Threat to dissolve Force India Team by Companies House

[John S]

OMG will it be FIF1 that Stefan GP replaces on the grid this season?

http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/7157613/Companies-House-threatens-to-dissolve-Vijay-Mallyas-Force-India-team.html

[Jericoke]

I saw this earlier.  I'm not familiar with British business practises, and have no idea what this means.  (Aside from the big picture of no more FIF1)

[Dare]

I've never seen a sport or series  with more distractions than F1.It's
a wonder there's any teams at all.

I wonder what the next gate will be?or how many gates we'll have this year

[FW14B]

There is an article on pitpass that makes me very worried about this situation

http://www.pitpass.com/fes_php/pitpass_news_item.php?fes_art_id=39896

I would be sad to see them go under, I just hope this is all a lot of misunderstanding, FIF1 are a good team and as one of the few independents of recent years I have lots of respect for them and lots of F1 fans I know away from here are ardent fans of the team through the various guises it has had.

[John S]

Blimey that last para in the Pitpass article about the losses and indebtedness is really unpleasant reading, no wonder the authourities are treating it very seriously. Does anyone care to guess how much FIF1 owes now?

I also see pitpass grasped the chance to have a go at Autosport, they don't get to do that very often. 

[Scott]

I bet this story will see-saw over the next few weeks before we see the real picture.  I don't know that much about British business law, but I guess that companies have to file their accounts with 'Company House' each year.  If they are late, it could also be simply that their accountants are at fault.  Having losses in one company, while profit in others while held by another holding company can be nothing more than a tax write-off, and therefore a wash. 

My guess is is that VJ enjoys the F1 atmosphere, and that if he wants to continue in his position, he will simply chuck another pocket full of change at it (because really, in the grand scheme of things, that is all it would take of his wealth), and continue on for another year or so.

We will see.  I hope FIF1 continues, mostly because of such a great showing they had late last season, and showed the potential that they could have.  I have more faith in them continuing than I do in some of the others making the grid this year.

[Jericoke]

I still don't get it.  Does FIF1 owe the British Government money?  Does it owe someone else money?

All I can get out of the articles is that they're losing money, but it doesn't say who they're losing money to, or why it might force the company to close.  (Presumably the money they're losing is Mallya's, and he can lose as much money as he wants, right?)

What is an 'account'?  Is it a tax?  Is it a filing of taxes paid to employees?  Is it a filing of income for purposes of paying tax?

[Alianora La Canta]

Firstly, despite Pitpass's assumption, this has nothing to do with owing anyone anything. The problem here is simply a lack of paperwork. In other words, the tax office is upset because it has no idea what Force India's financial situation is. Legally, this is very different to being upset because the company is trading at a loss it cannot carry or trading wrongfully. The charge would be "irregular trading".

Some history may help to explain why this happened now. It's the third year in succession that this team has been very late in submitting its paperwork. A limited company such as Force India gets 9 months between the end of its trading year (which appears to be January) and its due date (which is the end of October) and a chartered accountant must approve the submission before it goes to the tax office (taxes must also be paid, but if that was the issue I think the tax office would have mentioned it because that's a separate offence). You get a fine if it's even one day late - £150 initially, then a sliding scale up to £1500 for 6 months late. It's supposed to be significant without being punitive. Further extensions are at the tax office's discretion, but everyone gets 6 months on the automated fine system before other measures are considered in the first instance.

There are two reasons for this regime. Firstly, it means that companies can't simply stop trading without going through the formalities and settling its affairs in a manner satisfactory to those involved in its trading. Secondly, it stops companies thinking they can keep their financial affairs secret from the government, which enables enforcement of various financial laws (tax-related laws are only one of many types of cases for which an accurate return can assist regulatory efforts).

Now, Midland/Spyker/Force India's 2006 and 2007 accounts (mostly covering the Midland and Spyker eras) were 28 months late between them. Note that the scale of fines the tax office can levy against an organisation only goes as far as 6 months after the due date, so the tax office were pretty annoyed. Personally, I think this is down to a culture of financially skating close to the edge which dates right back to the Silverstone squad's foundation and has continued this long because up to this point it's worked for them... ...after a fashion.

The tax office (not surprisingly) does not consider this a valid excuse for repeated late submission of paperwork. Now, it hasn't been 6 months between the point where the 2008 accounts were due and January 26 when the office's patience snapped, but it appears they've taken previous behaviour into account, in which case the tax office is within its rights to bring out the big guns.

At this point, Force India has been granted a one-month extension to get its house in order (though due to the delay in the story's appearance and my delay in commenting on it, it's now only 20 days because the deadline is February 26). By this, the tax office means the same as it did when the return was originally due: record the statutory information about transactions between February 2008 to January 2009, get a chartered accountant to approve the return as accurately reflective of events and send it (along with any taxes due) to the tax office. If it doesn't manage it... ...there will be trouble.

By "trouble" I mean that third parties will have 2 months (they also have the month leading up to the extension deadline, but if the return goes through everything in this paragraph and below is moot) to prove that Force India is still trading. Invoices and similar proofs of transactions are what the tax office will be looking for. If such evidence is provided, Force India lives to fight another day pending the third parties' and the court's agreement. However, it will almost certainly do so with a completely fresh board of directors because the current ones will all be liable for charges of "irregular trading" in such a situation. Imprisonment for some or all of them is possible; fines are very likely if the charges are proven and a guilty verdict for any director would lead to automatic exclusion from being a director of any company trading in the UK (and, through reciprocal arrangements, I believe the rest of the EU as well) for six years. The senior people in the financial department should have sorted out the financial documents are also at risk of the same treatment, except that they would also effectively get a life ban from whichever financial bodies chartered/approved their training. Ouch!

If no third parties are in a position to confirm that Force India is still trading (unlikely but possible) by April 26, the team will legally cease to exist. It will be subject to a compulsory wind-up order and anything left over after creditors are paid will belong to the British government. It'll be unable to go to any further races because the company that's failed to send back its return is the one that has FIF1's entry into F1. So Force India, even in the worst case scenario, should appear in the first four flyaways (and still exist long enough for everyone to get home from China!) but in that scenario, it wouldn't exist by the time Spain came around. All the court cases suggested in the previous paragraph would happen, alongside other cases for, at the very least, wrongful trading (the company having effectively no legal confirmation of its financial status since last January) and possibly other stuff depending on what the inevitable investigation discovers. The money Force India earned in 2009 for its performances would be given to the other teams; Toro Rosso's would be topped up to what it would have got for being 9th itself and the remainder shared between all teams eligible for 2009 prize money.

So this is why you should never upset the tax office...

[raindancer]

Ali ! As usual well researched and well written. I am a M&A ( Mergers and Acquisitions) consultant with significant cross border deal experience and I can assure you all that
1. This is common amongst companies.
2.VJ is too seasoned to let it happen.
Lets not lose sleep over it. Moreover I saw someone say that they are disturbed over borrowings and so on, seriously the financial side of F1 is murky, offshore based, uses tax havens and so on. Lets not even get into those discussions.

[cosworth151]

Thanks, Ali & Rainy. I think most of us were uncertain about what this all means. Corporate accounting laws vary so widely from country to country.

I'd hate to see FIF1 go under, especially over something like an accounting paperwork problem.

[raindancer]

 

[lkjohnson1950]

I have really come to depend on Alia to explain these sorts of things to me. Perhaps you should consider the law as a career, Alia?

Lonny

[cosworth151]

I brought this up in another thread, but I feel it belongs here, too.

FIF1 has settled their problems with Companies House.

http://www.motorsport.com/news/article.asp?ID=359080&FS=F1

[Alianora La Canta]

Perhaps you should consider the law as a career, Alia? {lkjohnson1950 - 2 posts ago}

Maybe, but I need quite a lot more money to pay for the courses to try doing that (the options seem to be a one-year full-time course at about £300 that required me to pay my own living expenses or a £675 online one that could be done while in work or on benefits). A legal secretary would be an interesting line of work for me, but for now I need to get some work as a general/medical admin in order to be able to pay for that.

In theory, I could do a legal conversion course and not pay anything, but that wouldn't qualify me to be a legal secretary, only a lawyer. I say "only" because it would be completely unsuitable work in my case - my blood would boil listening to the various shades of permitted lying employed by my colleagues and their witnesses/defendants/prosecutors. Whereas a legal secretary is something I could actually make a career out of doing...

[Alianora La Canta]

As for the news of Force India having filed its paperwork (one whole day before the deadline at that), this makes me really, really happy