Yes, a limited company can enter liquidation even if it still owes a Bounce Back Loan (BBL). The loan remains a company debt and is dealt with in the same way as other unsecured liabilities in the liquidation process.

Whether you personally face consequences depends not on the existence of the loan, but on your conduct as a director and how the funds were used.

Picture the scene: the bank balance is empty, suppliers want paying, and the Bounce Back Loan still sits on the books. Anxiety rises over possible director liability, and the Government’s “100% guarantee” only adds to the confusion. The following guide dispels common myths, explains how the loan is handled in liquidation, and outlines the safest, most practical steps to protect both creditors and your own position.

Quick answer: yes you can, but here’s the catch

An outstanding Bounce Back Loan does not prevent your company from entering liquidation. The loan simply joins the list of debts handled by the liquidator.

Snapshot

• A Bounce Back Loan is a company liability.
• The Government guarantee benefits the lender, not the director.
• The borrower company always remains legally liable for the debt.
• A liquidator must submit a conduct report on directors in every insolvent liquidation.
• Misuse of the loan or wrongful trading can lead to personal consequences.

General guidance only – take professional advice for your specific circumstances.

How a Bounce Back Loan is treated in liquidation

A Bounce Back Loan ranks as an ordinary unsecured company debt in liquidation. It does not have preferential status and does not move ahead of employees or other statutory preferential claims.

In an insolvent liquidation, assets are distributed in a statutory order:

Statutory rank	Who is paid
1	Liquidator’s fees and costs of the liquidation
2	Preferential creditors (for example, certain employee claims and certain HMRC debts)
3	Floating charge holders (subject to the “prescribed part” carved out for unsecured creditors where applicable)
4	Unsecured creditors (including Bounce Back Loan lenders, trade suppliers, and remaining HMRC balances)
5	Shareholders (if any surplus remains)

Because a Bounce Back Loan is not backed by a personal guarantee under the scheme rules, the lender’s claim is against the company only.

What the Government guarantee actually does

Under the Bounce Back Loan Scheme, the Government provided lenders with a 100% guarantee for the outstanding balance (subject to scheme rules).

However:

• The borrower always remained fully liable for the debt.
• The guarantee is between the lender and the Government.
• It does not transfer liability to the director.

In practice, if the company enters liquidation and the lender receives only a partial dividend (or none), the lender may claim under the Government guarantee. That process does not automatically create personal liability for directors.

Personal exposure arises only if there has been misconduct.

When should liquidation be considered?

If your company cannot pay debts as they fall due, or its liabilities exceed its assets, it may be insolvent.

The two legal tests are:

• Cash-flow insolvency – inability to pay debts when due.
• Balance-sheet insolvency – liabilities exceeding assets.

Once insolvency is apparent, directors must prioritise the interests of creditors. Continuing to trade in circumstances where there is no reasonable prospect of avoiding insolvent liquidation may expose directors to wrongful trading claims under section 214 of the Insolvency Act 1986.

Common warning signs:

• Persistent HMRC arrears (VAT, PAYE, Corporation Tax)
• Creditor threats of legal action or winding-up petitions
• Returned direct debits or refused credit
• Reliance on personal funds to meet routine costs
• Negative net asset position

At this stage, seeking advice from a licensed Insolvency Practitioner is usually the safest course.

Risks of delay or using the wrong closure route

Once a company is insolvent, inaction increases risk.

Wrongful trading

If a director knew, or ought to have known, there was no reasonable prospect of avoiding insolvent liquidation, the court may order them to contribute to company assets (Insolvency Act 1986, s.214).

The temporary COVID-19 suspension of wrongful trading provisions ended in 2021. Normal rules now apply.

Director conduct reporting

In every insolvent liquidation, the office-holder must submit a report on director conduct to the Insolvency Service. This is mandatory and happens regardless of whether wrongdoing is suspected.

Under the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021, the Insolvency Service also has power to investigate directors of dissolved companies and seek disqualification or compensation orders.

Voluntary strike-off risks

Applying to strike off a company with outstanding debts is risky.

• Creditors can object.
• Failing to notify creditors within seven days of a DS01 application is an offence.
• The company can be restored to the register by court order.
• Directors may still face investigation.

Strike-off is not designed for insolvent companies with significant unpaid liabilities.

Choosing the right closure route

Closure route	Control	Investigation	Risk profile
Creditors’ Voluntary Liquidation (CVL)	Directors initiate process and nominate liquidator	Standard statutory conduct report	Lower where directors have complied with duties
Compulsory liquidation	Court process, Official Receiver appointed	Full Official Receiver investigation	Higher if there has been delay or poor record keeping
Voluntary strike-off	Registrar process	Can still trigger investigation	High if debts remain

For insolvent companies with unpaid Bounce Back Loans, a timely CVL is typically the appropriate formal route.

What happens in a Creditors’ Voluntary Liquidation?

A simplified overview:

1. Directors resolve that the company is insolvent and should be wound up.
2. Shareholders pass a special resolution to wind up the company.
3. Creditors are invited to participate in a decision procedure.
4. A licensed Insolvency Practitioner is appointed as liquidator.
5. The liquidator realises assets and distributes funds according to statutory order.
6. The liquidator submits a conduct report on directors.
7. Once administration is complete, the company is dissolved.

The duration depends on complexity and asset position; there is no fixed timetable.

Costs

There is no statutory fixed fee for a CVL. Costs depend on:

• Complexity of affairs
• Quality of accounting records
• Asset recovery work required
• Investigations necessary

If assets are insufficient, directors often fund initial costs.

Your duties during liquidation

Directors must cooperate fully with the liquidator.

Under section 235 of the Insolvency Act 1986, officers of the company must:

• Provide information
• Deliver up company property and records
• Assist the office-holder

Failure to cooperate can result in court orders and potential sanctions.

Key statutory risks

• Misfeasance (s.212) – breach of duty or misuse of company assets
• Fraudulent trading (s.213) – intent to defraud creditors
• Wrongful trading (s.214) – continuing when insolvency unavoidable

Proper vs improper use of a Bounce Back Loan

✔ Proper use: Paying wages, rent, suppliers, or other business expenses.

✘ Improper use: Transferring loan funds to a personal account for non-business use.

Misuse can lead to disqualification or compensation orders.

Alternatives: Pay As You Grow and restructuring

Where the business remains viable, restructuring options may help.

Pay As You Grow allowed borrowers to:

• Extend the term from six to ten years
• Take interest-only periods
• Take a short repayment holiday

However:

• The company remains liable for the debt.
• These measures do not prevent investigation of past conduct.
• Once liquidation begins, restructuring options fall away.

A Company Voluntary Arrangement may also be possible where future profitability is realistic.

Bounce Back Loan misuse and enforcement

The Insolvency Service has publicly reported significant numbers of director disqualifications linked to COVID-19 financial support abuse.

Misuse of scheme funds can lead to:

• Director disqualification
• Compensation orders
• Civil recovery
• Criminal prosecution in serious cases

Personal use of funds, fraudulent applications, or attempts to dissolve a company to avoid repayment are high-risk behaviours.

FAQs

Your Next Step

If your company cannot repay its Bounce Back Loan and is insolvent, speak to a licensed Insolvency Practitioner promptly.

Early advice:

• Reduces wrongful trading risk
• Preserves remaining assets
• Ensures compliance with statutory duties
• Protects you from avoidable personal exposure

Taking action early is usually safer than waiting for enforcement action.