What Is A Distribution Under New Zealand Company Law?

If you run a company in New Zealand, it’s normal to think of “paying money out” as something you can do whenever the business has cash in the bank.

But under the Companies Act 1993, many payments and value transfers from your company to shareholders (or to people connected to shareholders) can count as a distribution. And before your company makes a distribution, your directors generally need to be satisfied the company passes the solvency test.

This is where the solvency test in New Zealand company law becomes very practical for small business owners. Getting it wrong can expose directors to personal liability, create shareholder disputes, and cause major headaches if you later sell the business or raise capital.

Below, we’ll break down what a “distribution” is, what the solvency test involves, how directors should document their decision-making, and the common traps we see in owner-operated companies.

What Does “Distribution” Mean Under The Companies Act 1993?

In everyday language, you might think “distribution” just means a dividend.

In New Zealand company law, it’s broader than that. A distribution generally means your company is transferring value to shareholders (or for shareholders’ benefit), whether that’s cash, assets, or the release of an obligation.

Common examples of distributions include:

• Dividends (cash or in-kind)
• Share buybacks (where the company buys back its own shares)
• Redemptions of shares
• Certain financial assistance by the company in connection with the acquisition of its shares (where the Companies Act treats it as a distribution or applies distribution-like controls)
• “Soft” value transfers that benefit shareholders, such as forgiving a shareholder’s debt to the company

It’s also worth remembering that some transactions can become “distribution-like” in substance, even if you don’t label them that way. For example, if the company pays personal expenses for a shareholder-director and you don’t treat it correctly in the accounts (for example, as drawings, a shareholder loan, or as salary with PAYE), it may raise questions about whether value has been transferred in a way that should have followed the Companies Act rules.

From a small business perspective, distributions come up most often in:

• family companies where profits are regularly paid out to owners
• companies with multiple shareholders where one shareholder expects regular dividends
• companies restructuring ownership (buying out a co-founder or investor)
• business sales or fundraising (because buyers and investors will often ask whether past distributions complied with the law)

Why Does The “Distribution” Label Matter?

Because once a transaction is a distribution, the company must comply with the Companies Act process - including the solvency test and director approvals.

This is exactly why the solvency test is such a common search topic: directors and shareholders want to know what they must do before taking money out, not after a dispute has started.

What Is The Solvency Test In Company Law (And Why It Matters For Small Businesses)?

The solvency test is a legal check your company must satisfy before making a distribution.

In simple terms, your directors need to be satisfied that:

• Liquidity test: the company can pay its debts as they fall due in the normal course of business; and
• Balance sheet test: the value of the company’s assets is greater than the value of its liabilities (including contingent liabilities).

These two parts work together. A company might look “asset rich” but still fail the liquidity test (for example, if its assets are tied up in stock or equipment and it can’t pay suppliers on time). On the flip side, a company might have cash today but be balance-sheet insolvent once you properly account for liabilities.

What Does This Mean In Practice?

For many owner-operated companies, the solvency test isn’t about doing a complicated valuation every time you pay a dividend. It’s about acting like a responsible director and checking the basics properly.

For example, directors should usually consider:

• current cash position and expected cashflow for the next weeks/months
• upcoming bills (for example, PAYE, GST, rent, supplier payments, loan repayments)
• any disputes, claims, or guarantees that could turn into real liabilities
• whether the company is relying on one big customer invoice being paid
• seasonality (many small businesses are profitable annually but tight month-to-month)

If you’re unsure whether a proposed payment is safe, this is one of those times where getting advice early can protect you personally as a director.

What Types Of Transactions Count As A Distribution (Beyond Dividends)?

Dividends are the classic distribution, but they’re not the only one. If you only associate distributions with dividends, you can accidentally skip the solvency test process in scenarios where it still applies.

1) Dividends

A dividend is a distribution made to shareholders (whether in cash or sometimes in-kind, such as transferring an asset rather than cash). Importantly, dividends aren’t simply “paid out of profits” whenever the business has done well - they must be authorised in accordance with the Companies Act, including the solvency test and the company’s accounting and governance requirements.

Even if your accountant helps prepare the numbers, the directors still need to turn their minds to the solvency test before approving a dividend.

Note: This article is general information only and isn’t tax advice. It’s a good idea to speak with your accountant or tax adviser about the tax treatment of any payments to shareholders.

2) Share Buybacks And Share Redemptions

Buying back a departing shareholder’s shares is a common small business scenario, especially when a co-founder leaves.

A buyback can be a powerful tool, but it also triggers extra legal steps and documentation. If your company is considering a buyback, having a properly structured Share Buyback Agreement can help clarify price, timing, releases, warranties, and the mechanics of the transaction.

Because the company is providing value in connection with its shares, these transactions commonly involve the distribution rules and solvency test analysis.

3) Forgiving Shareholder Debt Or “Writing Off” Loans

If a shareholder owes money to the company (for example, a shareholder current account) and the company forgives or writes it off, that can amount to a transfer of value for the shareholder’s benefit.

This is the sort of issue that often appears later in due diligence (for example, when you’re selling the business), because it can look like value left the company without proper process.

4) Company Pays Shareholder Expenses

Owner-operated companies sometimes pay for vehicles, travel, home office costs, or other expenses that can be partly personal. This can be legitimate if handled correctly and recorded properly.

The risk is when personal benefits are paid out casually without clear documentation, approvals, or accounting treatment. Depending on the circumstances, it may raise questions about whether the company has effectively made a value transfer that should have been treated more carefully.

If your arrangements are informal, it can be worth tightening them up as part of a broader Legal Health Check, especially before bringing on investors or selling the business.

Who Is Responsible For The Solvency Test (And What Records Should You Keep)?

Under New Zealand company law, it’s the directors who must be satisfied the company meets the solvency test before a distribution is made.

This matters even in “one-person companies”. If you’re the sole director and sole shareholder, it’s easy to think: “I’m paying myself, so who cares?”

But legally, you wear two hats:

• Shareholder: you benefit from distributions; and
• Director: you have duties to the company and must comply with the Companies Act process.

How Do Directors Document The Solvency Test?

Good record-keeping is a big part of staying safe. Practically, directors usually record:

• the decision to approve the distribution
• the basis on which they believe the company satisfies the solvency test
• the amount and type of distribution (cash dividend, buyback payment, in-kind transfer)
• the date the distribution is authorised and paid

Often, this is done through a written directors’ resolution. If you need a starting point for documenting decisions properly (and tailoring it to your situation), a Directors Resolution Template can be a helpful foundation.

In many companies, distributions also interact with the company’s internal rules (for example, what shareholders must approve and when). That’s where having a clear Company Constitution can really reduce confusion as your business grows or brings on new shareholders.

Why Is Paperwork So Important If The Company Is Actually Solvent?

Because if there’s ever a dispute (between shareholders, with a liquidator, or with a purchaser during a sale), you may need to show:

• the directors genuinely turned their minds to the solvency test, and
• the decision was made on reasonable grounds at the time (not with hindsight).

This is one of the most overlooked parts of solvency test compliance for small businesses: it’s not just about being solvent, it’s about being able to prove you followed the right process.

Common Solvency Test Traps For Owner-Operated Companies

Even very successful small businesses can run into trouble here - not because they’re trying to do the wrong thing, but because day-to-day operations move quickly and legal compliance can feel like admin.

Here are some common traps we see.

Relying On “Cash In The Bank” Alone

Having cash today doesn’t automatically mean you pass the solvency test. Directors should consider whether the company can pay debts as they fall due after the distribution, including:

• GST and PAYE due dates
• loan repayments and interest
• supplier invoices and wages
• any deferred rent or agreed payment plans

Ignoring Contingent Liabilities

A contingent liability is something that might become a real liability depending on what happens (for example, a dispute, a warranty claim, or a guarantee you’ve given).

For small businesses, common examples include:

• personal guarantees and company guarantees (especially for leases and lending)
• potential employment claims
• refund/returns exposure (depending on your industry)
• contract disputes with customers or suppliers

You don’t need to assume the worst, but you do need to consider realistic risks.

Confusing Dividends With Salary Or Drawings

If you’re taking money out of the business regularly, it’s important to be clear whether it’s:

• salary/wages (employment income with PAYE obligations)
• shareholder remuneration (often used in NZ tax planning)
• a dividend (a distribution under the Companies Act)
• a repayment of a shareholder loan

Your accountant will usually guide you on the tax side, but the company law side still matters - particularly for dividends and other distributions.

Not Aligning Shareholder Expectations Early

If you have multiple shareholders, distributions can become a flashpoint. One shareholder might want to reinvest profits for growth, while another wants regular dividends.

Clear rules can help avoid disputes, especially when you’re setting out what happens with profits, decision-making, and exits. This is where a properly drafted Shareholders Agreement can be a game-changer for small businesses.

How Do Distributions Affect Buying Or Selling A Business?

If you plan to sell your business one day (even if that feels far away), it’s smart to treat the solvency test and distributions as part of your “legal foundations”. Buyers and investors often want comfort that the company has been run properly.

During a sale, due diligence commonly looks at:

• financial statements and retained earnings
• dividend history and shareholder payments
• director resolutions approving distributions
• share buybacks or shareholder exits
• related party transactions (payments to owners and connected entities)

If records are missing, buyers may:

• ask for price reductions
• seek warranties/indemnities (which can shift risk back to you)
• delay completion while issues are investigated

If you’re either preparing for a transaction or you’re already in the middle of one, a structured Legal Due Diligence Package can help identify issues early, while you still have options to fix them.

On the flip side, if you’re buying a company, understanding distributions and the solvency test can help you spot risk. A company that’s been paying out value aggressively (without solvency documentation) might have hidden liabilities or governance problems.

Key Takeaways

• A “distribution” under the Companies Act 1993 can include dividends, share buybacks, redemptions, and other transfers of value to shareholders (or for their benefit).
• Before making a distribution, directors generally need to be satisfied the company passes the solvency test (both the liquidity test and the balance sheet test).
• The solvency test isn’t just theory - it affects common small business activities like paying dividends, buying out a co-founder, and handling shareholder loans.
• Directors should document decisions properly (including why they believe the company is solvent), because good records can protect you if issues come up later.
• Distributions and solvency compliance often come under the microscope during business sales, fundraising, and shareholder disputes - so it pays to get this right from day one.

If you’d like help working out whether a payment is a distribution, whether your company passes the solvency test, or how to document decisions properly, you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.