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Geoff Rowley and Geoff Carton-Kelly, partners of FRP Advisory LLP, the specialist restructuring and recovery firm, have been appointed joint administrators to Manor Grand Prix Racing Limited, trading as the Marussia F1 Team.

“With the Marussia F1 Team now in administration, the joint administrators have assessed that, given the current financial circumstances of the Group, it is not viable for the Marussia F1 Team to participate in the next race, the 2014 Formula 1 United States Grand Prix, due to take place this weekend in Austin, Texas,” said Rowley.

The company will continue to operate while the joint administrators assess the longer term viability of the company in its present form. The key question now is whether or not Manor Grand Prix Racing Ltd  (registered company number 6661964) was the signatory to the Concorde Agreement in 2009 when it first entered F1. This is important because while a signatory company can change its name, it cannot transfer it rights to other companies and so if this is the same company (which appears to be the case) then, in all probability, the team’s rights, obligations and benefits all terminate immediately if the company is declared to be insolvent. Administration is a rescue mechanism for insolvent entities and so it is fair to say that the company is insolvent. The details of the bilateral agreements between the teams and the commercial rights holder are secret, but we believe that there is a clause that terminates all rights if a team is insolvent. Thus the entry evaporates and is not available for sale. Thus the team cannot simply turn up at future races and take up where it left off.

The administrators say that no redundancies have been made and that all staff have been paid in full to the end of October. The ongoing staff position will however be dependent “on whether the company can secure new investment in the limited time available.”  It is not clear what the Administrator means by this, but it might either mean that the entry is held by a different company (which does not appear to be the case) or that they have not yet had a chance to read the various agreements.

 

You can read elsewhere on the Internet what I consider to be absolute tosh in respect of third cars. This suggests that the big teams will supply the smaller teams with cars in the event of there not being enough teams to make up the numbers. As I have explained several times all the contractual details of F1 in these circumstances are confidential so no-one – Bernie Ecclestone included – is allowed to divulge details, except in very specific situations, which require written permission from the other signatories. Thus if the organ grinder has been giving details to his performing monkeys, he would be in breach of the agreements…

One does not imagine that Mr E would be doing such a thing. Having said that, the signatories are perfectly entitled to spin fantastic yarns about the future, as long as the truth is not included in the story, and if journalists are naive enough to take these stories at face value then they could easily end up with egg all over their faces.

The process of signing up all the teams to a new Concorde Agreement that runs from 2013 to 2020, with substantially the same deal going on until 2030, meant that the Formula One group (aka Bernie Ecclestone) did not really have the luxury to come up with all manner of exotic new solutions. The old Concorde Agreement (which took years to construct) covered all the necessary elements required and it was easier to use the same basic clauses to draw up the bilateral agreements with the teams. All of them, obviously, had to have the same basic terms, except when it came to money.  There may have been some minor tweaks, but the idea of having big teams supply small teams with cars was very clearly not one of them. This would have stirred up untold opposition.

These contracts are legally-binding (for both sides) and so the Formula One group may now try to sway the smaller teams to agree to changes but one must remember that these teams took entire careers to build and they are not going to allow themselves to be destroyed because someone in the food chain decided that he needed more cars. Some of these teams would rather take the whole business down and see the Commercial Rights Holder lose his rights than agree to give up what they have built to date. The worst case scenario in such a situation would be that the FIA take over and exploit them, rather than the current bunch of golden goose stranglers.

Third cars are not going to happen this year. If they have to happen next year it will be on a random basis. Whatever the case, they will be bad news for the sport as they will weaken the manufacturing base and thus the strength of the sport. The irony, of course, is that there is plenty of money in the sport but it is going to the wrong places. Close to half is being sucked out by financiers who don’t care and the big teams are taking more than they should. The only answer is restructuring and the only people who can force this are the FIA. As guardians of the sport they need now to act. A cost cap has to be the first step. After that, there needs to be a new commercial structure. If it is allowed to drift on, further disaster awaits.

The word from Bernie Ecclestone (by way of Reuters) is that neither Caterham nor Marussia will be in Austin next weekend, which means that the field will be reduced to just 18 cars. There is no time to cobble together any third car options, as it is believed that these require a minimum of 60 days to be actioned. That being the case, this season will be over before third cars are required to appear.

The crazy thing about the current situation is that the rules regarding third cars are not public and the people who know the answers are bound not to reveal the details by strict confidentiality agreements, so no-one outside the signatories know how they work and anyone revealing the details (including Ecclestone and the FIA) can get into trouble by doing so. In the modern day and age it is astonishing that a sport can have secret rules and one wonders how the International Olympic Committee and other international bodies that recognise the FIA agreed to allow the federation to be a member  of their organisations when such things are still the case. One can understand the desire of some to keep the money out of the public domain, although if everyone is paying their taxes there really is no reason to hide this stuff and indeed prize money can be used as a promotional tool, as often happens in US racing.

In the meantime, the best that we can do is to guess the method by which the teams are chosen (with a little guidance perhaps) but without being able to read the full texts of the most recent agreements. It is believed that there is some kind of a ballot included in the rules, but there are no details of how this can and would be done. It is entirely possible that there are actually no rules regarding that. Whatever the case, these things cannot be changed without unanimous agreement. As I understand it, the third car rule is far less simple than some imagine. Teams cannot just turn up and run extra cars at all the races. In order to be fair (in a fashion) the teams should be given the same opportunities to run third cars because there will always be a strategic element in any additional car running. This means that the choice of these third cars has to be random. As we understand it, each ballot will exclude the team that ran a third car in the last race.

We do not know whether or not the third cars have to be run in the same livery as the two normal entries, or whether the space can be sold to different sponsors. That might help teams pay for these otherwise useless cars, but there may be rules that stop this happening, although there is nothing in the public domain that suggests that this is the case.  The Sporting Regulations state that “both cars entered by a competitor must be presented in substantially the same livery at each event”, which does not really help as “both” does not take into account a third car.

The real question is not who turns up in Austin but rather whether there are sufficient cars for next season, or whether teams will be required to run third cars to make up the numbers. This is a disastrous situation for all concerned because it is clear that third cars do not score points (and therefore  do not create prize money) but they do deprive others of income because their results are declared void and the others who finish behind them in a race do not move up the order. If, for example, a dominant team is running a third car, the team can score 43 points (for first and second) but the best a rival team can hope for is 22 points because third place will also likely go to the third car of the fastest team, leaving only fourth and fifth places (12 and 10 points) available. If the third car was not there, the second best team can score 27 points. Thus the midfield teams will be forced back in the F1 pecking order and will become less able to make money.

The FIA should get a good idea within a few days as to whether there will be 18 cars or 22 in 2015, as teams entering the World Championship have to lodge an entry by November 1. An entry fee is required. This is $516,128, plus $5,161 per point for the 2015 season.

The other key question that we do not know the answer to is what is in the 100-year agreement between the FIA and FOM regarding the number of entries that must appear at each race, and what allowances (if any) are made for breaches. If there are 18 cars only in Austin this could in theory be a breach of the 100-year deal, but we do not know. If it is a breach the FIA could cancel the agreement and claim the commercial rights as its own once again. That is probably not the the case, but as all of this is secret we can only guess.

One can hope that one or both of the teams will be able to revive in the weeks ahead but in both cases the problems lie with the owners. Caterham is a mess and is being led by an Administrator who knows next to nothing about the sport. His actions will largely depend on who gives him advice and he is barely qualified to choose who is the best consultant. It is going to be very much a question of luck. His efforts thus far have been described to me as “blundering”.

Marussia has a buyer waiting in the wings but the Russian owner, who cannot afford to pay for the team, appears to be asking for way too much money for the team to be taken seriously. Missing Austin may drive this point home to him: his team is worth nothing as long as there are 11 teams. If there are 10 it has a little more value, depending on the debts.

There is no official confirmation from Marussia that the team will not be in Austin and, to be honest, it is strange for the Commercial Rights Holder to have announced such a thing before the team has made any statement to that effect. It is dreadful publicity for Formula 1 and thus one must assume that either Ecclestone has done this deliberately, or he does not realise the impact that such a remark. Whatever the case, this brings down the sale value of the Formula One group. The current agreements that bind the FIA and FOM cover the period from 2013 to 2020 and an agreement to renew until 2030 on substantially the same terms, so it is a long-term problem.

No doubt, we will find answers to these questions in the weeks ahead.

Meanwhile in Coventry

Coventry, traditionally the home of the British motor industry, is planning to one of the first cities in Britain to host street events, once the British Government passes new legislation allowing the local authorities to close roads for competition, without the need of an act of parliament. The city council has given the go ahead or the project which aims to turn the streets into a track for exhibition runs for the British Touring Car Championship. The idea is to turn the city’s ring road into a race track for what will be called Motofest 2015. If these time trials are successful, the city hopes to stage a round of the BTCC in the future. The event is due to take ace on the Spring Bank Holiday weekend of May 29-31, which will give the city extra time to get things set up and dismantled.

The Administrators from Smith & Williamson are planning to take over ownership of 1MRT in addition to acting as administrator for Caterham Sports Limited. This offers the potential for the team – or what is left of it – to race again this season. The news has been reported as Bernie Ecclestone allowing the team to miss to races, but the truth is that under the terms of the contracts between the teams and the Formula One group, all the teams are allowed to miss a maximum of three races and can still retain the franchise, as long as the company that signed the agreement remains solvent. The plan appears to be to miss Austin and Brazil and for the team to retun in Abu Dhabi. This presumably means that the Administrator will make an entry for 2015, which needs to be done by November 1, and will pay the entry fees necessary.

Finbarr O’Connell and Henry Shinners of Smith & Williamson say that the accountancy and investment management group, have agreed terms to acquire the share capital of 1MRT, the Malaysian company which holds the licence to participate in the Formula 1 World Championship. With the debts likely to be wiped out by the Administration, the agreement to acquire the parent company gives the administrators something to sell.

“This includes the Formula 1 licence, the racing cars, the designs and intellectual property for current and future seasons, plus the workforce and all of the technical support provided to the racing team by CSL from the Leafield Technical Centre,” explained Shinners. “Purchasing the assets would give the buyer ready access to F1 racing.”

The problem is that with 11 teams, the teams have very little value because they have to compete for prize money, which only 10 teams get. The 11th team will have to fight for a token payment of $10 million, as happened this year with Marussia. The prize fund is not about to change in the short term. The administrators say that they have already been contacted by a number of interested parties expressing a wish to buy the team, but it is doubtful that the offers will be very large. If Caterham finishes 11th this year, it will be 2017 before it will be able to get back into the top 10 prize money because the pecking order is established by results from two of the last three seasons. Caterham finished 11th in 2013 and will probably do do again in 2014, so it will not be possible to claim big money until the team has finished 10th or above in 2015 and 2016.

The two parties in the Caterham debacle have now descended to throwing accusations at one another, while the Administrator has impounded the cars and locked out the staff. By blocking the team from using the cars the Administrator is basically destroying what little value is left in the business. The staff is not going to hang around hoping that the team will be revived and everyone will be out looking for work with immediate effect. The good people will be snapped up. The good news is that the franchise is not owned by the insolvent company and as long as the holding company 1MRT remains solvent, the franchise will survive until March, when the first race of 2015 begins. However, that will only happen if someone lodges an entry with the FIA before November 1. And that will cost a considerable sum of money. The owner of the 1MRT franchise will need to do that, which appears to mean that Tony Fernandes and his partners (who wanted to get out of F1 at all costs in June) will have to invest more to keep the franchise alive. Given that they do not want to run a team and that they would, in any case, have to buy their assets back from the Administrator (once it is worked out who owns what), it is unlikely that they will do this.

If the Administrator will not allow the team to go to Austin, then he is hardly going to invest in an 2015 entry. However, the way things are going everything looks likely be locked up in a legal dispute for years to come, which will only serve to waste money and damage reputations. In consequence, unless something that moves the story forward emerges, I see no point in further comment on the matter.

One could say that it might be an idea for Bernie Ecclestone to buy the whole mess for a dollar, let the Administrator give the suppliers a nasty haircut and then buy the assets before giving the whole thing to someone to run next year. The franchise will survive until March next year, so long as someone makes an entry in the weeks ahead. If Ecclestone was to do this, the most likely person to get that job in this scenario would be… Colin Kolles.

Then perhaps the people behind Engavest (which is actually now called Caterham CF1 Grand Prix Holding SA) can prove that they do have money to run a team and were not paying because the shares had not been signed over.

However, when you stop and think about it, it would probably be more efficient to let it die. The Formula One group needs only 20 cars to keep the FIA happy. Without competition for 10th place in the Constructors’ Championship, the F1 spending “arms race” can now stop for the next two years, at least in the midfield. As the demise of Caterham will create a sort of unofficial budget cap because the lack of an 11th team means that all the small teams at the back can back off on spending because their prize money is no longer under any threat. Not having an 11th team means that the pressure is off and all they need to do is turn up with a couple of cars to make up the numbers. This will give them time to repair their finances and prepare for the future. Haas will (in principle) turn up in 2016 but the rewards structures in F1 means they the new team will not be eligible for prize money until the end of 2017, at the earliest, and in any case the new team is unlikely to get anywhere close to the others for a while, so the tail-end teams will get at least two full seasons to cruise and collect before they need to ramp up performance in 2017 just in case Haas is competitive. Thus if Bernie was looking to help anyone, it would be helping Marussia, Sauber and the others to sort out their messes, getting new investment in place and moving on… It is not quite “start and park” but it is the same principle.

Ironically, the demise of Caterham would also mean that the rival teams will all have a guaranteed value, of at least $90 million and that means that their franchises are suddenly worth more than a token sum…

Strange world we live in.

Tony Fernandes has now responded to the suggestion that the Caterham Group has failed to sign over the shares in Caterham Sport Ltd. This is rather more than yesterday’s Twitter remark, but it does little to clear up the situation.

“In June 2014, I decided, together with my co-shareholders, to sell my stake in the Caterham F1 team,” he said. “We agreed in good faith to sell the shares to a Swiss company named Engavest on the basis that Engavest undertook to pay all of the existing and future creditors, including the staff. The continued payment of staff and creditors was so important to me that I ensured that the shares would not be transferred to the new buyers unless they complied with this condition. Sadly, Engavest has failed to comply with any of the conditions in the agreement and Caterham Sports Ltd (the UK operating company of the F1 team) has had to be put into administration by the bank, with large sums owing to numerous creditors. Our agreement with Engavest was very clear: there was no legal obligation to transfer the shares to them unless certain conditions – which included paying creditors – were met. Those conditions have not been met. Our lawyers have asked Engavest several times to comply with these conditions but they have failed to engage. If you agree to buy a business, you must pay its bills. They have breached that promise and now, sadly, it is others such as the employees and the fans of the Caterham F1 team that will suffer if the team ceases to race. I sincerely hope that this will not be the case and that a solution can be found.”

Thus we have two versions of the story. One presumes that all the money owed was written down in a clear manner so that the buyers knew exactly what they were taking on. If this was not the case, one can see why they might feel aggrieved. The lawyers will no doubt one day sort out who is right and who is wrong, but on paper it seems that if Fernandes still holds the shares then he still owns the business and if he is so keen to protect the employees then perhaps he should step in and do the right thing and get the team moving again. If that does not happen the team is dead. The parties involved can go on arguing on who killed it, but the result is the same.

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