The Bounce Back Loan Scheme closed to new applications on 31 March 2021. Around 1.56 million loans worth roughly £47 billion were made, and the question directors ask us now is not how to get one. It is what happens to it when the company cannot carry on.
The short answer: a Bounce Back Loan is an unsecured company debt, and in a liquidation it ranks alongside your other unsecured creditors. You are not personally liable for it simply because the company cannot repay it. What can make you personally liable is what you did with it, and that is a separate question the liquidator is required to look at.
What the Scheme Was, and What Survives of It
The scheme ran from 4 May 2020 to 31 March 2021. It let a small business borrow between £2,000 and £50,000, capped at 25 per cent of turnover, with no personal guarantee, no interest and no repayments for the first twelve months, and a fixed 2.5 per cent thereafter.
One feature of it is still widely misunderstood, and it is the one that matters most in an insolvency:
Directors sometimes read the guarantee as meaning nobody is chasing the money. In practice it means the taxpayer is, and the government has been notably less willing than a commercial lender to let a doubtful case go quietly.
What Happens to a Bounce Back Loan in Liquidation
In a Creditors’ Voluntary Liquidation, the loan is an unsecured claim. The liquidator realises the company’s assets. A lender with a fixed charge is paid from the assets it holds security over. From the rest, the liquidator pays the costs of the liquidation, then the preferential claims, then any lender with a floating charge, after setting aside a prescribed part for unsecured creditors where the charge was created on or after 15 September 2003. What is left goes to unsecured creditors in proportion to what they are owed.
Most Bounce Back Loans in liquidation are not repaid in any meaningful part, because there is rarely much left. Once the company is dissolved at the end of the process, creditors can no longer pursue it in practice, so the unpaid balance is not collected. The debt is not extinguished, and a creditor can apply to court to restore the company to the register and claim again. Writing off the balance in this way is the ordinary outcome, and it is lawful.
The lender has no claim against you under the loan itself, because no personal guarantee was given. Where personal liability does arise, it comes from separate action over the application, how you ran the company and how you used the money, which is covered below.
Where Personal Liability Actually Comes From
The liquidator of an insolvent company has a statutory duty to report on the conduct of everyone who was a director in the three years before the liquidation, and with a Bounce Back Loan on the books there are specific things they look at. Personal exposure comes from four routes, none of which is the debt itself.
- Overstating turnover on the application. The limit was 25 per cent of turnover. If the figure was inflated to borrow more than the business was entitled to and you are disqualified or give a disqualification undertaking, the Secretary of State can apply for a compensation order, often measured by the excess, and the conduct can be treated as fraud. A liquidator can bring separate claims against a director.
- Using the money for something other than the economic benefit of the business. The loan was for the business. Paying a director’s mortgage, buying a vehicle for personal use, or moving funds to a connected company without a genuine business reason can be a misapplication, and the liquidator can pursue you for it.
- Repaying yourself or a connected party. Using the loan to repay money the company owed you, or to settle a debt you had personally guaranteed, can be a preference. A liquidator can apply to court to reverse it under section 239 of the Insolvency Act 1986 if it happened within the two years ending with the onset of insolvency (the date the winding-up petition was presented in a compulsory liquidation, or the date of the resolution to wind up in a creditor-led voluntary liquidation) and the company was unable to pay its debts at the time, or became unable to pay them because of the payment. The court must also be satisfied that the company was influenced by a desire to put you in a better position. Because you are a director, the law presumes that desire unless you can show otherwise. Using it to clear an overdrawn director’s loan account (money you owed the company) is a separate problem. The liquidator can pursue it as a misapplication and recover the balance from you.
- Continuing to trade when there was no reasonable prospect of avoiding insolvent liquidation. That is wrongful trading, and it is worth being precise about it. Wrongful trading is a civil liability under sections 214 and 246ZB of the Insolvency Act 1986, not a criminal offence. It is also not the same thing as trading while insolvent. The test is whether you knew, or ought to have concluded, that there was no reasonable prospect of avoiding insolvent liquidation or insolvent administration. You have a defence if, from that point, you took every step you ought to have taken to minimise the potential loss to creditors.
Take the four together and the pattern is clear enough. A director who borrowed within the rules, spent it on the business and stopped when it was plainly over has very little to worry about. A director who did none of those things has a good deal to worry about, and the liquidator will find it, because the bank statements are the first thing we ask for.
Why Striking Off Is the Wrong Answer
The instinct to dissolve the company quietly and move on was common in 2021, and it no longer works.
The law does not bar a company with debts from applying to be struck off, but every creditor must be sent a copy of the application within seven days, and any creditor can object. Failing to send the copies is an offence, though it is a defence for the person applying to show they took reasonable steps to give them. More importantly, the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 gave the Insolvency Service power to investigate the conduct of directors of companies that have already been dissolved, without first restoring them to the register.
That power is retrospective. It reaches conduct that happened before the Act came into force. Disqualification runs from two to fifteen years, and the court can also make a compensation order requiring a disqualified director to pay creditors personally. The first disqualifications under the Act, announced on 29 July 2022, were all Bounce Back Loan cases, with bans of between seven and twelve years.
So dissolution is not an exit from a Bounce Back Loan. It is a slower route to the same investigation, with the added difficulty that you dealt with the company’s affairs yourself instead of handing them to a liquidator.
If You Cannot Repay the Loan
Work out first whether this is a cashflow problem or a solvency problem, because the answers are different.
- If the business is viable and the loan is the strain, speak to the lender. Pay As You Grow options let borrowers extend the term to ten years, move to interest-only for six months, or take a repayment holiday. They lower the monthly payment, but interest continues to build up, so the total cost over the life of the loan usually rises.
- If the business is viable but the wider debt is not serviceable, a Company Voluntary Arrangement can restructure the whole creditor position, the Bounce Back Loan included, over a fixed term.
- If the company cannot be saved, a Creditors’ Voluntary Liquidation closes it properly. You choose the timing and the company nominates the liquidator, though creditors can nominate someone else and their choice normally prevails. The company’s unpaid debts cannot be pursued while it stays dissolved, though the debt is not extinguished and the company can be restored to the register, and any you personally guaranteed can still be claimed from you, and your conduct is reported on by someone who can also record that you acted correctly.
The Honest Reading
From the office-holder’s chair, the Bounce Back Loan cases that go badly for directors are almost never the ones where the business simply failed. Businesses fail. They are the ones where the application figure cannot be reconciled with the accounts, or where £50,000 arrived and left the company account within a fortnight in a direction that had nothing to do with trading.
If that describes your situation, take advice before you do anything else, and take it from someone who will tell you where you actually stand. If it does not, the loan is a company debt like any other, and closing the company properly is a legitimate thing to do.