What happens to fines when a business goes under? By Bede Henderson

Company liquidations remain elevated in 2026, with the IRD continuing a firm enforcement approach. Practitioners regularly encounter files featuring provable tax debts alongside penal liabilities such as court-imposed fines and reparation orders, which sit outside the normal insolvency distribution framework.

When these penal elements surface, a structural tension is exposed – one that Parliament has long recognised and chosen not to fix.

The Legal Framework

S 303(1) of the Companies Act 1993 adopts a broad conception of admissible liquidation claims, which is immediately curtailed by s 303(2). Certain liabilities are excluded from proof in liquidation, including fines, monetary penalties, sentences of reparation, orders, and related costs to which s 308 applies.

Those liabilities do not participate in the “pari passu” (on equal footing) distribution of assets, which is the foundational insolvency principle requiring creditors of equal rank to share proportionately in the available estate. The exclusion rests on sound policy. Punitive sanctions should not dilute recoveries for creditors uninvolved in the wrongdoing.

But it gives rise to a difficult question: if penal liabilities are excluded from the collective process, what becomes of the punishment itself?

The answer lies in s 308. It provides that nothing in Part 16 of the Act (the entire liquidation regime) limits or affects the recovery of such fines, penalties, and reparations. Importantly, this extends to the usual moratorium on enforcement contained in s 248(1)(c). In practical terms, the Crown may therefore continue enforcement outside the liquidation process, potentially obtaining what amounts to a de facto “super priority”.

That outcome sits uneasily with the approach proposed by the Law Commission in its 1989 Company Law Reform and Restatement report. The Commission recognised that fines and penalties could be characterised as claims by the community against the company, but contemplated that they should rank alongside other unsecured creditors. The critical point is that they would remain unsecured claims within the collective regime.

The current framework takes a different path. Penal liabilities are neither extinguished nor treated as ordinary unsecured debts. Instead, they are carved out of the proof and distribution process altogether, while remaining fully enforceable outside of it. In practice, that can elevate them above the very unsecured creditors from whom they were supposedly separated.

That is the structural tension at the centre of this issue.

The Reform That Never Arrived

In 2019, following the Insolvency Working Group review, Cabinet signalled a straightforward solution: admit penal liabilities into the liquidation regime, but subordinate them to unsecured creditors. Punishment preserved; coherence restored.

It went nowhere.

Subsequent insolvency reform focused elsewhere; particularly on voidable transactions, phoenix activity, and director accountability.

Until reform arrives, New Zealand insolvency law will continue to accommodate an uneasy contradiction: penalties excluded from the collective process, yet still capable of outranking it in practice.

Bede Henderson is a Wellington-based Chartered Accountant and manager with Waterstone Insolvency.