IS FORCE INDIA INSOLVENT?
The fact that a company is in administration does not mean that it is insolvent. This is an important definition because if the team is deemed to be (or have been) insolvent, it then automatically loses all the rights and benefits that it has under the terms of the commercial agreements that exist in Formula 1.
The problem with F1 comes because of the commercial agreements that exist between the rights holder (the Formula One Group) and the individual teams. These bilateral agreements are all different and all confidential, but when it comes to insolvency, they all refer back to the Concorde Agreement of 2009, in which insolvency is defined using Article 123 of the Insolvency Act (1986) as one of the ways of defining what F1 calls a "Cessation Event". So did Force India go through a "Cessation Event".
In order to file a winding-up petition, a creditor must have evidence that a debt cannot be paid. Thus there is a device called a Statutory Demand, which a company must settle within 21 days. If it does not do this, then it is an indication that the company is not able to pay and the creditor can then to go court and petition for a winding-up order. If this is granted the company is liquidated and the debt will be paid off from the money raised by the sale of the company's assets. The winding-up petition is not valid unless it has been published in the London Gazette and thus a winding-up petition on its own does not guarantee that a company is, or has been, insolvent, unless it has been published in the Gazette. The odd thing is that a winding-up petition may be advertised in court listings, but this is not legally the same as it being in the Gazette. And if an administration petition arrives when a winding-up petition has not been advertised, it can take preference. This is what appears to have happened to Force India
In the past we have seen teams go into administration and emerge without the other teams having a say, but in these cases there were never any winding-up petitions because the teams satisfied all Statutory Demands within the 21 days allowed and were thus never technically (or officially) insolvent.
So what does this all mean? If Force India has not gone through a Cessation Event its rights and benefits as defined in the commercial agreements remain active and the other teams (the other signatories to the commercial agreements) have no say in the matter. So why then has there been a kerfuffle in recent days with teams saying that they will not sign for Force India to keep its rights and benefits but using a different company number.
There is no need for a new company to be established but it seems that the explanation lies in Vijay Mallya's claim that the team owes the Orange India holding company in Luxembourg $208 million. In administration, the company's capital reserve cannot be used to pay shareholders, but if the firm emerges from administration this would become real debt once more. Getting rid of that debt will obviously make the company easier to sell. So the team has debts of just $43 million, but if it escapes administration it will still owe a vast sum of money. Thus the attempts to get teams to agree to allow the team to change company numbers is really an attempt to keep the team alive, with no debt at all, rather than reviving it with a huge debt.
There is another option, as the administrator might be able to find a buyer who is willing and has deep enough pockets to forego the prize money for a while (as happened with Gene Haas). This means that the buyer would not get any Force India prize money, but would earn the rights with a different company. This would mean a loss of at least $100 million, depending on the results achieved, but it means that there is no unwanted baggage that comes with the team. Given that acquiring Force India will be a relatively cheap operation with only $43 million in debt (compared to the $250 million which the owners were trying to get in the sale), some might consider it wiser to buy the assets and put them in a new company and then get on and earn prize money, rather than buying it.
Will it work? Teams are famously self-interested and rarely do things for the good of the sport but they may all be convinced to sign if the Formula One group will make concessions. The downside of this strategy is that it could end up with Force India struggling to find a buyer and the teams taking the blame for that. This would be deserved, but the sport cannot really afford to lose a strong team, laid low by its previous owners.
Source: JSMB
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