Bounce Back Loan liquidation: what happens if your company can't pay

What was the Bounce Back Loan Scheme?

The Bounce Back Loan Scheme was a government-backed lending scheme, open from 4 May 2020 to 31 March 2021, that let small businesses borrow from £2,000 up to 25% of turnover, capped at £50,000, with a 100% government guarantee given to the lender.

Accredited lenders made the loans, and the British Business Bank, which oversaw the scheme for the government, did not lend to businesses itself. By February 2021 more than 1.4 million businesses had borrowed nearly £45 billion.

From the British Business Bank's scheme pages and lender manual, and GOV.UK. The same terms apply to every Bounce Back Loan, whichever lender made it.

What happens if a limited company cannot pay its Bounce Back Loan?

When a limited company cannot pay its Bounce Back Loan, the lender first offers forbearance such as Pay As You Grow, then demands the full outstanding balance and, if that goes unpaid, claims its loss from the government under the 100% guarantee.

Your company stays liable throughout, and a default could harm its credit score. Under the collections and recoveries principles that the government, the British Business Bank and the lenders agreed in December 2020, lenders are not generally expected to start insolvency proceedings just because a Bounce Back Loan is unpaid. Lenders keep a discretion to do so, though, so if a petition arrives, read our guide on what to do about a winding-up petition straight away.

A default usually follows the sequence below.

What happens to a Bounce Back Loan when the company goes into liquidation?

When a company goes into liquidation its Bounce Back Loan becomes an unsecured claim in the liquidation, so the lender claims the balance alongside the other unsecured creditors and recovers its loss from the government under the 100% scheme guarantee.

Under the scheme's own lender manual, Bounce Back Loans are unsecured facilities, so the lender has no charge over the company's assets. It receives a dividend only if money is left after the costs of the liquidation, any secured lender and the preferential creditors, who are paid first under the Insolvency Act 1986. Anything it recovers after its guarantee claim has been paid goes to the government. Once the liquidation ends and the company is dissolved, the unpaid balance cannot be collected from the company, and because no personal guarantee was allowed, the lender has no claim against you for the shortfall.

Expect the liquidator to look at how the loan was obtained and spent, because the Insolvency Service asks about Covid support schemes when directors' conduct is reported. Its guidance to insolvency practitioners says that a loan still outstanding when the company becomes insolvent is not, by itself, a reason to report a director where the application and the use of the money were legitimate.

Is a director personally liable for a company's Bounce Back Loan?

A director is not normally personally liable for a limited company's Bounce Back Loan, because the company was the borrower, lenders were not permitted to take personal guarantees under the scheme, and the government guarantee protects the lender, not the borrower.

Every borrower declared that it understood the guarantee covers losses made by the lender and that it remained fully liable for the repayments. For a limited company that liability sits with the company. Sole traders and partners are in a different position, because they borrowed in their own names and are personally liable, although the scheme stops lenders recovering against their principal private residence or primary personal vehicle. This page is written for limited companies.

That protection for directors holds as long as the loan was obtained honestly and spent on the business.

When can a director become personally liable for a Bounce Back Loan?

A director can become personally liable over a Bounce Back Loan where the money was taken for personal use, the application was false, the funds were used to favour the director or a connected creditor, or the company kept trading when it should have stopped.

Each situation gives the liquidator, the Insolvency Service or the courts a route to the director personally.

• Personal use of the money. Each borrower confirmed to the lender that the loan would be used only to provide an economic benefit to the business and not for personal purposes. Money paid to a director can be claimed back as an overdrawn director's loan account, and section 212 of the Insolvency Act 1986 lets the liquidator ask the court to order a director to repay misapplied money or pay compensation.
• A false application. Overstating turnover, applying for a second loan for the same business, or borrowing for a business that was not trading on 1 March 2020 can amount to fraud by false representation under the Fraud Act 2006 if it was dishonest, and fraud carries up to 10 years in prison.
• Paying off debts that favour you. Even where the scheme allowed refinancing, using the loan to repay a director's own loan to the company, or a debt the director had guaranteed, can be challenged as a preference under section 239 if the company was insolvent, looking back two years where the person preferred is connected to the company.
• Trading on too long. If a director knew, or ought to have concluded, that the company could not avoid insolvent liquidation and did not take every step to minimise creditors' losses, the court can order a contribution for wrongful trading under section 214.
• Disqualification and compensation. Misconduct can lead to disqualification for 2 to 15 years under the Company Directors Disqualification Act 1986, and the Secretary of State can then apply within two years for a compensation order to cover creditors' losses under section 15A.

Can you close a company with a Bounce Back Loan by striking it off?

A company with an unpaid Bounce Back Loan cannot safely be closed by striking it off, because the directors must send a copy of the DS01 application to the lender within seven days, and the lender can object and keep the company on the register.

If you have already applied and received an objection, the British Business Bank says it may be due to a Bounce Back Loan and that you need to speak to the lender, because the bank itself did not lend. GOV.UK also says a company can only apply to be struck off if it is not threatened with liquidation and has no agreement with its creditors.

• Telling the lender is a legal duty. Under section 1006 of the Companies Act 2006, failing to send the application to a creditor within seven days is an offence, and doing so to conceal the application is an aggravated offence with a maximum of seven years in prison.
• An objection holds things up. An accepted objection stops the strike-off for six months, and Companies House can extend that if the creditor shows it is taking steps to recover the debt.
• Dissolution can be undone. A creditor can apply to court to restore the company for up to six years after it is dissolved, under section 1030, and then pursue it.
• Dishonesty is an offence. GOV.UK warns that a dishonest strike-off application can lead to a fine and prosecution.

How did the 2021 Act change the risk of dissolving a company with a Bounce Back Loan?

The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 lets the Insolvency Service investigate and seek to disqualify the directors of dissolved companies, and it reaches back to companies dissolved before the Act was passed.

It received Royal Assent on 15 December 2021 and was fully in force from 15 February 2022. Section 6 of the Company Directors Disqualification Act 1986 now covers a director of a company "dissolved without becoming insolvent", and compensation orders under section 15A were extended in the same way. Its Explanatory Notes say the aim was to discourage the use of dissolution as a way of fraudulently avoiding repayment of government-backed loans, and they name the Bounce Back Loan Scheme.

In practice, dissolving a company to walk away from the loan swaps a debt for an investigation. A formal liquidation, in which the liquidator reviews the loan and reports on it, is usually the safer course. Our guide to director disqualification explains how an investigation works and what can follow.

What are the options for a company that cannot repay its Bounce Back Loan?

A company that cannot repay its Bounce Back Loan has four realistic options: Pay As You Grow, an affordable repayment plan with the lender, a company voluntary arrangement if the business is viable, or a creditors' voluntary liquidation if it is not.

Which one is right depends on whether the business can trade profitably once its debts are dealt with. In a CVA the Bounce Back Loan lender votes as an unsecured creditor, and under rule 15.34 of the Insolvency (England and Wales) Rules 2016 the proposal is approved if at least 75% by value of the creditors who respond vote for it, but fails if more than half of the unconnected creditors by value vote against. If the company has no future, our guide to what it costs to liquidate a company sets out the fees, and you can compare every route in your options if the company is in debt.

Not sure which applies to your company? Call us and we will tell you honestly.

How does Pay As You Grow work for a Bounce Back Loan?

Pay As You Grow lets a Bounce Back Loan borrower extend the loan from six years to ten at the same 2.5% rate, pay interest only for six months up to three times, and take one repayment holiday of up to six months.

You can combine the options. The interest-only periods can run back to back for up to 18 months, and the repayment holiday can only be taken once six consecutive payments have been made. Interest keeps running, so the loan costs more overall. The British Business Bank says using Pay As You Grow does not affect a borrower's credit rating, though lenders may take the outstanding loan into account when the business next asks for finance. Requests go to your lender, which handles every part of the scheme.

Pay As You Grow lowers the payments without reducing the debt. If the company already cannot pay its debts as they fall due, take advice before relying on it, because carrying on while insolvent puts the directors at risk.

Why speak to NTF about a Bounce Back Loan your company cannot repay?

NTF Corporate Solutions is a specialist insolvency practice whose advice on unpayable Bounce Back Loans comes from named practitioners, James Kaye and Nick Morgan, who are licensed by the Institute of Chartered Accountants in England and Wales and act under the Insolvency Act 1986.

We explain how the loan would be treated and where you stand personally before you commit to anything, and we tell you honestly whether Pay As You Grow, a CVA or a liquidation fits. As part of the NTF group, we have helped company directors since 2009, and the first conversation is free, confidential and without obligation.