Dunedin - The Otago Rugby Union will be placed in liquidation on Friday, potentially winding up one of New Zealand's strongest provincial teams which has produced 156 All Blacks in 131 years.

The Dunedin-based union is due to report a loss of several hundred thousand New Zealand dollars to its annual meeting after years of deficits and while facing almost NZ$2 million in negative equity.

New Zealand Rugby Union chief executive Steve Tew and Otago union chairperson Wayne Bennett told a news conference on Monday that there was no choice but to call in liquidators.

The Highlanders will continue to play in the Super Rugby competition as they are operated by a separate and independent organisation.

"The situation at Otago is unprecedented in our history," Tew said. "We have been working hard to avoid this outcome.

"That is why NZRU appointed a specialist late last year to develop a recovery plan and negotiate with affected parties and also why we provided interim finance to ORFU of NZ$200 000 over the last two months.

Tew said the NZRFU was were all prepared to help, but in the end, the financial hole was just too big.

"The union had debts of NZ$2.35 million and was facing a significant shortfall in revenue this year. Quite simply, it has run out of money and could not trade out of its difficulties."

Tew said negotiations were taking place with contracted players and sponsors to determine whether Otago could enter a team in New Zealand's national provincial championship later this year. Otago is one of New Zealand's top-four provinces after Auckland, Wellington and Canterbury and its absence would send shockwaves through New Zealand rugby.

The current board of directors of the Otago union is expected to be dismissed.

"The Otago RFU was a sovereign legal entity, like all unions, managing its own affairs," Tew said.

"A number of attempts were made to recover the situation. We will now discuss with all interested parties the way forward from here in terms of future arrangements for delivering rugby across the region."

Monday's announcement is likely to raise concerns throughout New Zealand rugby that if a province as large and established as Otago can fail, others my not be far behind. Many large provincial unions are wrestling with debt as they face the expanding cost of player salaries while revenue from ticket sales and sponsorship declines.

Otago is one of New Zealand's proudest provinces, having won the national championship twice in its current format. It has been the home province of players such as David Kirk, captain of the first All Blacks team to win the Rugby World Cup, and Jeff Wilson, who represented New Zealand at both rugby and cricket.