The situation remains fluid and this represents our advice based on public announcements by the BoE and SVB UK that we are aware of as at 12pm on 12 March 2023.
If appointed, the bank liquidator will manage SVK UK’s assets and affairs in place of its existing management. The bank liquidator has two objectives:
- objective 1 is to facilitate the payment of UK Financial Services Compensation Scheme (FSCS) protected deposits (up to an £85k limit, or £175k for joint accounts) to eligible depositors as quickly as possible. SVB UK’s other assets and liabilities are then managed by the bank liquidator and sums repaid to creditors as soon as is possible. The quantum of the distribution to creditors (i.e. the percentage of the sums owed to creditors by SVB UK that they will recover from the bank liquidator) will depend on the extent of SVB UK’s other assets and creditors. If SVB UK’s assets exceed its creditors then creditors will receive 100p in the £. If not, then creditors will receive an impairment on their debt; and
- objective 2 is to wind up the affairs of the SVB UK so as to achieve the best result for SVB UK’s creditors as a whole.
Objective 1 must be prioritised, although the bank liquidator should work on both objectives in parallel.
The banking operations of Silicon Valley Bank in the United States are carried out through a different entity to SVB UK. On 10 March 2023, the California Department of Financial Protection and Innovation appointed the Federal Deposit Insurance Corporation (FDIC) as receiver of Silicon Valley Bank (a Californian public corporation). The impact of the FDIC receivership on Silicon Valley Bank is beyond the scope of this note as this will largely be governed by federal and state law in the United States. However, should any clients require US law advice we are happy to suggest US counsel who may be able to advise.
1. The Bank Insolvency Procedure
How do I get my money back?
- SVB UK is currently not making or accepting any payments. This includes the return of deposits to account holders.
- Eligible (i.e. protected deposits) will be recoverable from the FSCS up to the prescribed limit of £85k/£175k. However not all deposits will be eligible (e.g. an FCA authorised investment firm or AIFM will not be an “eligible claimant” under FSCS rules in respect of amounts held at SVB UK to meet operational expenses or for regulatory capital reasons). FSCS compensation is generally only available to individuals, small businesses and some fund vehicles in certain circumstances). In the liquidation, deposits are given preferential status (with sums owed in respect of eligible deposits ranking first and non-eligible deposits held by certain types of deposit holder above the prescribed limit ranking junior, but ahead of ordinary creditors).
- Creditors will need to submit a "proof of debt" in relation to the sums owed to them. This is a prescribed form in which the relevant creditor sets out details of the amounts owed. The bank liquidator then uses the proof of debt to calculate the amounts owed to creditors. To avoid this process being overly drawn out, the bank liquidator is likely to impose a "bar date" by which creditors must submit proofs of debt in order to claim in the Bank Insolvency.
- Once the bank liquidator has received proofs of debts from all creditors, they will be in a position to calculate the amount of the potential distribution that can be made. The bank liquidator can then make distributions to creditors when a sufficient amount of funds have been raised through disposals or realisations of SVB UK’s assets. This could just be a single large distribution or as a series of smaller interim distributions.
- There is currently no visibility on the timing for distributions. We expect that the bank liquidator or the BoE will circulate information regarding the timing and process over the coming days. It is also likely that the bank liquidator will establish an online portal for creditors to submit proofs of debt.
- To the extent that any eligible deposits are held with SVB UK, submit a claim to the FSCS.
- Monitor the BoE/SVB UK’s website for details regarding the claims process.
- Submit a proof of debt when the process has been opened.
Is there anything I can do to accelerate payment?
No. Accounts have now been blocked and will be under the control of the bank liquidator. The only way for creditors to recover sums will be via the claims process outlined above.
Will non-protected deposits be repaid ahead of other claims?
- It is a fundamental principle of the Bank Insolvency process that ordinary creditors rank pari-passu (i.e. equally). Paying out a certain type of unsecured creditor (i.e. deposit holders) ahead of others would breach this (although please see the comments in the “How do I get my money back” regarding the preferential status of deposits).
- There are however certain scenarios in which a liquidator can pay some creditors ahead of others if doing so is critical for the Bank Insolvency (such as paying an essential supplier).
- There is however no clarity on whether this will happen in relation to SVB UK at the moment. We also expect that the bank liquidator would want the blessing of the Court before taking this step. We also expect that the PRA and the FCA would contribute a view as to whether such an action would be required to maintain financial stability and/or protect the interests of consumers.
- There is also the possibility of some form of Government intervention to allow depositors the ability to access deposits or alternative funding to meet critical payments. We expect the Government to clarify its intentions quickly in this regard.
- Monitor SVB UK’s website to check if the Bank Liquidator intend to take any particular steps in this regard.
- Monitor the HM Treasury website for any announcements regarding intervention.
How much will I be entitled to claim?
- This will depend on the amount owed by SVB UK. Claims will however be subject to a mandatory form of set-off, known as "insolvency set-off" which applies automatically if the bank liquidator is appointed.
- Insolvency set-off replaces any contractual right of set-off between a creditor and SVB UK. It cannot be contracted out of or excluded.
- For a worked example of how insolvency set-off would apply, if a creditor is owed £100 by SVB UK but also owes £50 to SVB UK, the amount of that creditor’s claim in the Bank Insolvency will be the net amount of £50. If the creditor is owed £50 by SVB UK but owes £100 to SVB UK, the creditor will be liable to pay the net amount (£50) to SVB UK. The bank liquidator is obliged to seek to recover this amount, which may include enforcement action if payment is not made consensually.
- For insolvency set-off to apply there needs to be "mutuality" between the creditor and SVB UK. This essentially means that the creditor and SVB UK must owe sums to each other in the same capacity (for example if an entity in a group owes sums to SVB UK but a different entity in the group is owed sums by SVB UK, there will be no mutuality and therefore no set off). Mutuality could potentially also be "broken" if, for example, a creditor has assigned its claim against SVB UK to a funder or bank as security (as in that instance the beneficiary of the claim would be the funder or bank rather than the creditor, therefore meaning there is no mutuality).
- Set-off will not apply to any claims acquired after SVB UK enters into Bank Insolvency or after the relevant creditor had notice that SVB UK would enter Bank Insolvency.
- The most likely scenario where set off could apply in relation to SVB UK is where SVB UK holds a deposit for an entity (with the result that the entity is a creditor of SVB UK for the amount of the deposit) but also owes sums to SVB UK under a loan facility. The bank liquidator may look to set-off the deposit amount against the liability under the facility.
- Insolvency set-off may also apply where various swaps or derivative contracts have been taken out by an entity with SVB UK, which are both "in the money" and "out of the money". In that scenario, the net aggregate amount owed under the swaps/contracts when taken together will be claimable in the Bank Insolvency or, alternatively, payable to SVB UK by the relevant entity (depending on whether on an aggregate basis the swaps/contracts are in-or-out of the money).
- Claims should be valued as at the date on which SVB UK enters into Bank Insolvency. Claims falling due after this date can be included in the proof of debt but only if the estimated value for the claim as at the date of SVB UK’s entry into Bank Insolvency is included.
- Claims in currencies other than sterling should be converted into sterling at the Bank of England’s mid-market rate for the date on which SVB UK enters into Bank Insolvency.
- Interest owed to you and which has accrued up to the date on which SVB UK enters into Bank Insolvency can be included in the proof of debt. Interest from the date on which SVB UK enters into Bank Insolvency will only be paid on claims if all proven creditors’ claims accepted by the bank liquidator are paid in full.
- Set-off will not apply to sums owed by SVB UK in relation to any eligible deposits below the £85k/£175k threshold.
- Collate details of the amounts owed by you to SVB UK (including details of the relevant agreements and which entity in a group/fund is liable) and amounts owed by SVB UK to you (including deposits).
- Monitor SVB UK’s website for details of how set-off will be approached in connection with the claims process.
- Include full details of the amounts owed by SVB UK to you and owed by you to SVB UK in the proof of debt form, when available.
Payments instructed before the Bank Insolvency commenced have not arrived. What can I do?
Unfortunately, given its financial position it is unlikely that SVB UK actioned a number of payment requests to creditors/depositors in the days immediately preceding its entry into Bank Insolvency. All payments have now been blocked. All that creditors can now do is claim via the process outlined above for the sums owed.
Do I need to send any other notifications?
- If you are a licensed firm, you will need to consider if SVB UK’s entry into Bank Insolvency will cause you to breach any FCA or PRA rules to which you are subject and if those breaches need to be notified to the regulator. There may potentially be impacts upon your ability to meet liquidity rules, or the threshold conditions if all your accounts were with SVB UK.
- Firms holding client money with SVB UK will also need to consider the secondary pooling event rules in CASS 7A, and decide when it is reasonable for them to notify the FCA in relation to any shortfalls in client money under CASS 7A.3.19R. If you are a fund manager, the guiding principle on what to do must be the best interests of investors in the funds you manage and you will need to consider investor notification obligations, particularly if any material changes are required to the management of the fund to address liquidity issues. All licensed firms will need to consider client information needs depending on the extent and nature of their exposure to SVB UK’s insolvency.
Who do I contact with any questions?
The bank liquidator will most likely provide contact details for queries over the coming days. However they will, at least for the early part of the Bank Insolvency, most likely be incredibly busy meaning that they could take a few days to respond.
2. SVB UK as lender
Are we still liable for principal, interest and fees owed to SVB UK as lender?
- Yes, liabilities will continue to be owed to SVB UK under the facility agreement. The bank liquidator will seek to realise SVB UK’s assets (including its interests as lender under facility agreements) in order to pay SVB UK’s creditors (including its depositors). The bank liquidator does not however have any rights other than those set out in the facility agreement (i.e. it cannot demand repayment in full absent a default and acceleration).
- Commitment fees will still accrue on undrawn commitments notwithstanding that SVB UK is unlikely to honour drawdown requests. Consequently, borrowers should look to cancel undrawn commitments where possible.
- See below response to “SVB UK is the agent for the lenders under a facility agreement. Should I make payments of interest, loan principal or fees to SVB UK as agent?”
- Please also note the position above in relation to the possibility of deposits being set off against debts owed to SVB UK in “How much will I be entitled to claim?”.
- Review facility agreement for process to cancel undrawn commitments and deliver cancellation notice to SVB UK in accordance with the terms of the agreement.
SVB UK is the agent for the lenders under a facility agreement. Should I make payments of interest, loan principal or fees to SVB UK as agent?
- No, although these liabilities continue to be owed SVB UK is no longer able to process payments to other lenders, including as agent under a facility agreement.
- We are however referring here to the specific role of agent for the lenders under a facility agreement which has or contemplates a syndicate of lenders. Where the facility agreement with SVB UK is bilateral then payments should continue to be made to SVB UK directly as lender (unless SVB UK or the bank liquidator give directions otherwise).
- Any “Impaired Agent” provisions in the facility agreement should be followed. If these are included, these typically allow for (i) payments to be made directly to the lenders or (ii) the borrower to make the payment into a segregated account which the borrower then holds on trust for the intended recipients of the payment.
- Any notices under the facility agreement should be sent directly to the lenders rather than through SVB UK as agent.
- Liaise with the other lenders to identify and appoint an alternative agent. A facility agreement will typically allow replacement of an agent on short notice where the current agent is impaired due to insolvency.
Will SVB UK fund utilisation requests under our facility agreement?
- SVB UK’s entry into Bank Insolvency will not automatically terminate the facility agreement. However, we expect that SVB UK will not fund any utilisation requests.
- Lenders other than SVB UK under the same facility agreement will not be obliged to make up any shortfall in a requested loan as a result of a failure by SVB UK to fund its share of the loan.
- Liquidators (including bank liquidators) have the power to "disclaim" onerous/unprofitable contracts. This essentially terminates the contract and determines the parties obligations to each other as at the date of the disclaimer. The bank liquidator may claim the power to disclaim facility agreements where SVB UK has unutilised commitments, which would bring to an end SVB UK’s liability under the facility agreement. However, the bank liquidator may first seek to sell SVB UK’s interest as lender before exercising their power of disclaimer. Please also note that whilst a disclaimer is theoretically possible we are not aware of liquidators using this power in relation to a facility agreement in any other case.
- Alternatively the bank liquidator may simply refuse to comply with drawdown requests – whilst this would be a breach of the relevant facility agreement, any legal process/litigation is stayed whilst SVB UK is in Bank Insolvency (meaning that the relevant borrower will have limited options for recourse for any breach).
- Borrowers should consider how they will fund their own commitments on the assumption that funding from SVB UK will not be available. For example, capital calls to limited partners and/or investors should be submitted early as bridging finance under a subscription line facility agreement with SVB UK will not be available.
- We are happy to discuss possible replacement lenders or debt advisors who may be able to source alternative lenders.
- We are happy to discuss how SVB UK can be voluntarily prepaid as part of a refinancing to replace SVB UK with a solvent lender.
What if I need to place funds with a different account bank?
- The facility agreement may allow flexibility to change account bank if the new account bank falls within the definition of “Acceptable Bank”, which typically requires a certain level of public credit rating to be met.
- If the facility agreement does not include this flexibility then changing account bank may breach the facility agreement. However, because the borrower is essentially being forced to take this step as a result of SVB UK’s insolvency and inability to take deposits, we expect that (i) there are likely to be good arguments against enforcement by SVB UK for this breach and (ii) the bank liquidator would not take any steps in relation to such breach. There is case law that a party should not take advantage of the non-fulfilment of a condition by their counterparty where that party has hindered the counterparty’s performance. If these circumstances arises we would need to look into the specific details to consider the risks.
- Facility agreement to be reviewed to check whether there is any flexibility. We can assist with this.