Bank failure mitigation is critical to safeguarding your business against sudden financial shocks.
In early 2023, uncertainty rippled through the tech sector when Silicon Valley Bank UK faced collapse before HSBC stepped in to secure all depositor funds, and the Bank of England confirmed that their funds were safe. The April 2024 failure of Republic First Bank in the US further underlined the global nature of banking risks.
To protect your operations, you need clear legal guidance on compensation under the Financial Services Compensation Scheme ('FSCS'), emergency funding structures and your ongoing obligations under loan and credit agreements. Our financial services solicitors can advise you on structuring funding agreements, navigating FSCS claims, and negotiating with banks and suppliers, ensuring you’re ready to respond swiftly and confidently when the unexpected arises.
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Claiming compensation when a bank fails
The FSCS is a statutory compensation scheme in the UK for customers of authorised financial services firms. It provides compensation if these firms are unable to, or are expected to be unable to, fulfil claims against them.
Most individuals and corporates can claim compensation under the FSCS. However, credit institutions, investment firms, insurance undertakings, reinsurance undertakings, collective investment schemes, and pension schemes are typically excluded from making claims.
Compensation limits
In terms of compensation limits, the FSCS covers up to £85,000 per depositor per institution. For joint accounts, coverage extends to £170,000, which is divided equally among the account holders.
There are also special provisions for temporary high balances, such as after receiving funds from selling a house or a large insurance payout, when the FSCS provides enhanced protection of up to £1,000,000 for up to six months after the payment was made. If the temporary high balance is because of a payment for personal injury or incapacity, there is no limit on the amount of compensation you can claim.
Managing financial obligations during bank failures
If your bank is failing or has failed, you are still required to meet your contractual obligations. This includes paying any interest, fees, or other charges as specified in the terms of any loan or credit agreement with the bank.
If your bank fails, it may mean you are unable to pay your suppliers or landlord on time. If this is the case, it’s important to communicate with them as soon as possible. Explain the situation and negotiate for extended payment terms, if necessary.
An early conversation can help avoid penalties and preserve your rental agreement or other contracts, giving you time to arrange alternative funding.
The most important thing is not to panic; if you can put together a reasonable proposal and communicate early and consistently, most suppliers and landlords will be understanding.
Securing emergency funding and protecting data
If you need to inject cash into your business, Simple Agreements for Future Equity and Convertible Loan Notes are the most common choices.
These financing options allow you to raise money without relinquishing immediate ownership. You'll issue company shares later, often at a discount, and typically pay about 8% interest on a three-year note. You can also negotiate early repayment terms.
For an immediate cash injection, emergency funding from finance houses is a practical solution. These institutions can often provide funds within about seven days on a six-month term, generally without requiring a guarantee, and charge interest rates around 2%. However, be cautious, as borrowing during financial uncertainty can impact your attractiveness to future investors.
When seeking alternative financial assistance during banking instability, be cautious of data protection risks. Offers of help may require sharing significant amounts of personal and business-sensitive information, so ensure that the service you engage with complies with UK GDPR standards.
Employee and operational management
Employees and workers will almost always have a contractual right to be paid on a certain date of the month or week. If your company fails to pay on time, then you are at risk of Employment Tribunal claims and losing your workforce.
The best approach is to communicate with your workforce as soon as possible and to prioritise paying your workforce to maintain morale.
Making redundancies
When financial issues extend beyond a short-term disruption, consider alternatives to redundancy first. These could include offering sabbaticals, reducing working hours, implementing a hiring freeze, or relying less on agency staff.
If financial conditions do not improve, and redundancies become necessary, ensure that the process is legal and fair. Engage in genuine consultations, use fair selection criteria, and consider suitable alternative employment within the company.
If you think you may make 20 or more redundancies within a 90-day period, you will need to follow a collective consultation. If insolvency becomes unavoidable and you cannot meet payroll obligations, the National Insurance Fund provides a safety net by guaranteeing a minimum payment of wages, notice pay, and redundancy pay under certain conditions.
When your company faces ongoing financial challenges that go beyond temporary cash flow issues, you’ll need to consider various options. These include restructuring debts through agreements like Company Voluntary Arrangements (CVAs) or considering more formal insolvency proceedings such as administration or liquidation.
Each of these options has different implications and should be chosen based on your company’s specific financial circumstances after consultation with one of our insolvency solicitors.
It’s also important to remember that, as a director, you have a duty to act in the best interest of your creditors as soon as your company becomes insolvent. Failure to do so can result in personal liability. The most common situation in which this personal liability arises is in cases of wrongful trading, which is where you continued business operations knowing the company could not avoid going into insolvency.
Seeking legal advice early is the best way to navigate these situations properly and minimise the risk of personal liability.
Getting expert support
When a bank failure threatens your cash flow, taking timely, informed action is vital. From assessing your company’s eligibility for FSCS compensation and structuring short‑term funding through convertible loan notes to advising on insolvency options and director duties, our financial services solicitors offer comprehensive support tailored to your circumstances. Contact us today to develop a robust, legally sound strategy that protects your business’s liquidity, reputation and long‑term viability, with additional support from our insolvency solicitors on restructuring, CVAs and other formal insolvency processes.
