7 Mins
On 29 September, at the labour Party Conference, Chancellor Rachel Reeves announced she was creating a new ‘hit squad’ tasked with recovering Bounce Back Loans obtained fraudulently during the Covid Pandemic. But what happens when the company involved is already in or goes into liquidation?
When a UK company becomes insolvent, an Insolvency Practitioner (IP) is appointed to manage the process of winding up the business. This includes assessing the company’s assets, dealing with creditors, and, crucially, investigating the circumstances leading to the insolvency.
One area that has drawn significant attention since the COVID-19 pandemic is the recovery of Bounce Back Loans (BBLs). These loans, introduced as emergency support, were backed by the government and issued with minimal checks, creating a risk of misuse.
In this article, we explore the powers that UK Insolvency Practitioners have to recover Bounce Back Loans and the tools available to them in the insolvency process.
What is a Bounce Back Loan?
The Bounce Back Loan Scheme (BBLS) was introduced by the UK government in 2020 to provide financial support to small businesses affected by COVID-19. Companies could borrow between £2,000 and £50,000, interest-free for the first year, with a 100% government guarantee to lenders.
Whilst thousands of businesses relied on the emergency funding to survive, crucially, many loans were self-certified, meaning company directors simply had to confirm eligibility without extensive checks leaving the way open to fraudulent or misused loans.
According to the government’s website, as at December 2024, £76.89 billion was drawn of which only £24.3 billion has been repaid in full to date. £1.94 billion has been flagged by lenders as suspected fraud. You can read the full performance report at COVID-19 loan guarantee schemes performance data as at 31 December 2024 – GOV.UK
What Happens to a Bounce Back Loan in Insolvency?
Although BBLs were government-backed, they are still a debt of the company. If a company becomes insolvent and cannot repay its BBL, the debt is included in the list of liabilities. If the loan is not repaid through the insolvency process then the government guarantee will come into play.
However, the government guarantee does not protect company directors if the loan was misused or obtained fraudulently. This is where Insolvency Practitioners come in.
Key Powers of Insolvency Practitioners (IPs) Regarding Bounce Back Loans
Insolvency Practitioners act in the interests of creditors and have a legal duty to investigate how the company was managed before insolvency. If wrongdoing is identified, they may take enforcement action using a range of statutory powers under the Insolvency Act 1986.
Their powers in relation to BBLs include:
1. Investigating Director Conduct
IPs are legally required to review the conduct of directors in the lead-up to insolvency. This includes examining how Bounce Back Loan funds were used.
- BBL funds used for personal purchases (e.g. cars, holidays)
- Loans diverted to connected parties
- Large cash withdrawals without justification
- Use of BBL to repay director loans or fund dividends during downturns
If misuse is uncovered, further action is likely.
2. Bringing Misfeasance Claims
Under Section 212 of the Insolvency Act 1986, IPs can bring misfeasance claims against directors. Misfeasance involves:
- Breach of fiduciary duty
- Misapplication of company funds
- Wrongful trading
If a director has misused a BBL (e.g., used it to buy personal assets or pay themselves inflated salaries), the IP can seek a court order requiring the director to repay the funds back to the company for the benefit of creditors.
3. Pursuing Transactions at Undervalue or Preferential Payments
If BBL funds were used to:
If a company used BBL funds to:
- Repay loans to directors, family, or other connected parties (a preference)
- Transfer assets for less than market value (transaction at undervalue)
The IP may challenge these transactions in Court under the Insolvency Act and attempt to reverse them thus restoring the assets to the insolvent estate.
4. Disqualifying Directors
If an IP uncovers evidence of misconduct, they are required to report it to the Insolvency Service. This can lead to:
- Director disqualification for up to 15 years
- Potential civil or criminal proceedings
Using a BBL fraudulently can significantly increase the likelihood of disqualification.
5. Seeking Contribution to the Company’s Assets
In serious cases, if a director’s actions caused loss to creditors, an IP can apply for a contribution order, forcing the director to repay funds into the company to increase returns to creditors.
This could include:
- Repayment of misused Bounce Back Loan funds
- Compensation for losses caused by wrongful trading
6. Referral to Law Enforcement and Criminal Investigation
Where fraud is suspected (e.g. false declarations on BBL applications), IPs may refer the case to law enforcement, including:
- The Insolvency Service
- The National Investigation Service (NATIS)
- HMRC or other agencies
Directors may face criminal charges, prosecution, asset seizure, and custodial sentences in the most serious cases.
What Directors Should Know
Directors of insolvent companies who took out BBLs should:
- Cooperate fully with the IP
- Be transparent about how the loan was used
- Seek legal advice if concerned about potential claims
If the loan was used properly and for legitimate business purposes, it is unlikely that the IP will take action. However, poor record-keeping, cash withdrawals, or personal use will raise red flags.
Conclusion
Insolvency Practitioners in the UK have wide-ranging powers to recover funds misused from Bounce Back Loans. While these loans were intended to provide rapid support to struggling businesses, misuse can have serious consequences for directors, including personal liability and disqualification. Directors who acted responsibly and in the best interests of the company generally have little to fear — but where there has been misuse, fraud, or neglect, the consequences can be severe.
However, despite the wide-ranging powers available to Insolvency Practitioners to pursue errant directors, any decision to take legal action must be weighed against the likely benefit to creditors. If a director has no personal assets or means to pay, pursuing them for recovery of a Bounce Back Loan may only result in additional legal costs without any return to the insolvent estate. In such cases, while the director may still face disqualification or even criminal sanctions, this does not necessarily lead to any actual recovery for creditors — or, ultimately, reimbursement to the public purse.
Contact our team
If you would like more information on these or any other business recovery or insolvency matters, our team is always available and happy to assist.