March 13, 2023
The closure of Silicon Valley Bank by the California Department of Financial Protection & Innovation on 10 March 2023 and the appointment of the Federal Deposit Insurance Corporation (“FDIC”) as receiver has dominated the media over the weekend. The failure of the US parent precipitated the announcement by the Bank of England late on 10 March 2023 regarding the status of Silicon Valley Bank UK Limited (“SVB UK”). In particular, the Bank of England announced that absent further meaningful information (e.g. a purchaser is identified for SVB UK) the Bank of England as resolution authority for SVB UK intends to apply to the court to place SVB UK into a Bank Insolvency Procedure on the evening of Sunday 12 March. At around the same time, SVB UK also released a statement confirming this following discussions with the Bank of England.
SVB UK is a separate legal entity from SVB in the United States and is separately regulated and capitalised in the United Kingdom. This has been the case since 20 June 2022 when the previous business carried on the United Kingdom by Silicon Valley Bank, a branch of the US bank was transferred to a new subsidiary incorporated in the UK.
FAQ 1 – what is the bank insolvency procedure?
Larger banks who provide critical functions to the UK financial system and whose failure would cause systemic harm to the UK financial system would not be placed into an insolvency procedure, but rather would be resolved under the resolution regime implemented by the Banking Act 2009. However, as SVB UK is not perceived to provide any such critical functions, the Bank of England has indicated after applying the criteria set out in the Banking Act 2009, which includes public interest considerations, its intention to apply to the court for the bank to be placed into a bank insolvency procedure with effect from the evening of 12 March 2023 rather than resolution.
Resolution tools include bail-ins, sale or transfer to a bridge bank or transfer to temporary public ownership. The Bank of England has indicated its intention not to use any resolution tools in the case of SVB UK. Instead, it will apply to place SVB UK into a bank insolvency procedure; a modified insolvency procedure.
As at the time of writing, the court has not placed SVB UK into insolvency and further discussions are, we understand, ongoing. The outcome of those discussions is unclear. However, they may result in the bank being placed into resolution or some other solution outside of the Banking Act 2009 framework.
Assuming that the court is asked to place SVB UK into the modified insolvency procedure established under Part 2 of the Banking Act 2009, a court order will appoint a bank liquidator. The application to the court can be made by the Bank of England on the following 3 grounds:
- The bank is unable, or likely to become unable, to pay its debts;
- The winding up of the bank would be in the public interest (in other words, the bank may not be technically insolvent, but its winding up would protect its customers and the public;
- The winding up of the bank would be “fair” (i.e. just and equitable).
FAQ 2 – what does the liquidator do?
The liquidator appointed by the court has two statutory functions:
- To work with the Financial Services Compensation Scheme (“FSCS”) to ensure that, as soon as reasonably practicable, each eligible depositor has either their account(s) transferred to another financial institution or receives compensation from or on behalf of the FSCS; and
- To wind up the affairs of the bank to achieve the best result for the bank’s creditors as a whole.
The first objective is the primary objective and is given priority. In practice, once the primary objective of protecting eligible depositors is achieved, the bank insolvency process largely resembles the standard insolvency process under the Insolvency Act 1986 (as amended). With certain limited exceptions, deposit holders with deposits which fall outside of the FSCS eligibility criteria (i.e. because the deposits exceed the £85,000 threshold or the depositor is not an eligible depositor) will rank as general creditors in the insolvency.
FAQ 3 – are my deposits protected by the FSCS?
Eligible deposit holders are entitled to receive compensation from the FSCS up to the current limit of £85,000 (£170,000 for joint accounts). This limit applies on a per bank basis, i.e. if a person has multiple deposit accounts with SVB UK, that person (assuming it is an eligible depositor) is only entitled to £85,000.
In order to benefit from compensation under the FSCS, the depositor must be eligible. Many businesses are eligible. However, there are some important exceptions to this. In particular, businesses which are regulated as investment firms, insurance undertakings, financial institutions or that are collective investment undertakings (i.e. funds) are not eligible and will not therefore benefit from any compensation from the FSCS. In the context of private equity, this means that accounts opened in the name of the funds (or by their general partner, acting on behalf of the limited partnership) will not benefit from the FSCS protection.
The FSCS looks to make payments of compensation within 7 days. However, more complex cases may take longer. It is not necessary for claimants to apply to the FSCS, the process should be automatic.
FAQ 4 – what about my deposit amounts above £85,000?
Amounts held at a failed bank above the £85,000 (or £170,000 in the case of joint accounts) are not protected and therefore will be treated in accordance with the relevant insolvency procedure adopted. It is likely that most depositors with funds in excess of the protected amounts will rank as general creditors of SVB UK. There are some exceptions to this, for example, natural persons and small businesses, where they will rank in priority to general creditors but behind fixed charge holders, expenses of the insolvency process ordinary preferred creditors, e.g. employees. The outcome in respect of deposits over the protected amount remains very unclear and it is likely that it will be some significant time until that outcome is clarified.
FAQ 5 – can I withdraw funds on deposit with SVB UK?
No. The Bank of England’s statement states that “In the interim, the firm will stop making payments or accepting deposits”. This means that it is no longer possible to instruct SVB UK to transfer your funds to another bank; any payments out of your accounts at SVB UK which were instructed but not fulfilled will not be fulfilled; make new payments out of your accounts (e.g. payroll, rent and other business expenses) and payments into your accounts at SVB UK are no longer possible.
FAQ 6 – what about loans from SVB UK?
At this stage it is not clear what will happen to SVB UK’s loan book. However, it is likely that the liquidator will look to sell the loan book to one or more purchasers.
Loans will have not been drawn down will not be capable of being drawn down absent agreement from the liquidator to do so and such agreement is highly unlikely to be given. While a failure to honour a request to draw down may constitute a breach of contract by SVB UK, this will typically be an unsecured claim ranking alongside other unsecured claims (e.g. for deposits outside of the FSCS protection).
It is likely that the beneficiaries of any letters of credit issued by SVB UK will seek an alternative provider from you or require cash collateralisation of those letters of credit until an alternative provider can be found.
FAQ 7 – what happens if I have deposits and loans with SVB UK?
UK insolvency rules permit mandatory set-off of claims in certain circumstances. Consequently, to the extent that you have a loan from SVB UK and also deposits, you may be able to set-off the debt against the deposit. However, it would be prudent to contact the insolvency practitioner appointed by the court in order to agree the position. This may be impacted in the event that your loan is sold to a third party in the insolvency process.
FAQ 8 – what happens to derivatives contracts where SVB UK is a counterparty?
It is important to carefully review the terms of the contractual arrangements. It is possible that an event of default will have occurred either as a result of a non-payment under the contract by SVB UK or by appointment of the liquidator (once that happens). An event of default may enable you to trigger certain rights under the derivative contract, including the closing out and netting of payments and a right to the return of collateral.
As mentioned above, UK insolvency rules allow for mandatory set-off of claims in certain circumstances. However, the application of the mandatory set-off rules under UK insolvency rules and the close out and netting arrangements under the derivative contracts is complex and specific advice should be sought.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. If you wish to discuss any of the matters set out above, please contact the Gibson Dunn lawyer with whom you usually work, any member of Gibson Dunn’s Business Restructuring and Reorganization, Global Financial Regulatory, Global Finance, Investment Funds, or Private Equity teams, or the following authors in London:
Michelle M. Kirschner (+44 (0) 20 7071 4212, [email protected])
Gregory A. Campbell (+44 (0) 20 7071 4236, [email protected])
Ben Myers (+44 (0) 20 7071 4277, [email protected])
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