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

The solvency of the Company in early March 2010

Taking the assets and liabilities of the Company into account, I consider that the Company was insolvent to a significant extent by the first week of March 2010 (prior to 10 March 2010).

In the table below, I set out the Company’s solvency position based on (a) my assessment of the likely value of the villas of €3,035,000 (b) the advertised sale price of the villas at the time of €3,335,000 and (c) Dr Mountis’ view of the value of the villas at the time of €3,580,000. I note that the figures that I have included for the remaining works are conservative and may well have been expected to be higher. I also note that the exact interest costs on Mr Dunn’s loan would have been a little higher but the precise calculation requires assumptions to be made of when additional funds would have been disbursed and that level of detail is not necessary for the presentation below.

As is apparent from the table, on my assessment, as at the first week of March 2010 (prior to 10 March 2010), the Company was insolvent to a significant degree, to the tune of nearly €800,000. Even on Dr Mountis’ valuation, the Company was insolvent to a significant extent. It is not necessary for present purposes to establish precisely when the Company became insolvent but given the state of the property market and the views of market commentators, I consider that this was not a new state of affairs in early March 2010 and, as I explain below, the Company had been insolvent for, at least, several months.

Even using Dr Mountis’ valuation of the villas as at 31 December 2009 of €3,172,000 (which I consider was overly optimistic), I note that the Company was insolvent at that point too. The net proceeds of sale would have been €2,806,539 taking into account estate agency commission of 8% plus VAT, Mrs Heyes’ commission and the legal costs. These were exceeded by the levels of the loans owed to Mr Dunn, Mr Kazolides and Mr Stylianou of €3,129,575 as stated in the accounts. Adding in the costs of funding Mr Dunn’s loan to completion, the remaining building costs and maintaining the villas until sale would have increased the shortfall by at least another €300,000.

Given the extent of the shortfall, I consider that the Company had likely been insolvent since at least autumn 2009. For example, looking at 30 September 2009 and using Dr Mountis’ valuation of the villas for the end of the year of €3,172,000 (which I consider was overly optimistic), the net proceeds of sale would have been €2,806,539, taking into account estate agency commission of 8% plus VAT, Mrs Heyes’ commission and the legal costs. The outstanding debts at that date to Mr Dunn, Mr Kazolides and Mr Stylianou was €2,705,402. In addition, the project was likely at least 9 months from completion requiring €150,000 of further interest on the PD Loan, €36,000 of insurance and maintenance costs and over €400,000 of further build costs (and likely more). The total costs were therefore at least €3,291,402 giving rise to a shortfall of at least €480,000.

Although I do not consider it legally relevant, for completeness (given that the parties filed extensive evidence on valuation right up to 2019), I do not consider that the Company returned to solvency after early March 2010. This is unsurprising because by that stage, Mr Dunn’s loan which represented by far the largest component of the Company’s liabilities was growing at 8% per annum compounded on a quarterly basis. For much of that period, the Cyprus property market was falling and even though market conditions have since improved, prices have not recovered to a level where Mr Dunn’s loan could be discharged in full. That is self-evident from the existence of the sums claimed in the present proceedings where, in essence, Mr Dunn claims under the guarantee the significant shortfall between the Company’s assets and its liabilities.

I also record that I do not consider Mr Timinis’ views on the solvency of the Company to be illuminating for the assessment that the Court has to carry out. I note that Mr Timinis wrote to Mr Dunn on 28 June 2021 to say that the first year that he had any concern about the solvency of the Company was in relation to the Financial Statements which ended on 31 December 2011. The Court does not have the detail of the prior communications which prompted this letter and Mr Timinis does not address the issue in his witness statement. I do not consider that this letter, written a decade after the relevant financial period, is revealing as to the point at which the Company in fact became insolvent. Further, although an accountant may identify concerns during the process of preparing accounts that a company might be insolvent, the fact that such concerns are not raised does not necessarily mean that the company itself is solvent. Any conclusions that can be drawn from the work of the accountant will in turn depend on the process carried out by the accountant and the material shown to him.

In this case, as noted above, the solvency of the Company depended substantially on the prices that it was likely to realise on the sale of the villas. The accounts recorded the value of the villas at cost (rather than resale value). In the circumstances, there was no reason for Mr Timinis to satisfy himself on the resale value of the villas during the course of his work.

I also note that:

In the circumstances, I consider that the Company was insolvent for the purposes of clause 5(c) of the JVA from at least 30 September 2009 and that the PD Loan fell due for automatic repayment at that point. The Company was in no position to repay the loan at that point and was in default from then onwards.