The Otago Rugby Union has confirmed it will go into liquidation by Friday. The South Island club has debts of $2.35 million.
The New Zealand Rugby Union says the Otago Union's debt is too much for it to bail out, and further losses were expected in 2013.
The NZRU says despite the injection of hundreds of thousands of dollars' worth of time and money from the national body, the Otago Union's debt has grown to an unsustainable level.
The organisation says the decision does not affect the Highlanders franchise, as it is a separate legal entity contracted by the NZRU.
However, it says Otago may not be able to field a side to play in the ITM Cup, as there is no money to pay players.
The NZRU says some employees at the union will be hired in other positions, but others will be made redundant.
It says the Otago Union has limited assets and is unlikely to be able to pay back loans to creditors.
The union ceased trading in December last year.