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

Fecha: 22-Ago-2025

The profit sharing arrangements under the JVA

E.1.

The profit sharing arrangements under the JVA

42.

There was a dispute between the parties over the operation of the profit sharing arrangements in the JVA:

(1)

Clause 6(d) of the JVA provided that “[f]orthwith after the sale of all of the Property the Company shall cause to be prepared completion accounts drawn up to determine the amount of the Net Profit or Net Loss…”. Clause 15(2) was in similar terms, albeit that it envisaged that completion accounts may also be drawn up where there was a part sale.

(2)

“Net profit” was defined as the “excess of the aggregate of the Income and the Sale Proceeds over the aggregate of the Deemed Purchase Price and the [costs of the development]”

(3)

“Net Loss” was defined as “any excess of the aggregate of the Deemed Purchase Price and the Development Expenditure and the Pre Completion Expenses over the aggregate of the Income and Sale Proceeds”.

(4)

Clause 6(e) provided that: “Following the repayment of the PD Loan to PD and the Deemed Purchase Price to the Company the Net Profit shall be shared (or the Net Loss shall be borne as the case may be) 50% for the Company and 50% for PD”.

43.

The parties disagreed over the meaning of clause 6(e). The Claimant placed emphasis on the words “following the repayment of the PD Loan to PD and the Deemed Purchase Price to the Company” to contend that the repayment of the PD Loan was a prerequisite before there could be any sharing of profits or losses under the JVA.

44.

I agree with the Claimant that it was necessary to repay the PD Loan and the Deemed Purchase Price to the Company before there was any sharing of profits under the JVA. It is no surprise that the lending had to be discharged before the joint venturers could enjoy the profits.

45.

However, as regards a loss scenario, I consider that the Claimant’s interpretation is wrong.

(1)

First, as a matter of construction of clause 6(e), the loss scenario is addressed by the words which appear in brackets and the profit scenario is dealt with by the words outside of the brackets. I consider that the reference to the repayment of the PD Loan and the Deemed Purchase Price (all of which appear outside of the brackets) is dealing solely with the profit scenario. The loss scenario is covered by the words in brackets and contains no requirement that the PD Loan and the Deemed Purchase Price must be repaid first.

(2)

Second, in a loss scenario (such as the one that arises in this case), there will by definition be insufficient funds to repay all of the Company’s debts. In the circumstances, it makes little sense for the repayment of the PD Loan and the Deemed Purchase Price to be a prerequisite before the operation of any loss sharing provision.

46.

The Claimant’s position was that the loss-sharing provisions do not apply in the scenario which arises in this case where the proceeds of sale were insufficient to repay the Company’s debts. The Claimant contends that, in the present scenario, the losses fall in the first instance entirely on Mr Dunn, who is then entitled to recover them in their entirety from Mr Kazolides under the guarantee clause.

47.

Given that submission, I raised the question with the Claimant’s counsel of when the loss sharing scenario covered by clause 6(e) might arise. The Claimant gave an example where the development completed, five of the villas had sold, enabling the Deemed Purchase Price and the PD Loan to be repaid, and then an unexpected tax liability accrued. It was said that the loss sharing provisions were designed to apply in a scenario like that, rather than the present scenario.

48.

I find it difficult to accept that clause 6(e) was designed to provide for loss sharing in that unlikely scenario and not in the much more obvious and likely loss scenario (which has in fact arisen) where there were insufficient net funds on a sale to discharge the outstanding loans.

49.

In my view, clause 6(e) provides for loss sharing between Mr Dunn on the one hand and the Company on the other hand in circumstances where the Company has insufficient funds to repay the whole of the PD Loan and the Deemed Purchase Price.

50.

As is explained in further detail below, the guarantee performs an important function in ensuring that this loss-sharing mechanism works in practice, in particular in a scenario where the Company has insufficient funds to bear its half of the losses. This is considered in further detail below in Section F.1.1 below.