The UK government introduced the Bounce Back Loan Scheme (BBLS) in May 2020 to provide fast-tracked financial support to small and medium-sized businesses affected by the COVID-19 pandemic. Offering loans of up to £50,000 with no fees, zero interest for 12 months, and a fixed 2.5 % Bounce Back Loan interest rate thereafter, the scheme saw enormous uptake. More than £47 billion was lent to over 1.5 million businesses.
However, the relief was short-lived for many. As the economy transitioned out of emergency mode, already vulnerable businesses could not meet repayment obligations. Today, thousands of UK company Directors face the stark reality of trying to repay Bounce Back Loans amid falling revenue, rising costs, and lingering pandemic aftershocks.
If your business struggles to manage its Bounce Back Loan repayments, it’s essential to understand your responsibilities, the risk of inaction, and the options available.
This article explores what happens if you can’t repay your Bounce Back Loans, the legal obligations for Directors, and how to navigate these challenges safely and strategically.
What were the terms of the Bounce Back Loan Scheme?
Bounce Back Loans were designed to be simple and accessible. The government provided a 100% guarantee to lenders, and loans were approved with minimal checks. Businesses could borrow between £2,000 and £50,000, capped at 25% of turnover. The first year was repayment-free and interest-free, with a six-year term that could be extended for 10 years through the Pay As You Grow (PAYG) scheme. After the first year, the fixed Bounce Back Loan interest rate of 2.5% applied.
PAYG offered three key options to help businesses struggling to repay:
- Extend the term from six to 10 years to reduce monthly repayments
- Take one six-month payment holiday
- Make interest-only payments for six months, up to three times
These options gave some breathing space, but many businesses found them insufficient as financial pressures mounted.
Related Reading: Dealing with HMRC Business Debts
What happens if you can’t repay your Bounce Back Loan?
Despite the government guarantee to lenders, the loan is still a company debt, not a personal loan to the Director. If your business cannot repay its Bounce Back Loans, the consequences depend on its financial position and the next steps you take.
If your company is solvent and merely struggling with cash flow, you may be able to renegotiate terms or access additional support. However, if the company is insolvent, i.e, unable to pay its debts when due, or if liabilities exceed assets, you must tread carefully. Once insolvency is identified, your duties as a Director change. Your legal obligations shift from acting in the interests of shareholders to prioritising the interests of creditors.
This shift means that continuing to trade without addressing the company’s insolvency could put you at risk of serious consequences, including personal liability for company debts, disqualification, or even allegations of misconduct.
Can Directors be held personally liable?
Generally, Bounce Back Loans are not personally guaranteed, one of the scheme’s defining features. But there are important exceptions to be aware of. If a Director is found to have misbehaved, they may become personally liable for repaying the loan. Examples of improper conduct include:
- Using the loan funds for personal expenses instead of for the business
- Transferring funds out of the company without a legitimate business purpose
- Paying dividends or Directors’ loans when the company was insolvent
- Attempting to dissolve the company to avoid repayment
These behaviours could be interpreted as misfeasance, wrongful trading, or fraud. In these cases, the Bounce Back Loan loophole, where some believed they could take out the loan, dissolve the company, and walk away, has proven a dangerous myth.
If an Insolvency Practitioner (IP) is appointed, they are legally required to investigate the company’s affairs and the conduct of its Directors. Improper use of Bounce Back Loans is a red flag that will trigger further scrutiny.
Related Reading: Can One Director Close a Company?
What is a Bounce Back Loan loophole?
The so-called Bounce Back Loan loophole refers to a misguided belief that business owners could secure a government-backed loan, transfer the money, and then close the company via a strike-off, all without repayment. This approach has serious consequences. Strike-offs are prohibited if a company has outstanding debts, especially to government-backed lenders.
Attempting to exploit this so-called loophole could backfire in several ways:
- The company may be forcibly restored to the Companies House register if creditors object to the strike-off.
- Creditors, including HMRC, could initiate a winding-up petition.
- The Director could be investigated and face disqualification, fines, or personal liability if misconduct is found.
In short, there is no legitimate Bounce Back Loan loophole. Directors must deal with the loan as part of their company’s overall financial position, especially if insolvency is involved.
What are your options if you can’t afford the repayments?
A number of legal routes are available to Directors of companies that cannot meet their Bounce Back Loans obligations. These options vary depending on whether the company is still viable and whether you want to continue trading.
Extend or adjust your repayment terms
If your business is fundamentally viable but facing temporary cash flow issues, you may still be able to use the PAYG options to reduce immediate pressure. Contact your lender directly to:
- Extend the loan term from six to 10 years
- Take a six-month payment holiday
- Move to interest-only payments temporarily
These measures won’t eliminate the debt, but can help you buy time.
Related Reading: Who Do You Inform When Closing a Business?
Creditors’ Voluntary Liquidation (CVL)
If your business is insolvent with no prospect of recovery, a Creditor’s Voluntary Liquidation may be the most responsible route forward. In a CVL, Directors voluntarily close the company by appointing an Insolvency Practitioner. The company’s assets are sold, debts are written off, and the business is legally wound down.
Importantly, initiating a CVL shows that you are acting in the best interests of the company’s creditors, which is a key legal duty. It also protects you from accusations of wrongful trading and reduces the risk of personal liability, provided you have acted properly.
Bounce Back Loans, like other unsecured debts, are typically written off during the liquidation process unless there has been a mismanagement of funds or misconduct.
Dissolution (Strike-off)
Some Directors may consider striking off the company if it’s no longer trading. However, a strike-off is not appropriate if the business has outstanding debts, including a Bounce Back Loan.
Creditors, including banks and HMRC, can object to the strike-off, force the company to be restored, and pursue compulsory liquidation instead. This could be considered misconduct if the Director tried to strike off the company without addressing its debts.
Insolvent companies must use formal insolvency procedures such as a CVL. Attempting to dissolve a solvent company can lead to serious consequences.
What happens during liquidation?
If you enter a CVL, an Insolvency Practitioner like Clarke Bell will review the company’s finances, liquidate assets, and distribute proceeds to creditors in order of legal priority. We will also examine the conduct of the Directors, particularly around the use of the Bounce Back Loan.
If the loan was used properly and the Directors acted responsibly, it will typically be treated as an unsecured debt and written off if there are insufficient assets to cover it.
If the loan was misused or the Director tried to avoid repayment through strike-off or asset transfers, the liquidator may pursue legal action to recover the funds personally.
Directors should be prepared to:
- Provide full financial records
- Explain how the Bounce Back Loan was spent
- Cooperate with investigations into the company’s failure.
Being transparent and proactive will help demonstrate that you acted in good faith.
Are there alternatives for Directors?
Some Directors may consider starting a new business following liquidation. This is legally permissible, but certain restrictions apply:
- You cannot use a similar company name to the one that was liquidated without court permission or formal exceptions.
- If you were disqualified as a Director due to misconduct, you cannot act as a Director or be involved in company management for the duration of the disqualification period (usually 2 to 15 years).
It’s also worth noting that while Bounce Back Loans do not require personal guarantees, some Directors may have used the funds to create personal liability, for example, drawing the funds to make a mortgage payment on their house or as an illegal dividend or an overdrawn Director’s loan. If identified during liquidation, these will need to be repaid personally.
Related Reading: Do I Have to Pay Tax If I Close My Company?
Protecting yourself as a Director
If you’re struggling with Bounce Back Loan repayments, the most important step you can take is to seek professional advice as early as possible. Clarke Bell can assess your situation, advise on your legal duties, and help you choose the right course of action.
Delaying action increases the risk of trading while insolvent, which can result in:
- Personal liability for company debts
- Disqualification as a Director
- Damage to your professional reputation.
Documenting your decisions, maintaining accurate records, and cooperating with an insolvency professional are key to protecting your position. Trying to “wait it out” or hoping the problem will resolve itself rarely ends well.
Dealing with Bounce Back Loans
Bounce Back Loans were a lifeline for many businesses during the pandemic, but they have become an unsustainable burden for thousands. If your company cannot meet its Bounce Back Loan repayments, facing the situation head-on is essential. No legitimate Bounce Back Loan loophole allows you to avoid repayment through dissolution or delay.
By understanding your options, from PAYG adjustments to CVLs, you can take control of the situation, protect your legal position, and act in the best interests of the company’s creditors. Doing so helps you meet your responsibilities as a Director and gives you the best chance of moving forward with integrity and confidence.
How Clarke Bell can help
Clarke Bell is here for you if you’re unsure where to start. We can guide you through the options tailored to your circumstances and help you avoid the long-term consequences of inaction.
Contact us today for a free consultation to find out how we can help.
