The IndyCar team Dragon Racing has sued Group Lotus for at least $4.6 million in damages, accusing the company in its claim of damaging the team’s reputation by spreading “especially outrageous” falsehoods while at the same time failing to deliver two chassis which it had agreed to supply, which handicapped the team’s opportunity to be competitive. The lawsuit was filed in Los Angeles late last week by team owner Jay Penske. The team has deals to run Sebastien Bourdais and Katherine Legge, but the relationship with Lotus kicked off badly when Bourdais was without an engine until the night before the first practice for the first race in St Petersburg. The lawsuit said that Dragon had had enough of Lotus’s “deceit and wrongdoing”.

Dragon claims that Lotus was supposed to provide two chassis to the team free of charge, but did not deliver them, which meant that Penske had to pay for the cars. Despite this Lotus then refused to deliver engines until paid by the team. The lawsuit says that Dragon was forced to accept Lotus’s “outrageous and improper demands”.

Dragon also accused Lotus of defamation for ewhat it claimed were “knowingly false statements to the effect that Dragon was not honoring financial and contractual commitments to Lotus”.

Dragon also claims Lotus is in breach of its agreement because it did not disclose it was in the middle of a corporate reorganization, which meant that Lotus could not meet its contractual obligations.

Dragon wants the contract cancelled and is looking for engines. Chevrolet has taken on Dreyer & Reinbold, another Lotus refugee, in recent days, while Bryan Herta Autosport has also left the Lotus fold and hopes to get a deal with Honda. Dragon is hoping that it can get some Chevrolets. This leaves Lotus with one car for HVM Racing for Simona de Silvestro, although it has been announced that Jean Alesi will race a Lotus run by Fan Force United, an Indy Lights team run by former IndyCar driver Tyce Carlson. The Frenchman was due to run with Newman Haas Racing, but the team withdrew its entry, saying that it had run out of time to prepare for the event.

As a result of a number of media inquiries, Group Lotus plc (“Lotus”) can today confirm that, following an operational review, Chief Executive Dany Bahar has been temporarily suspended from his role to facilitate an investigation into a complaint about his conduct made by Lotus’ penultimate parent company, DRB-HICOM Berhad.

In Mr Bahar’s absence, Dato’ Lukman Ibrahim, Mr Mohd Khalid Yusof and Mr Aslam Farikullah (representatives of Lotus’ parent companies ) have been authorised by Group Lotus plc’s board to handle and conduct the day to day management and affairs of the Lotus Group. They will be assisted by Mr Rusman Zaihan. They have been authorised to take up these duties during the suspension period.

A spokesman for DRB-HICOM Berhad said: “The penultimate holding company would like to stress it is business as usual at Lotus. We fully support the company and will continue to support Lotus in its business endeavours and development.”

Several people have asked me why Dany Bahar, the CEO of Group Lotus, was suspended last Friday, and why DRB-Hicom have chosen not to give a reason when asked.

There are several possible reasons, none of which I’ve seen mentioned yet in the British press, but before touching upon these, perhaps it’s worth picking up on some of the confusion surrounding Bahar’s suspension.

In DRB-Hicom’s statement on Friday you’ll note it said, “..Chief Executive Dany Bahar has been temporarily suspended from his role to facilitate an investigation into a complaint about his conduct..”.

As in any CEO’s employment contract, there will be termination procedures (based on Lotus company policy) that must be followed, otherwise a claim of wrongful dismissal could be brought against DRB-Hicom. The employer must allow an employee time to respond to a complaint, and since Dany was only presented with the complaint at last Friday’s board meeting, he is still entitled to a hearing in which to respond.

The same reason is likely to apply to why DRB-Hicom has not stated ‘why’ Bahar has been suspended – doing so may prejudice his chances of a fair hearing and his subsequent re-integration back into Group Lotus (if he is cleared of any wrong-doing).

While the phrase ‘temporarily suspended’ is used, this is likely to avoid prejudicing Dany’s options, should he be able to respond to the complaint and prove it was made in error. In reality, DRB-Hicom would not have reached the point of issuing the statement unless they were convinced it was valid and intended to go through with Bahar’s termination.

The reason for making the statement prior to completing the termination procedure is because, as a public company listed on the Malaysian stock exchange (DRBM), they are required to do so. DRB-Hicom delisted Proton Holdings Bhd from the Malaysian Stock Exchange earlier this month.

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The post-acquisition review of Group Lotus’, performed by an advisory team from Ernst & Young and Rothschild Group, was completed some time ago. Since then the team will have been presenting their findings to DRB-Hicom executives, with last Friday’s board meeting being a key milestone in that process.

Although Lotus are perpetually being quoted as a ‘loss making business’, it’s worth bearing in mind that since 2009 its annual turnover has grown by 36% to £150 million, so this was a review to understand the assets and liabilities of the business DRB-Hicom had acquired as part of Proton Holdings Bhad.

While speculation about the reasons for Bahar’s suspension have ranged from a dispute over unpaid renovation work on Dany’s rented home(s) to the dormant Lotus Youngman company listed at Companies House, neither of these would form sufficient cause for termination of a CEO (in normal circumstances).

Over the last few weeks I’ve gained some insight into the business during a number of private discussions with Lotus, however all of the following is available to anyone in the public domain.

Despite the ridicule Bahar has received in the UK press, he’s no fool. Overconfident, maybe. Determined to achieve his goals, certainly. But Foolhardy? When the Lotus-powered IndyCars of Jean Alesi and Simona de Silvestro were black flagged after just 11 laps of yesterday’s Indy 500, many people blamed Bahar – but what was the alternative?

Whether Lotus would have been competitive in this year’s IndyCar series if DRB-Hicom hadn’t taken over Proton (and frozen Lotus’ capital expenditure), we’ll never know, but it certainly cannot have helped. If Lotus had withdrawn from supplying engines to their contracted IndyCar teams, they’d most likely be facing a stack of legal settlements (with teams and the series organiser) for breach of contract. Hindsight is wonderful, but the acquisition of Proton and then the continued uncertainty these past few months, will have made it challenging to know when to pull the plug.

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Which brings us on to the reasons for Bahar’s suspension. Picture yourself in the situation as CEO of Group Lotus. You’ve been brought on board to resurrect an ailing car company, recognising that its core business of producing small light-weight sports cars is no longer sustainable, but have only agreed to take on such a challenge if your bosses make sufficient capital available to fuel a serious transformation.

Eventually a plan is agreed, and as often happens in such situations, your bosses push for ‘stretch targets’. When financing these goals, supported by a syndicated deal with a consortium of six financial institutions (CIMB Bank Bhd, Malayan Banking Bhd, Overseas-Chinese Banking Corp Ltd, Export-Import Bank of Malaysia Bhd, Affin Bank Bhd and Hong Leong Bank), a series of covenants were agreed upon based on these ambitious targets covering steps within the turnaround plan which would impact Lotus’ ability to service the loan.

This is where the plan goes pear-shaped and the CEO’s adage “It’s always better to apologise afterwards, than ask permission beforehand” may have backfired.

As a CEO nobody thanks you for being cautious, or for playing by the rules. You take what decisions are needed in order to maximise the potential of your company and deliver the best returns to your shareholders.

In March this year, Proton Holdings Bhd noted in its interim results that Group Lotus was in breach of certain post-drawdown covenants on its existing long-term loan, mainly due to the longer-than-expected timeframe required for the execution of a management shares subscription and a joint-venture agreement on product development. Proton then requested an extension of the time to fulfil these covenants and submitted this appeal to the lenders.

Lotus’ earnings were trending downwards in the third quarter, due to the costs of Bahar’s turnaround plan and the on-going economic crisis in Europe and the United States. At the beginning of Dany’s plan, Lotus spent heavily, perhaps not as prudently as you or I would with our own money, but time was of the essence and Bahar was in a hurry to prove himself right.

The £270 million loan was re-classified as a short-term loan on December 31st 2011, shortly after DRB-Hicom announced its acquisition of Proton, but with the sale to DRB going slowly, the bankers were getting nervous and with Proton acting as a guarantor for Lotus, the consequence of banks withdrawing their facilities became the most significant risk faced by DRB from its acquisition. With Proton requesting an extension to Lotus’ covenants, those same bankers went from nervous to downright fearful.

To suppose that DRB-Hicom would suspend Bahar over an expenses transgression, when the fate of £270 million in syndicated loans is at stake, seems fanciful – unless of course it’s a cover for a more serious issue. The financial institutions who chose to invest in Bahar’s plan, did so with the expectation that the architect would be at its helm, so DRB-Hicom would not chose to upset this balance without very good reason.

With Lotus in such a critical position and the banks seeking answers from the E&Y/Rothschild review, certain covenants may have been knowingly breached and since Bahar’s executive powers were likely withdrawn some months ago, this would imply such breaches were made early on in the loan agreement.

Maybe Dany took a few liberties early on, so that he could get ahead of his plan, many CEO’s would do precisely the same – the trick is not to be found out until success is firmly in your grasp. But along came DRB-Hicom whose acquisition of Proton not only slowed things down, but also turned a microscope on the business at a time when Dany may have been taking a few more risks than his financial stakeholders would have liked.

If that is true, then Bahar as CEO must take full responsibility. When the music stops, sometimes you find yourself without a seat.