Director liability for IRD debt: when company tax becomes personal

One of the first questions directors ask when their company owes IRD is: “Can they come after me?” The honest answer is that a company’s tax debt is the company’s, but there are several well-defined ways it can become personal. Knowing them helps you avoid them, and helps you see through advice that treats liquidation as a clean exit.

Is company tax debt a director’s personal debt?

Not in the ordinary course. A company is a separate legal person, and IRD’s claim for unpaid GST or income tax is against the company. That’s the point of a limited liability company. But the protection has limits.

How can a director become personally exposed?

Route	What it is	Where to read more
PAYE decisions	Deciding the company won’t pay employee deductions	PAYE arrears
Reckless trading (s 135)	Running the business in a way likely to cause substantial risk of serious loss to creditors	Below
Obligations (s 136)	Agreeing to obligations the company can’t reasonably be expected to meet	Below
Asset stripping (s HD 15)	Stripping assets so a company can’t pay its tax	Below
Personal guarantees	Promises to banks, landlords and suppliers	Guarantees and current accounts
Overdrawn current account	Drawings treated as money owed to the company	Same page
Phoenix rules	Reusing a failed company’s name	Phoenix rules

Why is PAYE so dangerous for directors?

Because it’s money taken from employees. IRD’s March 2026 media release said that making deductions and failing to pay them to IRD “carries a maximum sentence of up to 5 years in prison”, and that “the director of a company who decides that the company will not pay the deductions to Inland Revenue may be prosecuted for the company’s failure to pay” (IRD). If PAYE is behind, deal with it first.

What do sections 135 and 136 require?

Section 135 of the Companies Act is the reckless trading duty. Put simply, a director mustn’t let the company keep trading in a manner that exposes its creditors to a substantial risk of serious loss. Section 136 deals with obligations: a director shouldn’t commit the company to a debt or contract without reasonable grounds for thinking it can be met when it falls due.

These duties matter most when a company is near insolvency, which is often exactly when IRD debt is building. The Supreme Court’s 2023 Mainzeal decision found directors liable for large sums under these duties, and the Law Commission is now reviewing directors’ duties (University of Auckland, March 2026). The practical lesson is to keep good records of how and why you made decisions, take advice early, and act on it.

Worried about your personal exposure? Clearing IRD debt removes much of the pressure. See if funding fits. No credit check to enquire.

What is asset stripping liability?

Section HD 15 of the Income Tax Act can make people personally liable where a company is stripped of assets so that it can’t pay its tax. IRD’s tax technical summary of a court case describes how the section has been applied (IRD Tax Technical). The practical point is simple: don’t move money or assets out of a company that owes IRD. If someone suggests it, see warning signs.

Does liquidation make these risks go away?

No, and it can sharpen them. A liquidator investigates the company’s failure and director conduct, and checks whether directors or shareholders owe the company money (insolvency.govt.nz). Guarantees survive. Past PAYE decisions remain past decisions.

An academic quoted by the University of Auckland made a related point about the current law: if liability depends mainly on the presence of risk, “directors may favour immediate liquidation over strategies that could improve returns for creditors”. In other words, fear of liability can push directors toward liquidation even when another route would be better for everyone. Get advice that weighs all the options.

What should a director do now?

1. Pay current PAYE on time, every time.
2. Get a clear viability view from your accountant.
3. Record decisions at board level, including the advice relied on.
4. Don’t move assets out of the company.
5. Look at funding and arrangements before formal insolvency.
6. Take legal advice about your personal position if insolvency is possible.

Our guide am I personally liable for my company’s tax debt? covers each point in more depth.

An illustrative example

Illustrative only. Not a real client and not an offer.

The sole director of a Canterbury engineering firm had paid wages but not PAYE for four months while waiting on a large overdue invoice. Worried about prosecution, he was urged to liquidate quickly. His lawyer advised that liquidation wouldn’t change the PAYE history. He used a property-secured loan to clear the PAYE and GST immediately, documented the decision and the late invoice, and kept the firm trading. The invoice was paid two months later.

Are shareholders who aren’t directors exposed?

Usually less so, but not entirely. A shareholder who has drawn money from the company, beyond what they’ve put in, can owe that money back through an overdrawn current account, and a liquidator can pursue it. Shareholders who act like directors, by making the real decisions, can be treated as directors for some purposes. If you’re a family member or partner listed as a shareholder, find out what your current account looks like before any decision about the company’s future.

Protect the company and yourself

If you’re a director worried about IRD debt becoming personal, talk to us today. There’s no credit check to ask, your details aren’t passed to other lenders, and a real person will help you see whether clearing the debt now is realistic. Please be accurate about PAYE, GST and any guarantees, so we can give you a useful answer.