F1 On Track For Legal Battle Next Month Over Force India Sale

I cover the theme park industry and the business of Formula One. Here is a list of the services my company provides:
https://www.formulamoney.com/products/

Formula One is gearing up for a legal battle next month after the prospective buyer of the Force India team announced that it is considering suing administrators over “serious concerns about the conduct of the bid process.”

At the end of last month the team crashed into administration, the British equivalent of Chapter 11 bankruptcy, after its owners’ financial woes revved up. It was owned by Dutch businessman Michiel Mol, Indian conglomerate Sahara and Indian aviation entrepreneur Vijay Mallya. At his peak in 2010, Mallya was worth an estimated $1.5 billion according to Forbes but his fortunes have reversed since then.

Force India was rescued at the start of August but there have been many twists in the saga since then (Photo by Dan Mullan/Getty Images)

Mallya is fighting extradition from Britain to his home country where the government wants him to answer money laundering charges. It surrounds $1.3 billion of unpaid loans granted by 13 banks to Mallya’s Kingfisher airline which was grounded in 2012.

Two years later Sahara’s chairman Subrata Roy also found himself in the sights of Indian authorities after he skipped court when his company failed to comply with a Supreme Court order to refund $3.5 billion to investors. Roy was granted parole in 2016 and he has been selling assets to pay off investors since then. Mol is the only one of the trio who hasn’t hit the skids but he only owned 15% of Force India with the remainder split equally by his Indian partners.

The obstacles in the way of Force India’s owners fuelled a climate where bills were left unpaid with its engine supplier Mercedes alone believed to be owned around $13 million. The situation came to a head in late July when Britain’s tax authority H.M. Revenue & Customs (HMRC) lodged a winding-up petition with a court in London which could have sent the team straight to the pits leaving its 405 staff without jobs.

If a court issues a winding up order administrators are appointed to close the company and sell its assets in order to pay off creditors. Although the petition from HMRC was settled, another creditor reportedly joined the action which kept the threat alive. It was headed off by an application to put the team into administration which is another tool available to creditors.

The administration application was successfully filed on 27 July by Brockstone, a company which manages Sergio Perez who drove for Force India and was reportedly owed $4 million by the team. In contrast to a winding up order, when a company is put into administration the objective is to try to rescue it through a restructuring or sale. It soon reached the finish line.

As we recently reported, with a helping hand from F1’s chairman emeritus Bernie Ecclestone, Force India was rescued by a consortium of billionaires led by fashion tycoon Lawrence Stroll.

Less than two weeks after it collapsed, the joint administrators, Geoff Rowley and Jason Baker of FRP Advisory, announced that “Force India is to be rescued from administration...following a deal agreed between the joint administrators, a consortium of investors led by Lawrence Stroll, and the team’s senior management...The company will be able to exit from administration, the creditors will be paid in full, all jobs will be secured, and ongoing funding guaranteed.” It was not to be.

The 13 banks which lent Kingfisher $1.3 billion claim that Mallya never intended to repay the money which is why the Indian government wants to extradite him and put him on trial. The banks are being advised by British law firm TLT and they aren't taking any chances. Although Mallya denies the charges and is fighting extradition, the banks have got a worldwide freezing order on his assets. This meant that they needed to give approval to the sale of Force India and it put FRP in a race against time to get it.

Two days after Force India went into administration F1 held its last race before a four week summer break. It returns tomorrow for the Belgian Grand Prix and if Force India hadn’t got a boost from a new investor by then it would have struggled to race. To give staff time to prepare for the race, FRP set new investors a deadline of midday British Summer Time on 17 August.

Everything was on the line. If Force India had failed to get funding by then and had missed a race there would have been a risk that staff would have left due to uncertainty over whether the team would be rescued and they would get paid.

It is understood that the deadline did not give enough time to get approval from the Indian banks and this put the brakes on the sale of the team. However FRP stayed the course and instead switched tracks to selling Force India’s assets. FRP didn’t need approval from the banks to do this as administrators have full control over a company’s assets when it is in administration.

Stroll’s consortium had already set up an acquisition vehicle to buy Force India – a company called Racing Point UK which is ultimately owned by Racing Point limited in the British Virgin Islands. However, instead of acquiring the team, it bought its cars, factory, and everything else needed to go racing. Just two things were missing – an entry to race and the right to $40 million of outstanding prize money that Force India had accrued. Both were tied to Force India not the new Racing Point outfit.

Transferring the prize money required agreement from the nine other teams as they would otherwise share in it if Force India is no longer racing. Racing Point team boss Otmar Szafnauer announced yesterday that it will indeed be receiving the prize money that Force India had accrued and its entry has been cleared up as well.

Entries usually have to be submitted by 1 November of the previous year with the fee payable by the end of that month to F1’s regulator the Fédération Internationale de l’Autmobile (FIA). It is calculated on the number of points earned and came to $1.5 million for Force India last year. However, the amount that Racing Point paid the FIA was reportedly much more high-octane than that.

Article 8.1 of F1’s sporting regulations states that applications which are received after 1 November “will only be considered if a place is available and on payment of a late entry fee to be fixed by the FIA.” An article yesterday in racing magazine Autosport points out that a place became available the moment that Force India was left moribund. It adds “what we haven’t been told so far is the size of that entry fee, but it is understood to be a significant sum.”

The payment did the trick as the FIA issued a press release on Thursday trumpeting that it had approved the mid-season entry from the new Racing Point team with immediate effect. Then came the bombshell.

The press release added that “since the Force India Formula One Team Limited was placed into administration on 27 July, the FIA has worked in collaboration with the Joint Administrators (Geoff Rowley and Jason Baker of FRP Advisory LLP), Racing Point UK Limited and Formula One Management to ensure the expedient and compliant transition of the team’s assets to the new entrant.”

In summary, the press release revealed that from the day that Force India went into administration, the FIA’s aim was for Racing Point to be the new F1 entrant. It is well-known that a number of other parties were interested in buying Force India so you wouldn’t have expected the regulator to have had a favoured bidder the moment the administrator began the bidding process.

It came as a surprise to Uralkali, one of the world’s largest potash producers and exporters. It says that it submitted a proposal to purchase the business and assets of Force India on a going concern basis but was ignored by FRP.

In a statement Uralkali says that it “assembled a team of professionals (including lawyers, accountants, insolvency experts and a Formula 1 specialist) to prepare and submit a competitive bid for Force India, which was led by Uralkali’s independent director Paul J. Ostling.”

It adds that “On August 3, 2018, Uralkali submitted a proposal comprising two options: 1) to rescue Force India as a going concern and to acquire a controlling stake in Force India to safeguard Force India from insolvency; and 2) to acquire the business and assets of Force India from the company in administration to enable the business to continue as a going concern in a new vehicle under new ownership.

“Both options proposed sufficient funding to satisfy claims of all creditors in full and included an undertaking to provide significant working capital and new investment program over a 5-year term to ensure success of Force India.”

Crucially, the statement suggests that these options met legal requirements as “under English law, the objectives of the Administrators’ activities are to rescue Force India as a going concern or, if that is not possible, to achieve a better result for the company’s stakeholders as a whole.”

Uralkali has inside knowledge as its chairman and shareholder Dmitry Mazepin is the father of Force India test driver Nikita Mazepin. In fact, as the BBC reported (https://www.bbc.co.uk/news/business-41610963) last year, the funding from him helped Force India to cover a boost in costs in 2016 driven by significant regulation changes the following year.

Despite being well-placed, Uralkali says it had to give its initial plans the red light due to the tight timeframe set by FRP. In addition to getting consent from the 13 banks by 17 August the statement claims that “on August 4, 2018 (a Saturday), the Administrator informed Uralkali that it would only consider the proposed rescue option if Uralkali provided, by 4pm on August 6, 2018 (i.e. in less than one business day), a binding agreement with Force India`s shareholders to acquire their stakes.” It wasn’t deterred.

Uralkali’s statement adds that to address the timing hurdles it submitted a restated proposal on 6 August which “no longer offered a rescue option but set out a very attractive proposal to purchase business and assets of Force India on a going concern basis.” Its says the bid still involved clearing all of Force India’s debts, including what it calls “questionable last-minute claims”, a cash consideration being paid to the team’s shareholders and commitment to a development plan for the team and an incentive plan for its employees.

Uralkali says it fell on deaf ears. “Following the submission of our proposal, the administrator refused to engage with Uralkali team, did not reply to phone calls and emails and communicated with Uralkali in a single email following close of business on August 7, 2018 that it had entered into an exclusivity arrangement with another bidder regarding a proposal to rescue the company.

“Despite expiration of the deadline set by the Administrator, no rescue plan was submitted to the court for approval, which confirmed Uralkali’s view that the rescue option was not achievable in the timeline and under conditions proposed by the Administrator. Under these circumstances, it is surprising that no attempt was made by the Administrator to engage with Uralkali with respects to its bid for the assets and business of Force India.”

The statement stresses that “over the course of the bidding process and discussions with the Administrator, Uralkali insisted on a transparent and fair process to ensure equal opportunities for each bidder.

“In particular, Uralkali proposed that the bidding process be conducted by way of the submission in sealed envelopes of best and final bids to be opened in the presence of appointed representatives of the interested bidders. However, this proposal was rejected by the Administrators.”

In response FRP told Autosport that all bidders for the team were treated the same. “All bidders were given equal opportunity to submit the best deal for Force India,” it said in a statement.

“Throughout, we (the Joint Administrators) have closely followed our statutory duties and objectives as administrators and had the advice of experienced legal counsel.”

Instead of pacifying Uralkali, it fuelled its ire. Last night the company issued an ultimatum which said “Uralkali has serious concerns about the conduct of the bid process for the acquisition of Force India. Debevoise & Plimpton LLP, Uralkali’s lawyers have accordingly this evening written to the administrators, FRP Advisory LLP, informing them that unless satisfactory explanations are forthcoming by 10 a.m. British Summer Time on 10 September 2018, court proceedings will be brought against them.”

Uralkali isn’t the only one which might feel short-changed by what has happened to Force India. The 13 Indian banks now have a freezing order on a company which has no assets and has lost $40 million of prize money. Time will tell what they think of the recent maneuvers but it appears that the chequered flag may not yet have come down on Force India.