The Silicon Valley Bank UK insolvency: FAQ for those doing business with the Bank

News of the failure of Silicon Valley Bank in the United States has dominated headlines over the last few days. Late yesterday, Friday, 10 March 2023, the Bank of England made an announcement about the status of Silicon Valley Bank UK Limited (SVBUK). We have been following the situation closely, answering questions from clients who have business with SVBUK and advising them on how to address the issues they face.

This FAQ addresses some of the most common and pressing questions that we have been receiving.

To discuss any of the issues below, please get in touch with the authors or your usual Goodwin contact. 

What is the status of SVBUK?

SVBUK is a separate corporation from the SVB Financial Group and is regulated in the UK by the Prudential Regulation Authority (PRA), a division of the Bank of England (BoE). In a statement released on 10 March 2023, the BoE stated: “absent any meaningful further information, [the BoE] intends to apply to the Court to place Silicon Valley Bank UK Limited (‘SVBUK’) into a Bank Insolvency Procedure.”^[1]

SVBUK also released a statement saying: “We are announcing that following conversations with the Prudential Regulatory Authority there is an intention, barring any intervening event, to put Silicon Valley Bank UK Limited into insolvency from Sunday evening.”^[2]

What is a Bank Insolvency Procedure?

The Bank Insolvency Procedure is one of three resolution options available to the BoE, PRA, and Treasury under the Banking Act 2009 enacted following the 2008 financial crisis. The Act allows any of those three authorities to apply to court for the appointment of a liquidator and gives the liquidator broad powers, which include the management of the insolvent bank’s assets and liabilities and distributions to creditors.

A liquidator must work to ensure eligible depositors receive compensation (see “I have monies on deposit with SVBUK. How are they protected?” below). The liquidator must also wind up the affairs of the bank to achieve the best result for the bank’s creditors as a whole.

The BoE Statement appears to explain why the BoE chose the Bank Insolvency Procedure, as opposed, for example, to arranging a private sector acquisition of SVBUK or taking it into temporary public ownership, as follows: "SVBUK has a limited presence in the UK and no critical functions supporting the financial system."

I have monies on deposit with SVBUK. Can I still withdraw those monies?

No. The BoE’s statement addresses this: “In the interim, the firm will stop making payments or accepting deposits.” The processing of regular payments from SVBUK accounts, such as payroll and rent, is therefore uncertain at this stage.

What happens if all (or a significant part) of our working capital is held in SVBUK accounts?

If all or a significant part of your working capital is held in SVBUK accounts such that you have insufficient funds to make payments as they fall due (for example you do not have sufficient funds to pay employees in the March payroll cycle), we recommend you seek urgent advice and have discussions with your investors, lenders, and, if required, alternative funding sources. Our restructuring colleagues can advise you on your options, but the key is to urgently identify what the shortfall amount is and whether funds are available from other sources. Time is of the essence in this situation and we can guide you through the duties owed by the board to all stakeholders.

I have monies on deposit with SVBUK. How are they protected?

As the BoE statement indicates, a Bank Insolvency Procedure would mean that eligible depositors are paid out by the Financial Services Compensation Scheme (FSCS) as quickly as possible up to the protected limit of £85,000 or up to £170,000 for joint accounts. Companies are eligible depositors, regardless of their size. The following do not qualify as eligible depositors: other banks, financial institutions, investment managers/advisers, insurance companies, investment funds (which would include funds acting through their general partners), pension or retirement funds, and large local authorities.

What about deposit monies above the guaranteed amounts?

The treatment of amounts in excess of those guaranteed amounts will depend upon the type of insolvency procedure and the form of any sale of its assets and liabilities. In the worst-case scenario, amounts in excess of the guaranteed amount would be treated as unsecured secondary preferential or unsecured/non-preferential claims in the liquidation of SVBUK (see the ranking of claims in the next section), and returns to unsecured creditors are often low. The timing of any payments is also uncertain.

If my claim for excess of the guaranteed amount is treated as an unsecured claim, where does that claim rank in the insolvency?

In broad terms, the Bank Insolvency Procedure ranks claims as follows:

• Fixed charge holders to the extent of their security
• Expenses of the insolvency process
• Preferential creditors (including FSCS guarantee amounts and then secondarily eligible depositors with amounts above the guaranteed amount, being depositors that are individuals and micro, small or medium-sized businesses for amounts in excess of £85,000 (i.e., the FSCS limit))^[3]
• "Prescribed part" set aside for unsecured creditors from floating charge asset realisations
• Floating charge holders (subject to the deduction of the "prescribed part")
• Unsecured creditors/non-preferential creditors (which includes creditors and non-eligible depositors that do not fall within the preferential creditor category above). Interest incurred on all unsecured debts post commencement of the insolvency process
• Any surplus to holders of equity

There are sub-categories within certain of the categories of creditor above and distributions to each category only take place once the prior category has been paid in full.

I am a borrower under a loan provided by SVBUK. How will my loan be treated?

The liquidator’s decision on how to treat any loans made by SVBUK will depend upon the contractual terms and the form of any sale of SVBUK’s assets and liabilities. In our experience, it is likely that the liquidator will seek to sell its loan portfolio, in whole or in part, to a third party. It is unlikely that the liquidator will agree to make new advances. A failure to make committed advances may give rise to a claim for breach of contract by SVBUK, but such claims would typically be unsecured non-preferential and would be added to the amount of any other unsecured non-preferential claims that you may have against SVBUK (see the ranking of claims in the section above), such as bank deposits in excess of the guaranteed amounts described above. If the sale process is delayed, you may wish to seek funding from alternative providers and may need to cash collateralise any outstanding letters of credit pending a transfer/replacement of SVBUK as issuing bank. There is also the possibility that the liquidators would seek to collect some of the loan book independent of a sale, as part of the wind down of SVBUK’s affairs.

I have monies on account with SVBUK and a loan from SVBUK. What should I do?

You should take specific legal advice on your payment obligations. The Bank Insolvency Procedure uses the general UK insolvency rules, which provide for mandatory set-off of claims in certain circumstances. Where they apply, to give a simplified example, if you have £1,000,000 on deposit with SVBUK and you have borrowed £500,000 from SVBUK, the two sums could be netted and the £500,000 difference would be the amount of your unsecured claim to prove for in any liquidation of SVBUK. We suggest making contact with the insolvency official that is eventually appointed to SVBUK to reach a common understanding of how your loan and claims will be administered and affected by any sale of the assets of SVBUK that is eventually implemented.

Are there any special considerations if I have entered into a syndicated loan?

The loan may include Loan Market Association Defaulting Lender provisions which could operate to disapply SVBUK’s voting rights and its right to receive a commitment fee. You should review those provisions carefully. In addition, if SVBUK is the agent of the loan it may be necessary to replace them if a swift sale is not implemented, because that may affect the processing of payments, voting on amendments, waivers, and other matters under the loan.

What if I have hedging and other derivatives contracts with SVBUK?

The terms of the contract will need to be carefully examined as you may not necessarily have contracted under an ISDA Master Agreement. In particular, you will need to check whether an event of default has been triggered because SVBUK has failed to pay amounts due or because of the appointment of the liquidator.

Those events of default may allow you to exercise certain rights and remedies under the derivative contract, including close-out and netting of payments and the right to have any collateral that you have provided to SVBUK to be released if SVBUK owes you more than you owe it. As mentioned above, the Bank Insolvency Procedure uses the general UK insolvency rules, which provide for mandatory set-off of claims in certain circumstances. You should take specific advice on any close-out and netting provisions in your agreements and their enforceability versus the mandatory insolvency set-off rules, because that is a complicated area of law. In addition, some of the SVBUK agreements that we have seen provide for automatic debiting of account balances to cover interest and other payments under loans provided by SVBUK, so a separate payment may not actually be required. The provisions of the loan documentation should be carefully reviewed.

My agreement refers to “Silicon Valley Bank (UK Branch)” as the counterparty. Does this change your answers above?

No, it should not. The assets and liabilities, including the loans and deposits of Silicon Valley Bank (UK Branch), were transferred to SVBUK on 31 July 2022 under Part VII of the Financial Services and Markets Act 2000.