BL-2022-000438 - [2025] EWHC 2212 (Ch)

By May 2012, Mr Dunn had commenced proceedings against the Company in the High Court, Queen’s Bench Division (Claim No: HQ12XO1936) for recovery of his loan. In those proceedings, he had made an application for permission to serve the claim out of the jurisdiction supported by a witness statement of his solicitor, Mr Martin of Brook Martin. In that statement, Mr Martin had said: “What has happened in this case is that the development costs have increased and have all been borne by the Claimant. He now believes that the value of the completed development is less than is owed to him… if, as he believes, the potential sale price is less than the amount owed to him, there will be a shortfall and the Company is insolvent under English law”.

On 2 November 2012, Mr Dunn wrote a letter to Mr Timinis (the “Letter of Comfort”) which said: “I hereby confirm that the loan advances I made to the company from year 2007 onwards plus accrued interest, totalling the sum of €3,640,964 … will not be demanded by myself for repayment within the next twelve months”.

the Letter of Comfort was a formal and binding commitment to postpone the repayment obligation of the Company which was done with the intention that the Company would avoid cashflow insolvency. The Defendant also relies on Mr Timinis’s evidence that: “I accepted Peter’s assurances that he would continue to provide funding until the houses were sold, and that he would not seek to recover his debt from Astriver by any other method” and refers to the Claimant’s apparent acceptance in inter-partes correspondence that Mr Dunn’s position that he would not call in the loan had the effect of “postponing the trigger to insolvency”.

If consideration is required for the postponement of the obligation to repay the PD Loan, it was provided by the Company continuing to trade and that absent the letter it would have gone into insolvent liquidation.

clause 14(1) of the JVA provided that “As soon as is practicable after the commencement of the Development the Company hereto shall use all reasonable efforts to dispose of the Property”.

Clause 5(e) of the JVA provides that “the PD Loan shall be repaid as soon as the Company (acting reasonably) is able to do so”. The Defendant alleges that it is implicit in this provision (for reasons of obviousness/ business efficacy) that even if Mr Dunn’s loan could not be repaid in full as much as possible should be repaid as soon as the Company acting reasonably could do so.

The first villa was not sold until 2018 with the remainder being sold to Black Flamingo in 2019. The Defendant alleges the failure to sell the villas for 9 years after completion was a variation (or fundamental breach) of the key terms of the JVA which therefore has the effect of discharging any guaranteed liability on the part of Mr Kazolides.

The terms of the JVA concerning the timing for the sale of the villas

The focus of clause 14(1) is on the disposal of the Property, rather than price. Indeed price is not expressly mentioned. Under clause 3(c) the directors were required to act in the best interests of the Company and on sound commercial profit making principles. On that basis, I consider that directors were required to achieve a reasonable price on a disposal. Nonetheless, the key obligation under the JVA was disposal rather than price. This is logical given the interest rate payable on the PD Loan. Subject to a grace period, the PD Loan carried interest at the rate of 8% per annum until repayment in full, with interest to be compounded quarterly in arrears. I do not consider that the directors were entitled to adopt a wait and see approach to the market in the hope that market prices would materially improve over time. Indeed, there was an urgent commercial need to sell the villas; hence the requirement under clause 14(1).

As the Defendant highlighted in his submissions, clause 14(1) imposed an obligation on the Company from the date of “commencement of the Development”, not the completion. It is logical that a commercial property developer might want to proceed in that way. As Dr Mountis noted in his evidence “no property developer or property expert sells the property when they are completed; they sell them almost before they start”.

Whether the JVA was varied

Under clause 14(1) of the JVA, the Company was required to sell the villas as soon as is practicable after commencement of the Development. The main contractor Oikosytheseis started work in around September 2006 and so there was a requirement to sell from that point onwards.

Clause 14 did not dictate a sale price. If the market was depressed, it was not permissible to wait to see how the market behaved.

By at the latest 30 September 2009, under clause 5(c) of the JVA, the Company was insolvent and the PD Loan had become automatically repayable. The Company was in default of its repayment obligations.

Under clause 3(c), the directors had to act in the best interests of the Company and “on sound commercial profit making principles”. Where the Company was insolvent, this actually meant minimising the Company’s loss. This was a further reason to sell the villas forthwith.

From his appointment as director of the Company in March 2009, Mr Dunn was effectively in control of the Company. Mr Stylianou was no longer a director. At that point, the other directors were Mr Michael and Ms Abou Shaaban. They do not have appear to have had any detailed involvement in the running of the Company.

Mr Michael and Ms Shaaban resigned as directors in 2010 and were replaced by Mr Heyes in November 2010. Mr Heyes was involved in the day to day running of the Company and did express views, from time to time, to Mr Dunn about the advertised price of the villas being too high. Nonetheless, he was ultimately content to accept Mr Dunn’s view as to the approach which the Company would take.

By late 2009, Mr Michael and Ms Shaaban were content for Mr Dunn to make the decisions for the Company on what remaining works needed to be completed on the villas, the price at which the villas would be advertised for sale and ultimately the pricing and timing of any sale. After he was appointed as a director, Mr Heyes was also content for Mr Dunn to make decisions on such matters.

On 22 October 2009, after the PD Loan had become automatically repayable, Mr Dunn emailed Mr Stylianou copied to Mr Kazolides “I have made my mind up on only one thing, and that’s easy, - I will not lose any money on this project. All other options are open …”. I consider that this emailwas likely sent by Mr Dunnin the realisation that the Company was already insolvent and absent a recovery in the market, he would lose money on the project.

By this point, Mr Dunn had decided, as he accepted in evidence, that he was not prepared to take a loss on the PD Loan and would veto a transaction which would result in a loss.

The villas were on the market at a combined price of €3,270,000. I consider that this price was too high given the relative lack of interest from buyers and the obvious weakness in the market following the financial crisis. The appropriate step, consistent with the obligation in clause 14(1), was for the Company to lower its prices in order to facilitate a sale as soon as practicable.

Nonetheless, in December 2009, the Company put the prices of the villas up to €3,335,000. That price was much too high. In this regard, I note Mr Dunn’s evidence that, in March 2010, he would have been delighted with a sale of the villas at €2,500,000. As noted in paragraph 115(4), I consider that this evidence was an after-the-event rationalisation because at the time, Mr Dunn was looking to achieve a sale at a much higher price, even though the market would not sustain it.

Given the state of the Company’s liabilities, by at the latest March 2010, I consider that a sale at €3,335,000 would have involved the Company sustaining some loss although obviously a smaller loss than would have been sustained if the Company had sold the villas at market prices. I consider that from this point onwards, the Company set its prices by reference to the prices that Mr Dunn wanted to achieve rather than the market price. Over time, the Company did start lowering prices but I consider that its pricing, at Mr Dunn’s instigation, remained unrealistically high.

As noted elsewhere the Company did not effect its first sale until 2018 and even then only sold one villa. I consider that this failure to sell the villas was due to the approach on pricing which in turn affected its ability to market the villas successfully.

Mr Dunn’s own expert said that the volume of sales only reduced from 2010 or after 2010 and was clear that the villas could have been sold in 2009 / 2010.

Mr Dunn seeks to explain away the failure to sell the villas prior to 2018 as due to difficulties in obtaining the title deeds for the villas in Cyprus. I do not consider that this was the real reason for the delay which was down to the price. The difficulties in obtaining title deeds for many properties was a long standing issue in Cyprus. However, it did not prevent sales being made (albeit that a purchaser might want additional comfort before executing a sale where the title deeds were not available and the lack of title deeds might themselves impact price). Ultimately, I do not consider that the issue had a material adverse impact on buyer interest until much later, likely around 2014. At that point, the issue was, as noted in a Daily Express article dated 12 May 2014, that developers were failing with outstanding debt secured on their properties and buyers were unaware of that debt when purchasing their properties due to the lack of title deeds.

The PD Loan had already fallen due for payment by at the latest, 30 September 2009, on the basis that the Company was insolvent under clause 5(c).

Mr Dunn will likely have appreciated that the Company was insolvent by this stage. His own assessment in May 2009 of the likely build costs to completion was already €2.8 million. Including interest, he recognised that the figure might be €3.3 million and there were further costs for commissions and legal costs to add on top which Mr Heyes had previously estimated, the previous year, to be in excess of €250,000. That meant a combined cost of €3,550,000. The asking prices for the villas were at €3,270,000 from November 2008 and later €3,335,000 from December 2009. On that basis, the sale price of the villas would be insufficient to discharge fully the Company’s costs. Mr Dunn likely had a good understanding of the state of the market in late 2009 because he had access to estate agents and the advice of Mrs Heyes (a professional realtor), Mr Heyes and also Mr Honey.

Mr Dunn’s career had been in insolvency and corporate recovery and he had worked as an insolvency practitioner. In the circumstances, these considerations would have been at the forefront of his mind. In particular, I consider that the reason that Mr Dunn was talking about his unwillingness to suffer a loss in his October 2009 email was because he was aware that is precisely what would have happened if the villas had been sold at that point.

I also note that, in May 2012, Mr Martin had stated in the proceedings brought by Mr Dunn in the High Court that the Company was insolvent.

Mr Dunn continued to bankroll the Company, meeting all expenses through to completion of the villas and beyond. The expenses were not limited to items which were strictly necessary to complete the project. They included various upgrades to the villas, such as the installation of barbeque areas, pool shower areas and an additional pool, which were all intended to enhance the sale price received. All of these activities were inconsistent with Mr Dunn demanding immediate repayment and in fact reflected Mr Dunn’s agreement that the repayment would be deferred until the villas could be sold at a time and price of Mr Dunn’s choosing.

I note that, consistent with the above understanding, notwithstanding the downward pressure on market prices, the prices were increased (overall by €65,000) in December 2009; that reflected a desire on Mr Dunn’s part to minimise his losses rather than to prioritise the sales.

In early November 2012, the Letter of Comfort was issued which confirmed formally that Mr Dunn would not demand the repayment of the PD Loan for 12 months. By the time of the Letter of Comfort, Mr Dunn had already issued proceedings against the Company and he had applied for default judgment. The determination of the application was imminent, and was subsequently granted on 22 November 2012.

Mr Timinis explained that he requested the Letter of Comfort “in order that I could complete the accounts on a going concern basis” (emphasis added); the implication from Mr Timinis being that the accounts would not have been prepared on the basis absent Mr Dunn adopting the position set out in the Letter of Comfort.

The Letter of Comfort must have been intended to defer the repayment obligation faced by the Company both before and after the default judgment (which had been applied for but not received at the time of the Letter of Comfort). If the Letter of Comfort had no legal effect at all then it would have had no bearing on whether the accounts could be completed on a going concern basis, as Mr Timinis confirmed that it did.

Although no other letters of comfort have been located by the Claimant, I consider that it is likely that there would have been other letters. The logic of Mr Timinis’s request for the letter of comfort is that once the issue was identified by him, the point would arise for each subsequent accounting year. The evidence indicates that the point was first raised as part of the preparation for the 2011 accounts and it is reasonable to assume that such letters were requested for those subsequent financial years. I note that Mr Dunn’s witness statement refers to “letters of comfort” in the plural, saying “As the only creditor of [the Company] I told the auditor that I had no intention of enforcing my debt against [the Company] prior to completing the sales of the properties, and I signed appropriate letters of comfort when asked to do so”. This is also consistent with my view that there were other letters of comfort.

As to the position for prior financial years, it is unclear whether there were any letters of comfort. However, in my view, the contents of the Letter of Comfort confirmed what was already the understanding between Mr Dunn and the Company reached after the October 2009 email, namely that he would not be requiring repayment of the PD Loan for the foreseeable future.

This understanding was, as Mr Timinis noted, a factor which was relevant to the going concern assumption. I note that, notwithstanding the clear insolvency of the Company, the directors had been content to record that in their management representation letter dated 22 March 2010 for the financial year ending 31 December 2009, and 16 December 2011 for the financial year ending 31 December 2010 that “We confirm that we have reviewed the going concern considerations and are satisfied that it is appropriate for the financial statements to have been drawn up on the going concern basis. In reaching this opinion, we have taken into account all relevant matters of which we are aware and have considered a future period of at least one year from the date the financial statements are to be approved”.

In the circumstances, I consider that there was an understanding between Mr Dunn and the Company that Mr Dunn would fund the Company until a sale at a price and time of his choosing and he would not require repayment of the PD Loan (or any judgment based on it) prior to that.

I note that, during the relevant period, Mr Dunn was wearing two hats, qua creditor, and also qua director for the Company. However, I consider that it is appropriate to conclude that there was such an understanding between the Company (as a whole) and the creditor, rather than a simple disregard by Mr Dunn for the Company’s interests. The other directors were content to take Mr Dunn’s continued funding, let Mr Dunn have day to day conduct of the Company and to make the decisions on marketing (including setting the price of the villas), completing the build and the timing of any sale. I consider that was the case both for the period when the directors were Mr Michael and Ms Abou Shaaban and later when Mr Heyes was appointed.

Mr Dunn benefitted from such a variation because it offered the chance of a market recovery which would increase the return to him and in the interim, he was earning a strong rate of interest on the PD Loan. In return, the Company continued to operate as a going concern rather than ceasing operations and crystallising the loss. Mr Dunn accepted that he had received a benefit in his oral evidence:

Q. So, there was a benefit passing to you in exchange for writing this letter: the company could continue in existence without insolvency -- without a liquidation?

A.

My Lord, yes, that is correct.

As regards the Company, it also benefitted from not having to crystallise its losses by selling the villas at that point. It also had the prospect of a market recovery and was able to continue trading as a going concern. The Company also had the benefit that there was, at least for the period up to the default judgment on 22 November 2022, a forbearance on Mr Dunn’s part to advance his claim.