An analysis of the Arrows situation

SEPTEMBER 11, 2002

An analysis of the Arrows situation

Enrique Bernoldi, Spanish GP 2002
© The Cahier Archive

The situation surrounding Arrows is a complex one for those who are interested in Formula 1 and not in the finer points of English law. However in order to clarify the issues involved in the Arrows case it is best to explain the options that exist for the team and some of the potential pitfalls ahead.

Insolvency in English law is legally defined as being when a company does not have enough assets to cover its debts or if it is unable to pay its debts as they fall due. Tom Walkinshaw has always said that Arrows is not insolvent although others clearly do not agree, notably the creditors which are now applying for a compulsory winding-up order. Back in July a High Court judge said that he believed the company was insolvent and had been for some time but that was just an opinion and not a legal judgement.

If a company does not go into voluntary insolvency (which Arrows is clearly not going to do) it can be forced into that position with a winding-up petition from creditors. Under the 1986 Insolvency Act this can be made if a company is unable to pay its debts or if it has failed to pay a debt of more than £750 within three weeks of a written demand from a creditor. The court then examines the petition and decides whether or not to make what is called a winding-up order. Once that has been made a company is then placed in either administration, administrative receivership or liquidation.

Arrows's decision in the last few days to pay off the petitioner (Champion Recruitment) was, in essence a delaying tactic. There are eight other companies which want to see Arrows wound up but without Champion Recruitment they have to go through the petitioning process again. There are some legal issues about whether one is allowed to favour one creditor over others but these do not seem to apply in this case. Transactions which appear to favour one creditor over another can be challenged if they take place within six months of the start of a winding-up process but if they are cash payments made for debts which are due they are considered to be acceptable.

Thus a small debt such as that which Champion Recruitment (which was claiming only around $15,000) can, in theory, be settled without problems.

If the company does eventually get wound up the receiver or liquidator will examine all such transactions and decide whether there is a case for a report to the Department of Trade and Industry. This happens only in extreme circumstances although in recent years there has been an increase in the number of reports to the DTI and this has resulted in new legislative processes which were introduced in the Insolvency Act of April 2001.

Walkinshaw is clearly trying to show with his actions that he does not believe that there is a need for Arrows to be wound-up. Some of his creditors disagree and that argument will be examined when the next winding-up petition is heard. It is not yet clear when that will happen.

Directors of companies are responsible to ensure that the finances of a company are properly handled and understood. If directors knowingly cause a company to trade when it is insolvent and when there is no real prospect of improvement in its finances, they are liable to disqualification from being directors for up to 15 years and even, in extreme circumstances, to prosecution. Directors of companies are not personally liable to any losses of a company unless they have given guarantees to that effect or if they are found to have been guilty of fraudulent or wrongful trading. Wrongful trading is defined as being when a director fails to minimise the loss to creditors after insolvent liquidation becomes inevitable. Fraudulent trading liability requires evidence of dishonest intent to defraud creditors.

There is no suggestion that any of this will apply in the case of Arrows.

The big question now, therefore, is whether or not there will be any action from the FIA which, as guardian of the Concorde Agreement, must decide whether or not the agreement has been breached by Arrows. If it decides that Arrows's non-appearance at races is in breach of the agreement the team could lose its rights and benefits and will not be allowed to compete further. Unfortunately the Concorde Agreement is vague about what insolvency is. The moment a team is legally insolvent and misses a race, it is very clear that all its rights and benefits are cancelled. But until it is legally insolvent nothing along these lines can be done. Beyond that it is hard to make any comment as, absurdly, the Concorde Agreement (the rules of the sport) remain confidential.

Obviously the FIA and the other Concorde Agreement signatories do not wish to be seen as the organisations which have pushed Arrows out of business - and that perhaps explains the lack of activity - but there must be a point at which such behaviour can no longer continue as dangerous precedents are being set for the future.

And while all this is going on, several team bosses have spoken privately of the damage they feel is being done by the Arrows saga but no-one wants to stand up publicly and be counted.

The FIA is expected to explain its position shortly.

Other stories for SEPTEMBER 11, 2002