This month, a Costa del Sol-based businessman, has found that a seemingly smart investment in a Dublin construction project is turning into a nightmare

When planning approval for three more apartment complexes came through, 40-year-old developer Barry Smyth could see his expansion dreams coming true. His construction company, Canterbury Ltd, with 23 employees, had just built 80 apartments in south Dublin, making a profit of €4 million. He was ready to move on to a 120-apartment complex in Malahide, Co Dublin and two 80-apartment projects in the inner city.

Barry met his bank manager, Tom Kane from Impixa Bank, on July 1st, 2005, to review the year's performance to March 31st, to evaluate the financial projections for the three developments and to consider Canterbury's application for a new working capital facility of €10 million.

Tom was concerned that the projected cash outflows required to develop all three sites over the next year would put an untenable strain on the company's resources. Barry's personal finances were also under pressure as he had mortgaged all available assets to fund Canterbury Ltd. Tom suggested that Barry delay the Malahide development by 18 months. But Barry was adamant the company needed to develop the three sites immediately. "The time is right, let us maximise the opportunities," he said. The bank manager advised Barry to take a few days to consider his options.

The next week, Barry went for a drink with his old school friend, Hugh Kirwan, who was now his financial adviser. They discussed Tom's concerns about the projected cash flows. Hugh suggested that Barry should consider bringing a joint venture partner on-board. This could provide much-needed finance in return for a share of the profit, meaning that the Malahide development could go ahead immediately and that Canterbury would not have to borrow so much. Barry liked the idea and Hugh offered to find him such a partner.

Among Hugh's clients was 55-year-old Paddy Coleman, who now spent most of his time on the Costa del Sol, having made €10 million on the sale of property. Since Paddy had left for Spain in 2002, he had seen his friends back home make significant profits from developments and he wanted to get back into property. He visited Ireland regularly and still had a portfolio of investments in pension and other funds.

Hugh introduced Barry to Paddy on August 27th, 2005. Barry presented his budget for the development, which showed a €12.4 million projected profit before tax. After some negotiation, Paddy and Barry struck a deal. A new company, Nelson Ltd, would be incorporated on September 1st, 2005. Barry told Paddy that he personally owned the land, now worth €3 million, that the Malahide apartments were to be built on and that it was debt free. They agreed that Barry would transfer the land into Nelson Ltd in return for 50 per cent of the share capital of the company.

Paddy undertook to lodge €4 million into a bank account of Nelson Ltd: €3 million for a 50 per cent stake in the company and the other €1 million as an unsecured loan. A shareholders' agreement was sketched out and signed. They agreed that:

• Barry would be appointed managing director and Paddy would become a director;

• Nelson Ltd would sub-contract the building of the 120-apartment complex to Canterbury Ltd;

• At conclusion of the project, Paddy would be repaid his loan of €1 million and interest at 10 per cent per annum, and the profit would be split 50/50.

• Impixa Bank would be Nelson's bankers and Barry would be authorised to arrange whatever banking facilities needed by Nelson Ltd.

• Barry's accountant would prepare quarterly management accounts and send these to Paddy. His accountant would also audit the year-end accounts to August 31st in each year.

In January 2006, Barry provided Paddy with management accounts to November 30th, 2005 (the first three months since Nelson Ltd was incorporated). There seemed nothing unusual about them. Nelson Ltd had incurred €560,000 in development costs, and it had drawn down on a facility at Impixa Bank that Barry had arranged. On a trip to Ireland in February 2006, Paddy visited the site in Malahide. Barry said the indications from real estate agents were very encouraging. Paddy left the site reassured that the project was going to be a huge success.

It was not until October 2006 that Barry provided Paddy with the management accounts for the quarters ending February 28th 2006 and May 31st 2006. Paddy was concerned at the delay, but Barry explained his accountant had had computer problems.

Two days before Christmas, Barry phoned Paddy to tell him that 75 per cent of the development had been sold with a total sales value of €24.750 million. Of this €24.750 million, he said €18.3 million had already been collected from completed sales. Paddy was happy to hear this but he reminded Barry that he wanted to see the year-end accounts to August 31st, 2006 and the management accounts to November 30th, 2006. The lack of up-to-date financial information was worrying him.

"You'll get them any day now," Barry promised. "My accountant has had more computer difficulties but don't worry, things are in hand." However, despite leaving numerous voice mails, it was not until February 12th, 2007, that Paddy received the remaining quarterly management accounts and the financial statements for the year ending August 31st, 2006. He studied them with an increasing sense of alarm.

The accounts showed that Nelson Ltd had, in fact, incurred substantial losses. Although the company had yet to complete the Malahide development, with the sales that Barry had reported, he had expected some profit to be shown in the accounts. If that wasn't enough cause for concern, Paddy noticed that the balance sheet showed that the company owned a fishing boat at a cost of €260,750.

Paddy flew into Dublin for Nelson Ltd's AGM on April 13th, 2007, at which Barry provided a revised forecast of the project's profitability. It showed that the development was 90 per cent complete and that the revised profit was €2.1 million (down from €12.4 million). The cost to build the apartments had skyrocketed from the original estimate.

Accusing Barry of financial mismanagement, Paddy demanded an explanation for this escalation in costs and said he was concerned that profits were being diverted from Nelson into Canterbury by excessive charges being invoiced to Nelson.

"And what's the story with this boat?" he added angrily "I bought it to use with the family at weekends," said Barry, "but I wanted to record it in the company's name for personal reasons."

"That was not properly authorised," replied Paddy. Barry said he could do whatever he liked as long as the company was not prejudiced. By the end of the AGM, Paddy and Barry were hardly speaking. Flying back to Spain the next morning, Paddy felt that he did not have any control over Nelson's affairs and was worried about his investment in the company.

It dawned on him that he didn't really know anything about Barry and that he hadn't done any due diligence. After the introduction by Hugh Kirwan, he had simply accepted Barry at face value. One of Paddy's brothers in Dublin had heard that Barry had had to lay off 10 of his staff at Canterbury and was having difficulty paying suppliers on time. With so much at stake, Paddy had to consider his options to protect the €4 million paid to Nelson Ltd and to ensure he got his entitlement to whatever profit the company earned.