NZ's system for dealing with business distress is too blunt.

New Zealand is closing businesses faster than it is learning from their failure.

March 2026 was the worst March for company liquidations in 11 years, with 286 company liquidations and 308 insolvencies reported. Construction was hit hardest, with 768 firms liquidated in the year to March. Hospitality followed with 399 liquidations, up 49 percent on the previous year.

The easy explanation for this is the economy. Interest rates have increased. Demand has weakened. Costs have risen. Sales pipelines have thinned. For firms living on narrow margins, a few months of pressure can be enough.

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That explanation is incomplete. The liquidation spike is not only telling us that the economy is weak, it is telling us that New Zealand’s system for dealing with business distress is too blunt.

Consider a small subcontractor waiting 60 or 90 days for payment, while wages, PAYE and GST obligations continue. The firm may have skilled staff, future work and a good reputation. Its problem may not be commercial failure, but bad timing. Yet once creditors lose patience, confidence evaporates. Staff leave. Customers hesitate. Suppliers tighten terms. What might have been a restructuring becomes a liquidation.

Some firms should fail. Keeping unviable businesses alive traps capital, labour and attention in the wrong places. Exit is part of a healthy economy. 

The issue is not liquidation itself, it’s whether we can distinguish early enough between firms that should close and firms that could recover.

Too often, we cannot.

New Zealand’s insolvency framework is too oriented towards late-stage failure. Voluntary administration exists, but for many smaller firms it is too formal, too costly and used too late. By the time the process starts, the business is often beyond recovery.

This is not inevitable. The European Union has explicitly adopted a “second chance” approach, giving viable firms a window to restructure early and honest entrepreneurs a pathway back after failure. New Zealand could recognise the principle that failure should not automatically mean disappearance.

This is also a matter of innovation, although not in the usual sense. Innovation is not only about start-ups, patents and venture capital, it is also about preserving and recombining practical capability. When a firm disappears, more than a legal entity is lost. Teams break up. Supplier relationships dissolve. Local knowledge disappears. In a small economy, these losses are not easily replaced.

Failure also shapes behaviour before it happens. When the downside is abrupt, punitive and value-destroying, entrepreneurs learn the lesson. They invest cautiously. They scale slowly. They avoid visible risk. Individually, that may be rational. Collectively, it weakens the economy’s capacity for renewal.

Culture compounds the problem. New Zealand likes to describe itself as having an entrepreneurial no 8 wire mentality, but we remain uneasy with visible success and visible failure. The tall poppy instinct is usually discussed as a reaction to achievement, but it also affects second chances. In a small country, reputation travels quickly and lingers. That can make founders slower to acknowledge distress and less confident about trying again.

A better system would not shield weak firms from consequences, it would create earlier, cheaper and more disciplined pathways for firms with a viable future.

One option is a preventive restructuring process designed for small and medium-sized businesses. It could include elements such as a temporary stay on creditor enforcement, an independent restructuring adviser, directors remaining in control under supervision, a fast creditor vote, and eligibility limited to firms that can demonstrate underlying viability. That would not save every firm, nor should it. But it would give recoverable firms a chance before value is destroyed.

It would also allow for earlier advice. Directors should be encouraged to seek help before distress becomes terminal, without regarding that step as an admission of defeat. Inland Revenue, banks, accountants, industry bodies and tertiary education providers all have a part to play in shifting firms from avoidance to early intervention and ongoing capability development.

The current wave of liquidations should be treated as a warning. It is not just a story about weak demand or high costs. It is a test of how well New Zealand recycles talent, capital and capability when firms come under pressure.

An economy that wants more innovation needs to be thinking across economic cycles and across stages in firm lifecycles, not just start-ups. Hard times are inevitable, so we cannot afford a failure system that treats recovery as an afterthought.