure as possible.

It’s also worth doing this because if you apply for an insolvency procedure, the Official Assignee will need to review the documents to confirm your financial position and eligibility.
Make sure you collect and analyse all:

  • statements
  • invoices
  • contracts
  • tax returns
  • debt ledgers
  • cashbooks.

Seek professional advice

Once you have a debt figure in mind, you should seek professional insolvency advice to manage your financial situation. It’s important at this stage not to make any rash judgements or assumptions. You need to be fully informed so you can recognise all the options available to you and weigh up the repercussions of each.

  • Accountant/Lawyer - Your first stop must be your accountant or lawyer, especially if you plan to continue trading or refinance your debts to help you resolve your insolvency. They should be able to hit the ground running because they’re already familiar with your business.
    If you don’t bother consulting them, you could just end up repeating the mistakes that made you insolvent in the first place.
  • Budgeting advice - Seek budgeting advice to help you lower your outgoings and slow the speed you’re accruing debt. If you owe tax, budget advisers can also help you negotiate an agreement with  Inland Revenue so you can avoid any penalties.

Be pro-active

It can pay at this early stage to take pro-active actions to address and repay as much of your debt as possible.

Selling assets to repay debts and talking to your creditors to negotiate a compromise or repayment schedule are always good ideas. If you don’t, you could miss a golden opportunity to resolve matters in a more amicable and less stressful way than if you went to court.

The court may very well order you to take these same actions anyway, but under less flexible and accommodating terms than your creditors might be willing to provide.

Just make sure that if you do negotiate with your creditors, you do so under the guidance of professional advice from your accountant, lawyer or budgeting expert. Never accept any new financial arrangements without first gaining a second opinion from a professional.

Your options

Many insolvent debtors assume filing for bankruptcy is the best or only option available to them, but very often that’s not the case. It might not even be an available option.

If you apply to the court or to the Official Assignee to enter into an insolvency procedure, your options will be limited by:

  • the size of your debts
  • the value of your assets
  • what the debts are for
  • whether you’ve been insolvent before and the options (if any) used then.

Here’s a list of common insolvency solutions and procedures in an ascending order of the limitations they impose on your business future. This allows you to see how bankruptcy should always be a last – rather than first – resort.


The option with the least formal implications is to simply come to a compromise with your creditors before the issue goes to court. A compromise is an informal agreement with creditors to pay some of (if not all) the money owed, so by definition it is not an arrangement overseen by the Official Assignee.

However, for this reason, you must ensure you negotiate a compromise with the input and assistance of an accountant, lawyer or budget adviser.


This is a formal agreement between you and your creditors that needs to be approved by a court. You will require the assistance of a lawyer or accountant in drafting the necessary documentation.

A proposal can include conditions such as assigning all or some of your property to a trustee, such as an accountant who will act as the private sector equivalent of the Official Assignee, or offering part or full payment of your debts by instalment.

Your trustee will need to call a meeting of creditors to discuss the terms of the proposal and seek their agreement. Once your creditors approve the terms, court approval must be sought to make the proposal legally binding. After that point, your creditors can’t pursue you for their debts without the court’s permission for the duration of the proposal.

Always seek independent legal advice and assistance before considering a proposal.

Summary Instalment Order (SIO)

An SIO is a more formal repayment agreement with creditors that typically lasts three years (or five under special circumstances) and sees you repaying some of (if not all) the money owed in agreed instalments.

How much you pay is assessed by the Official Assignee. Once a SIO has been granted, creditors cannot take further action to recover their debts as long as you follow the agreement exactly.

Either you or your creditors (with your consent) can apply to the Official Assignee for an SIO. You can do this online using the  Insolvency and Trustee Service online services.

After an application is made, each party is given the opportunity to make representations about the conditions of the order. If approved, an SIO is then managed by an Approved Supervisor.

An SIO is only typically approved if:

  • your unsecured debt (excluding student loans, fines, penalties, and reparation orders) totals less than $NZ40,000
  • you are unable to pay those debts immediately.

No asset procedure (NAP)

A NAP is an alternative to bankruptcy that only lasts a year, but is managed by the Official Assignee in much the same way.

You can only use this option once.

Applications are made to the Official Assignee.

To qualify you must:

  • have no realisable assets (realisable assets exclude cash up to $NZ1,000, a motor vehicle up to $NZ5,000, tools of trade, and personal and household effects)
  • not have previously been granted a NAP
  • not have previously been adjudicated bankrupt
  • have total debts (excluding student loan) of no less than $NZ1,000 and not more than $NZ40,000
  • complete a means test showing you have no means of repaying any amount towards your debts.

However, the Official Assignee can refuse entry into a NAP if:

  • your creditor(s) object to entry
  • bankruptcy proceedings have been initiated and the likely outcome for the creditor would be materially better if the proceedings continued
  • you have concealed assets
  • you have committed an act that would be an offence under the  Insolvency Act (2006) if you were bankrupt
  • you have incurred debts knowing you had no means to pay them.


Bankruptcy is a legal proceeding that allows you to get a fresh financial start if you can’t pay your debts by immediately stopping all your creditors from seeking to collect debts from you.

The right to file for bankruptcy is provided by law.  You can apply for bankruptcy using the Insolvency and Trustee Service online services.

However, creditors can also apply to court to have you adjudicated bankrupt. If successful, you will be served with a notice of hearings and can attend court to make representations, where you’re entitled to have legal representation.

If you do not attend, the bankruptcy proceedings will proceed in your absence. Once you are bankrupt, an Insolvency Officer from the Insolvency and Trustee Service manages your estate, and arranges the sale of assets if required.

During bankruptcy you must:

  • file an acceptable Statement of Affairs
  • co-operate fully with the Official Assignee at all times
  • comply with all requests for information
  • notify the Official Assignee whenever you change your name, address, employment or terms of employment, income and/or expenditure
  • fulfil all your legal obligations.

During bankruptcy if required you must:

  • make payments toward your debts
  • vacate land and/or buildings
  • attend interviews or examinations on oath.

During bankruptcy you may not:

  • withhold information or mislead
  • incur credit of $NZ1,000 or more without disclosing you are bankrupt
  • conceal assets
  • stop, attempt to stop, or hamper the Official Assignee dealing with any property or assets.

During bankruptcy you may not without consent:

  • leave New Zealand
  • enter into, carry on, or take part in the management or control of any business
  • be employed by a relative or an entity owned, managed, or controlled by a relative.

Failure to adhere to these responsibilities and restrictions can result in a fine, imprisonment, or both.

The Official Assignee can only assess one application for you at a time, so ensure only one application (No Asset Procedure, Bankruptcy or Summary Instalment Order) is completed and sent to the Insolvency and Trustee Service.


Each partner involved in a partnership is equally responsible for its debts (including tax), but if your other partners can’t be located or can’t pay their debts, then you have to shoulder the responsibility of repayment.

If a partner of yours is adjudicated bankrupt, the partnership usually dissolves unless stated otherwise in the deed of partnership agreement. From then on, only the non-bankrupt partners can continue to deal with the partnership’s assets and liabilities.

If all partners are adjudicated bankrupt, the partnership is dissolved and all assets and liabilities of the partnership are assigned to the Official Assignee to manage.

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