Bounce Back Loans and Liquidation
If your company still owes money on a Bounce Back Loan and is considering liquidation, you may be worried that the loan will become your personal responsibility.
For most directors, the starting point is straightforward: a Bounce Back Loan taken out by a limited company is a company debt. The company entering liquidation does not automatically make the director personally liable for the outstanding balance.
The original Bounce Back Loan Scheme did not permit lenders to take personal guarantees from directors.
However, the circumstances in which the loan was obtained and how the money was used can be reviewed if the company becomes insolvent. Problems can arise where a company was not entitled to the borrowing, inaccurate information was provided or company funds were used improperly.
What happens to the Bounce Back Loan in a Scottish CVL?
debts?
The borrower is the limited company. If it enters a Creditors’ Voluntary Liquidation, the lender is a creditor and can submit a claim for the outstanding balance.
The liquidator deals with that claim under the Scottish liquidation process alongside the other creditors. Liquidation does not transfer the company’s ordinary loan balance to its director just because the company cannot repay it.
Does the government guarantee protect the director?
The Bounce Back Loan Scheme gave a guarantee to the lender and did not permit a personal guarantee for the Bounce Back Loan. It was not a promise that the company could ignore the debt. The lender’s claim remains against the company.
A director may still face a separate issue if there was improper conduct, a misleading application, misuse of funds or money owed to the company through an overdrawn loan account. Those issues must be assessed on their facts; they are not automatic consequences of company failure.
What will the liquidator review?
The liquidator will review the company’s records and relevant transactions in the ordinary way. For a Bounce Back Loan, that may include the application, the amount borrowed, company bank statements and how the funds were used.
Keep those records available. An honest business failure and an inability to repay the loan are different from an inaccurate application or using company borrowing for personal purposes.
What if the company cannot keep up repayments?
ook at the whole financial position, including current trading, HMRC liabilities, other lenders and employees. If the business is viable, discuss available repayment options with the lender and take restructuring advice. I
f recovery is not realistic, a Scottish CVL may allow the company’s debts to be addressed in an orderly process.
Do not take further company funds or make selective payments without advice when insolvency is apparent.
Can a liquidator pursue a director personally?
Potentially, but only where there is a proper basis for a claim.
A liquidator’s role includes identifying and recovering assets belonging to the company and considering whether claims exist arising from the company’s affairs.
That can include claims against directors where, for example:
- The director owes money to the company
- Company assets or money have been improperly taken or retained
- A transaction involving the director or a connected party requires recovery
- The director has breached duties owed to the company
- Wrongful or fraudulent trading provisions apply
The existence of a liquidation does not itself create a claim. The liquidator has to consider the facts and the relevant legal basis.
If a material personal claim is identified, the liquidator is acting for the insolvent estate rather than as the director’s personal adviser. A director may therefore need separate independent legal advice about their own position.
Misfeasance and breach of directors’ duties
The Insolvency Act provides a procedure commonly referred to as misfeasance proceedings.
A claim can potentially arise where a director has misapplied or retained company money or property, become accountable for it, or committed a misfeasance or breach of fiduciary or other duty in relation to the company.
Depending on the circumstances, the court can require a director to repay, restore or account for money or property, or make a contribution by way of compensation.
Examples of matters that may require review include:
- Company money used for personal expenditure
- Assets transferred away from the company without proper value
- Improper payments to directors or connected parties
- Dividends paid when there were insufficient distributable reserves
- Failure to account properly for company property
- Decisions made in breach of directors’ duties
Whether any particular transaction creates personal liability depends on the facts. A payment or transaction being questioned by a liquidator does not automatically mean that misconduct has occurred.
Wrongful trading
Wrongful trading is often misunderstood.
A company being insolvent, or even continuing to trade while insolvent, does not automatically make its directors personally liable for wrongful trading.
The statutory test focuses on the point at which a director knew, or ought to have concluded, that there was no reasonable prospect of the company avoiding insolvent liquidation and on what steps were then taken to minimise the potential loss to creditors.
Factors that may become relevant include:
- When the company’s financial position became clear
- What financial information was available to the directors
- Whether further trading had a realistic prospect of improving the outcome
- Whether creditors’ losses increased during the relevant period
- What professional advice was taken
- What steps directors took to protect creditors
- Whether decisions were properly considered and documented
The purpose is not to punish every director whose business ultimately fails. The issue is how the directors acted once the company’s position had deteriorated to the relevant point.
Fraudulent trading
Fraudulent trading is more serious and involves dishonesty.
The Insolvency Act allows the court to order a contribution where the company’s business has been carried on with intent to defraud creditors or for another fraudulent purpose and the relevant person knowingly participated in that conduct.
Ordinary commercial failure, poor forecasting or a business decision that turned out badly is not the same thing as fraudulent trading.
If there are concerns about deliberate deception, false representations or misuse of company funds, specialist legal advice may be appropriate.
Payments and transactions before liquidation
Transactions entered into before insolvency can be reviewed by the liquidator.
Particular attention may be given to transactions involving:
- Directors
- Shareholders
- Family members
- Connected companies
- Creditors whose debts have been personally guaranteed
- Assets sold shortly before liquidation
- Unusual or substantial payments
The mere fact that a transaction occurred before liquidation does not make it improper. The legal tests depend on matters including the nature of the transaction, its value, the company’s financial position and the reason it was entered into.
Directors should be particularly cautious about transferring assets, repaying themselves or connected parties, or paying creditors whose debts they have personally guaranteed once insolvency is apparent.
Can HMRC make a director personally liable for company tax?
Company tax liabilities such as VAT, PAYE and Corporation Tax do not normally become the director’s personal debts simply because the company enters liquidation.
There are, however, specific statutory circumstances in which HMRC can issue a joint and several liability notice to a director or other individual connected with a company.
The legislation is targeted at specified circumstances, including certain cases involving:
- Tax avoidance or tax evasion
- Repeated insolvency and non-payment of tax
- Specified penalties connected with facilitating avoidance or evasion
A joint and several liability notice is not an automatic consequence of a company owing HMRC money or entering liquidation. Statutory conditions have to be satisfied before HMRC can issue one.
If HMRC has already issued or threatened a notice against you personally, obtain advice on the notice itself rather than assuming it will be dealt with through the company liquidation.
What about a Bounce Back Loan?
A Bounce Back Loan taken out by the company is normally a company liability rather than a personal liability of its directors.
The company entering liquidation does not, by itself, require a director to personally repay the remaining Bounce Back Loan balance.
The liquidator may, however, review the circumstances in which borrowing was obtained and how the funds were used.
Issues can arise where, for example, there are concerns that funds were obtained on inaccurate information, used for purposes unrelated to the economic benefit of the business, or transferred improperly.
Can I lose my house if my company goes into liquidation?
Company liquidation does not automatically put your home at risk.
Your personal assets are not company assets simply because you are a director or shareholder.
Your home or other personal assets could potentially become relevant if, for example:
- You have granted security over personal property to support a company debt
- A creditor successfully enforces a personal guarantee against you
- You owe a substantial amount to the company and cannot meet the claim
- A successful legal claim establishes personal liability against you
Those are personal claims or obligations. They are not the same thing as the liquidator simply taking a director’s personal property because the company has failed.
Can a liquidator take my personal bank account or belongings?
Not simply because you were a director of the insolvent company.
The liquidator deals with assets that belong to the company.
If the company has a valid claim against you personally—for example, repayment of an overdrawn director’s loan account—the liquidator may pursue that claim in the same way that the company could have done.
If a personal liability is established and cannot be paid, the usual debt-enforcement or personal insolvency consequences may then need to be considered separately.
Can I start another company after liquidation?
Usually, yes.
Being a director of a company that enters insolvent liquidation does not automatically prevent you from being a director of another company.
There are, however, important restrictions around using the same or a similar company name.
A person who was a director of a company during the 12 months before its insolvent liquidation is generally restricted for five years from being involved in another business using the same or a sufficiently similar prohibited name unless a statutory exception applies or court permission is obtained.
Breaching those rules can have serious consequences, including personal liability for certain debts of the new business.
Does liquidation mean I have done something wrong?
No.
Businesses fail for many reasons. Loss of major customers, rising costs, bad debts, market changes, illness, economic conditions and simply unsuccessful commercial decisions can all contribute to insolvency.
A liquidator is required to review relevant aspects of an insolvent company’s affairs and director conduct. That review is a normal part of the insolvency process and does not mean that wrongdoing is assumed.
Where directors have acted properly, maintained records, protected company assets and sought advice when difficulties became serious, the existence of a failed business does not itself create personal liability.
What should directors do when insolvency becomes apparent?
Once a company becomes insolvent, directors need to place greater emphasis on protecting creditors and avoiding unnecessary deterioration in their position.
Practical steps include:
- Protect company assets
- Preserve accounting records and company information
- Review the company’s current financial position
- Avoid unnecessarily increasing liabilities
- Be cautious about selective payments to directors, connected parties or particular creditors
- Do not transfer company assets without proper consideration
- Document important decisions
- Take professional insolvency advice promptly
Taking advice does not commit the company to liquidation. It helps directors understand whether rescue remains realistic and, if not, what steps should now be taken.
Bounce Back Loan FAQs
Will the lender pursue me personally for the company’s Bounce Back Loan?
The scheme did not permit lenders to require a personal guarantee for that loan. Ordinary non-payment by the limited company does not, by itself, make its director personally liable. A separate claim based on misconduct or another legal obligation is a different matter.
Does liquidation make the loan disappear?
The lender remains a creditor of the company and can claim in the liquidation. Any unpaid company debt is dealt with through that process; liquidation does not erase questions about how the loan was obtained or used.
What if I used some of the money personally?
That requires a careful review of the transaction and the company’s records. A personal withdrawal may be reflected in an overdrawn director’s loan account or raise another issue. Do not assume it is covered by the lender’s government guarantee.
What happens if I owe money on my director’s loan account?
Where automatic release applies, arrested funds are normally released to the creditor after 14 weeks unless an objection or another legal event prevents release. They may be released earlier if an appropriate mandate is given.
Can I be personally liable simply because I continued trading?
Not automatically. Wrongful trading has a specific statutory test and depends on the company’s circumstances, what directors knew or ought to have known, and what steps were taken to minimise creditor losses.
Will the liquidator investigate me?
The liquidator is required to review relevant aspects of the company’s affairs and director conduct. This is part of the normal statutory process and does not mean that the director is presumed to have acted improperly.
Can I protect myself by paying company debts personally now?
Do not make significant personal payments without first considering whether the company can realistically recover and whether you are actually personally responsible for the debt. Using personal funds to delay an unavoidable insolvency may not improve your overall position.
Should I take independent legal advice?
If there is a significant claim against you personally, a disputed personal guarantee, threatened litigation or another conflict between your position and that of the company, independent legal advice may be appropriate. We can identify where that issue arises during the insolvency review.
Worried that company debts could affect you personally?
Do not assume the worst.
We can review the company’s financial position alongside issues such as personal guarantees, director’s loan accounts, recent transactions and HMRC debt and explain which matters belong to the company and which, if any, may affect you personally.
The initial discussion is confidential and does not commit you to placing the company into liquidation.