Bank Launches Court Action Against Arrows

Investment bank Morgan Grenfell began a high court action against Arrows on Tuesday, a week after Formula One's governing body barred the team from competing in next year's Championship.

Arrows, who could become the second Formula One team this year to fold, made all their staff redundant last week and also face a winding-up petition led by their former driver Heinz-Harald Frentzen.

The judge in the current hearing is being asked to decide whether a binding agreement was entered into on July 11, 2001, to restructure Arrows' shareholdings and finances and whether previous financial guarantees remain valid.

The hearing, expected to last at least eight days, opened with Morgan Grenfell saying Arrows and team principal Tom Walkinshaw had "substantially diluted" the bank's large investment through a financial restructuring.

Morgan Grenfell says the restructuring caused it "serious prejudice", with Arrows diluting the bank's stake by creating three categories of new shares in its operating company Arrows Grand Prix International Limited (AGPI). They had also granted security over the assets of AGPI to HSBC Bank.

The court heard that Morgan Grenfell Private Equity had made a 'substantial investment' in Arrows in 1999 by means of equity investment and secured loans through a fund called Morgan Grenfell Equity Partners.

The bank's lawyer Ewan McQuater said that by 2001, the Arrows group was in "serious financial difficulty" and negotiations took place about a possible financial and corporate restructuring.

No Agreement

Morgan Grenfell says these negotiations did not lead to any concluded or binding agreement, but Arrows and Walkinshaw dispute this.

McQuater said his clients discovered in April 2002 that, despite warnings to Arrows to do nothing that was inconsistent with their rights under the 1999 agreements, the Formula One team had "unilaterally taken a series of steps to restructure the group and its finances".

"Those steps were taken in breach of the claimants' rights under the existing finance documents and they have potentially caused serious prejudice to their interests," he said.

Morgan Grenfell won a High Court injunction last May to prevent further such breaches. Arrows and Walkinshaw then failed in a High Court application to be released from their undertakings in July. Walkinshaw said he had dipped into his own pocket to pay for the team's Cosworth engines to enable them to race at the subsequent British Grand Prix.

But the team missed the last five races of the season, claiming that a sale was imminent and they had been given legal advice not to race until the deal was done, and also deliberately failed to qualify in France.

The governing International Automobile Federation (FIA) last week turned down the team's application to compete in next year's Championship.