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Property developer collapses

The reason the company has collapsed is not the crisis, but the fact that Cyprus’ legal and regulatory framework allows a builder with five years’ experience to set up as a developer and apply his own standards of commercial behaviour.

A&G PROPERTY Wise Development Ltd (A&G), the company operating the Froiber brand in Cyprus, will be liquidated on 17 July for repeated failure to make employer’s social security contributions.

The Social Security Fund (SSF) lodged a request with Nicosia District Court on 4 May 2007 for the company to be liquidated. The liquidation order was finally issued on 18 November 2008, with effect on 18 May 2009. At A&G’s request, the court agreed to postpone execution of the order for two months, to 17 July 2009.

As required by law, the announcement of the request for liquidation appeared in the Government Gazette of 24 April 2008, and will have appeared in at least one newspaper. However, owners of property built by A&G who are still without Title Deeds might still be unaware of the company’s impending liquidation.

In any case, as unsecured creditors, their claims will have to wait in line behind the SSF, the banks and then any other holders of security or guarantees from A&G. Ultimately, they will probably have to argue their case in court.

When contacted by the Sunday Mail to discuss his company’s liquidation, Director and company owner of A&G Georgios Andreou denied “any link whatsoever” with various Froiber companies. The simple fact is that the listed telephone number for Froiber Estates Agents is the same office number given for A&G in its own documents.

A&G’s official accounts for 2003 – the last accounts lodged with the Companies Registry – also demonstrate a direct link with companies such as Froiber Land Developments Ltd, Froiber Estates Ltd, Froiber Marisa Developers Ltd and Froiber Hellas – a 100 per cent-owned Greek subsidiary which made total losses of €1.77 million in 2003, rising to €2.31 million in 2004. The accounts also refer to an 80 per cent share valued at C£749,638 in a UK affiliated company, Southbury Lets Ltd., which entered into voluntary liquidation in September 2005, and was dissolved in August 2008. There is also an unconfirmed link with Froiber (UK) Ltd, whose Chairman listed as a George Andreou, signed a resolution in July 2007 to voluntarily wind up the company. This company was dissolved in April 2009.

So how could a company worth millions on paper fail repeatedly to pay a relatively modest amount – just 15 per cent of payroll, e.g. C£27,000 in 2003 – to cover its social insurance obligations to employees. The SSF routinely goes to court over a debt of €2,000-3,000. It has been suggested by a legal source that A&G owes as much as €500,000. Even with compound interest, it would take years to rack up that amount. If the suggested figure is even remotely accurate, this would imply that at best someone in the SSF has displayed gross negligence.

One clue to the company’s demise lies in the way that treats its customers. Some of them, like Colin Smith, former war correspondent for The Observer newspaper and author of history books such as Singapore Burning, got his Title Deed a mere five years after taking possession of his Froiber flat in June 2003.

Others have not been so lucky. Maria (not her real name) signed an agreement with A&G in April 2000 to buy a property in a Froiber block of nine flats. She took possession in August 2000, and has an official statement of account proving that all outstanding amounts had been paid.

Having finally lost patience after years’ worth of empty promises from Andreou regarding their Title Deeds, Maria and the eight other flat-owners – who had also paid in full – consulted a lawyer in December 2008.

The lawyer established that Title Deeds for all nine flats had been issued in December 2008 in Andreou’s name and he was promptly informed that if he did not proceed immediately to transferring the Title Deeds, he would be taken to court.

In mid-December 2008, Andreou sent a letter to each flat-owner, claiming insurance, sewerage, Immovable Property Tax – which was not payable on Maria’s flat, as its value was below €100,000 – and Transfer Tax for the period 2000-08. Despite the fact that the amount claimed was excessive, the lawyer advised Maria and the others to pay anyway, if it meant getting their Title Deeds.

They did so on February 2 2009. The Sunday Mail has a copy of Andreou’s written commitment on February 4 that, since “all of the flat-owners have paid the amount due on each flat“, he would transfer the Title Deeds to all of the flat-owners “within three weeks of today’s date“.

The lawyer obtained an execution order from Nicosia Court on the basis of Andreou’s written commitment, to be carried out on April 3. A&G failed to attend the Land Registry on the date set by the court. Instead, Maria and the others each received another copy of the bill for outstanding taxes, this time with a note saying: “The above amounts have been paid off. There remains a balance of €5,000 to cover the company’s administration costs, which must be paid on the day the transfer is effected.

Maria has now sued Andreou for non-performance of his various commitments. The writ was registered with Nicosia Court last month, but will only be heard on 17 September, in other words, two months after the court order to liquidate A&G is executed.

Maria said she had learned through a legal acquaintance of Andreou’s own lawyer that the developer had not paid any of the state taxes he had collected from her building’s residents. Andreou’s lawyer is reported to have said: “Tell them to light a candle, make a votive offering and pray that he pays the taxes so that they can get their deeds.

So what went wrong with A&G?

Its official accounts for 2003 show sales of C£2,200,200 plus C£1,838,935 in unsold stock (compared to C£534,069 the previous year), against a total cost of construction (including the cost of land) of C£3,566,970. A&G declared a gross operating profit of C£401,968, and a net profit of C£228,821 (around €393,000).

One can dispute the accuracy of a property developer’s accounts which include stated values of land, unsold stock and “work in progress“, and assets and balances of affiliated property companies. What stands out in A&G’s 2003 accounts is the C£1.84 million received as downpayments from clients plus C£1.91 million in unspecified “commercial debtors” on the credit side, and the C£2.02 million interest-bearing liabilities plus C£5.47 million in bank overdrafts on the debit side.

The bottom line is that in 2003 A&G declared current liabilities totalling C£8.74 million, which it would not be able to repay on demand in order to remain solvent.

A note in the accounts says that its long-term loans and bank overdrafts were secured by C£10.07 million in mortgages on land and buildings and C£2.04 million in assigned sales contracts (some €8 million with Universal Bank alone), and a further C£2.02 million in current charges and guarantees.

There is a question regarding what A&G has been doing since the liquidation order was requested in May 2007. The Official Receiver’s office said that Cyprus law allows a business to continue to operate normally, because at that point its financial status has not changed legally. Between May 2007 and November 2008, when the order was granted and a liquidator appointed, A&G will have been free to sell any stock it may have had, with no obligation to disclose to the buyer that it might not be in a position to have the Title Deeds issued.

Today, the Froiber website (www.froiber.com) is the internet equivalent of a deserted office containing a pile of unopened mail. Clicking on the links “Homes for Sale“, “Apartment Find“, “Real Estate Leads” and “Apartment Lease“, one gets the message: “We were unable to find results for your search term“.

But the liquidation of A&G will not necessarily mean the end of Andreou’s business career. In the UK, the law ensures that directors of bankrupt companies are disqualified on the basis that their conduct calls into question their fitness to be involved in the management of other companies.

Not in Cyprus. According to the Official Receiver’s office, someone who is personally bankrupt is disqualified, but a director of a bankrupt limited company is legally entitled to act for another company.

It is important to remember that the request to liquidate A&G was made in May 2007, more than a year before the global economic crisis began in the United States and spread outwards.

The fundamental reason A&G has gone bust is not the crisis, but the fact that the existing legal and regulatory framework in Cyprus allows a builder with five years’ experience to set up as a developer and apply his own standards of commercial behaviour. Factor in a bank or two willing to extend loans on a questionable basis – from a financial if not a legal point of view – and the prospects are grim for many who decide to purchase a new home from a developer.

It is hard to avoid the conclusion that when it comes to property rights, the legal and regulatory framework – and by extension the political system – in Cyprus is treating citizens like Maria with a degree of cynicism that borders on contempt.

Copyright © Cyprus Mail 2009

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