Silicon Valley Bank – Practical lessons to be taken forward
The rapid collapse and insolvency of Silicon Valley Bank US late last week, and initial statements about SVB UK being placed into a special bank insolvency process had numerous interested stakeholders in the VC ecosystem and advisors rushing to manage a potential cash crunch for thousands of businesses in the UK.
Thankfully, HSBC Bank, further to discussions with the UK Government and the Bank of England, came to the rescue by acquiring the shares in SVB UK, protecting its (otherwise healthy) balance sheet and allowing accounts and payments to continue to operate normally. Disaster averted, but there are likely to be further aftershocks despite this, not least of which being the failure of New York-based Signature Bank.
However, the considerations undertaken over the weekend by all parties should not be ignored. No matter how successfully a business has operated to date, lack of access to available funds is a critical factor in the ability of a UK business to continue to trade. Diversification and management of risk is an ongoing process, however the impact of globalisation and the speed at which issues can snowball (runs on banks can now be achieved by way of a few touches of an app) means that UK businesses should have practical steps and strategies in place now to mitigate the damage potential future issues.
Below are some examples as to matters which directors and stakeholders should consider in case of another material negative market event:
- Work out what you have available and what runway this allows for payment of liabilities. Ensure systems are in place to keep this updated reasonably regularly
- If bank accounts are frozen and subject to formal processes, businesses will need to wait on insured amounts being paid out (in the UK by FSCS up to a limit of £85,000 – UK companies will be eligible for this, but note that some other institutions may not be) which may take a number of days
- Any remaining uninsured amounts in an insolvent bank will be subject to a waterfall of payment to creditors in the insolvencies, which will almost inevitably take some time to finalise and be paid, and probably at less than 100% recovery
- Where accounts are frozen, urgently talk to debtors to discuss redirecting payments to non-insolvent bank accounts
- Those businesses with loans / hedging products with an insolvent bank should check the terms of such documentation and continue to ensure no covenants are breached. We can assist with this process and whether you have any rights arising due to the insolvencies
- We can also assist with raising any unsecured claim against an insolvent bank in order to try and recover funds from the respective insolvencies
- Ascertaining availability of funding from alternative sources is crucial
- Investors can be just as much impacted by the freezing of bank accounts as businesses, so emergency equity raises may not be possible
- Further, plans to restructure the business should be examined to appraise whether viability is achievable. This may impact various other stakeholders, so the points on communication below are key
- There are processes available to affected companies that can be put in place at short notice in appropriate circumstances to protect them from immediate creditor action
- Directors must consider their statutory duties and duties to stakeholders, which move from shareholders to creditors depending on the severity of the financial position
- Decisions should be clearly noted, and regular meetings held to try and minimise the risk of a potential personal liability claim for wrongful trading
- Due to the nature of the issues arising from the insolvency of a bank, there are a number of impacted parties
- Businesses should be discussing options with key stakeholders, creditors, suppliers and staff to provide updates and, where appropriate, confirmation that matters are being considered with urgency
- Experience tells us that early discussions with creditors and suppliers usually results in payment terms being managed or renegotiated – insolvency of a counterparty to a contract is usually to no-ones benefit
- Staff, whose lives are already being impacted by a cost of living crisis, will want to know whether salaries will be paid. Managing expectations and considering options may help de-lever stress and help with a consensual route forward
- Ensure that your communication is clear and concise to avoid misunderstanding. There is a lot of discussion and comment on the matter in the public domain, and not all of it relevant or accurate
- The UK VC community is active and thriving. It is clear from public threads that the ecosystem would look to try and support itself and find broader help eg. from UK Government
- Keep talking to your contacts who may have found a solution you were not aware of
- In unforeseen situations, stakeholders will find themselves working non-stop to protect their interests. However, these matters will rarely be resolved overnight. Where possible, try and give yourself an opportunity to recharge in whatever manner that may be so that you are in a position to make the best decisions
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Contact our Special Situations team if you’d like to discuss anything covered in this article.
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