When Does A Supervisor Have A Duty To Terminate A Company Voluntary Arrangement?

A Supervisor of a Company Voluntary Arrangement (“CVA”) has duties that will typically be set out in the CVA proposal. One such duty commonly set out in the CVA is the duty to terminate in the event of material breaches arising. The duty to terminate will depend on the CVA terms as drafted on matters such a termination or otherwise. 

The case of Paramount Licensing Inc v Batty & Anor (Re London Resort Company Holdings Ltd) [2024] EWHC 3287 highlighted an application by the applicant creditor seeking an order from the Court that the Supervisor terminate the CVA and for the relevant company it to be placed into Compulsory Liquidation due to the alleged breaches.

This case involved a prior challenge by a creditor to the company’s (London Resort Company Holdings Ltd) Company Voluntary Arrangement (“CVA”). The challenge by Paramount Licensing Inc (“Paramount”) is up for a hearing in April 2025. That appears to relate to the voting on the approval of the CVA and alleged unfair prejudice.

Paragraph 56 Termination Clause Of The CVA

Paragraph 56 of the CVA said:

’56. (Non-compliance) Failure to comply with any term of the arrangement will constitute a breach of the company’s obligation under the arrangement. The supervisor will work with the company to remedy any breach of obligation. Rule 15.3(3 and 4) (requisite majorities) will apply where any variation is proposed.

If any breach of obligation is not remedied within 30 days of its occurrence this will constitute a default of the arrangement that cannot be remedied and the supervisor shall issue a Certificate of Termination and petition for a winding up order without further recourse to creditors‘

CVA Supervisor Duties

The Court set out the key duty of a Supervisor as follows:

The primary duty of any CVA supervisor is to implement the CVA in accordance with the Insolvency Act, the Insolvency Rules and the terms of the proposals. Any power or discretion given to a supervisor is to be exercised for that purpose only, and not for any collateral purpose. As an officer of the court, the supervisor must also act reasonably: Appleyard v Ritecrown [2009] B.P.I.R. 235.

As an officer of the Court, a supervisor is also subject to the ethical duties imposed by the rule in Ex p. James (1873-74) L.R. 9 Ch. App. 609.

Creditor Control Of The Supervisor Via Court Application

Paramount issued an application under Section 7 of the Insolvency Act 1986.

Section 7(3) says:

If any of the company’s creditors or any other person is dissatisfied by any act, omission or decision of the supervisor, he may apply to the court; and on the application the court may—

(a) confirm, reverse or modify any act or decision of the supervisor,

(b) give him directions, or

(c) make such other order as it thinks fit.

That application sought to have the Court instruct the CVA Supervisor to terminate the CVA due to requirements under it. Paramount it seems submitted the Company was in breach of CVA terms.

Position Of The Supervisor

The Supervisor submitted a neutral position. However, the Court seems to have queried this position:

The supervisor, Mr Batty, has not terminated the CVA despite reasoned requests that he do so. Until very shortly before the hearing, his stance was that it was a matter for either the creditors or the court to decide. In correspondence running up to issue of the s7(3) Application, for example, he stated that ‘this is a matter to be determined by the Court and the creditors of LRCH, not be [sic] me as the Supervisor’. In my judgment this was not an accurate appraisal of the role of a supervisor in the events which have occurred in the context of this CVA.

The supervisor also maintained, until very shortly before the hearing, that he was ‘neutral’ in relation to the Applicant’s s7(3) application. At the eleventh hour, however, he filed a witness statement and instructed Mr Hunter of Counsel to represent him at the hearing. When asked by the court to clarify his client’s position, Mr Hunter said that Mr Batty had largely engaged as a result of a challenge to his entitlement to fees and his potential exposure on costs, stating somewhat elliptically that his client was ‘not fully neutral but not fully not neutral either’.

Mr Batty’s witness statement does not read as a ‘neutral’ witness statement. Read as a whole, it is supportive of the Company’s position and opposes the Applicant’s position on all fronts. In this regard I refer by way of example to paragraphs [19]-[21] of his witness statement (transfer of land allegation), [22] and [24] (failure to issue shares allegation); [25] failure to trade allegation; [26]-[27] (cross-application); [30] (whether to fail the CVA); [31] (whether the matter is urgent); [32] (whether the supervisor had refused to issue a certificate of termination); and [37] (whether the 7(3) application was necessary).

As counsel for Mr Batty, Mr Hunter adopted a similar stance in submissions on a number of the key issues to that adopted by Mr Batty in his evidence.

Issue Of Share To Creditors

It seems the Company did not comply with a term of the CVA to issue shares to creditors within 12 months. The effect meant that as the breach was it seems not remedied within 30 days the Supervisor under the CVA was obliged to terminate the CVA, under what was referred to as its paragraph 56. This did not happen.

The Court put it this way:

In my judgment, the Company’s failure to issue shares to the arrangement creditors within 12 months (ie by 3 April 2024) constituted a breach of paragraphs 26 and 35 of the proposal. As that breach was not remedied within 30 days of its occurrence, by operation of paragraph 56 of the proposal, it is ‘a default of the arrangement that cannot be remedied’. In such circumstances, under paragraph 56 of the proposal, on the expiry of 30 days from 3 April 2024, the supervisor was under an obligation to ‘issue a certificate of termination and petition for a winding up order without further recourse to creditors.’

This, of itself, is sufficient to dispose of the application. As I heard full argument on the two other limbs of the application, however, I shall address these as well. My ultimate decision on the s 7(3) application is based on the conclusions reached on all 3 limbs of the application.

Transfer Of The Land

It appears that a key asset in the CVA was a piece of freehold land valued by the directors at £500,000. However on 8 May 2024 without notice to the Surpervisor, it seems the Company transferred the land for no consideration to UKU London Limited.

The Court said this of the matter:

At paragraph [20] of his witness statement, Mr Batty went on to state that he had been told by (unnamed) ‘representatives of the Company’ that plot TT129442 was ‘held on trust’ for UKU at the date of the CVA. He said that he did not consider the non-disclosure of this in the CVA to constitute a ‘material inaccuracy/non-disclosure’, on the basis that ‘the land was not in any event an asset of the CVA which was available to creditors per paragraph 28 of the CVA Proposals.’

… 

In my judgment, whether or not the Company was the beneficial owner of the plot in question, the transfer of the plot to a third party, without putting any corresponding arrangement in place to ensure that the Company could still use the plot as an integral part of the Site for the development, was in my judgment a material change to the Company’s business.

At the time that the transfer of TT129442 took place, the supervisor had not consented in writing to the transfer and indeed knew nothing about it. In my judgment, this constituted a breach of condition 48 of the standard terms, which prohibits the Company from making any material change to its business without the written consent of the supervisor. As that breach was not remedied within 30 days of its occurrence, by operation of paragraph 56 of the proposal, it constituted ‘a default of the arrangement that cannot be remedied’. In such circumstances, under paragraph 56 of the proposal, on the expiry of 30 days from the date of the transfer, the supervisor was under an obligation to ‘issue a certificate of termination and petition for a winding up order without further recourse to creditors.’

…

The Freehold Land was presented in the proposal and the statement of affairs as the Company’s only asset: see [80] above. If, as the Company now maintains, the Freehold Land was not owned by the Company at the time of its entry into the CVA, the presentation of that land in the proposal and the accompanying statement of affairs as an asset of the Company was in my judgment (at the very least) a ‘material inaccuracy’. Again, I reject the supervisor’s attempts to downplay materiality on the ground that the land was not an asset in the arrangement. It was plainly material in a number of ways. The Freehold Land was an integral part of the Site on which the theme park is to be built. It was obviously central to the Company’s business and therefore to the CVA; without the Site, there was no land on which the theme park could be built. It was also material to the estimated statement of outcomes, which formed an integral part of the CVA proposal on which creditors voted.

Under condition 75.2 of the standard terms, such a material inaccuracy would qualify as an ‘event of breach’ which, on the expiry of the requisite 30 day period, would trigger the irremediable breach provision set out at paragraph 56 of the proposal.

In short, either (i) the transfer of plot TT129442 was a material change to the Company’s business made without the written consent of the supervisor and without informing the supervisor, in breach of conditions 48 and 45 respectively, or (ii) the presentation of plot TT129442 as an asset of the Company in the CVA proposal and statement of affairs was a material inaccuracy triggering an event of breach under condition 75.2. Either way, on the expiry of the requisite 30 day period, the irremediable breach provision set out in paragraph 56 of the proposal would be engaged.

Failure To Continue To Trade

The CVA required the Company to trade.

Paramount highlighted features suggesting the Company ceased to trade. The Court then noted the following points raised:

Mr Batty also stated (at [25] of his witness statement) that the Company was ‘an investment company’, adding ‘as such the definition of “trading” is subjective.’

I pause here to note that paragraph 2 of the proposal does not describe the Company as simply an ‘investment company’. It states that the Company was incorporated in 2011 ‘to develop and operate’ the London Resort.

Mr Batty’s stance on the trading issue is even more surprising when compared to that of the Company. On behalf of the Company, Mr Al-Humaidi at paragraph 37 of his statement states:

‘LRCH [the Company] cannot trade as a business at this time with the Challenge Application outstanding. The parties who have offered to fund the business of [the Company] are not willing to advance any funds if there is a risk that the Challenge Application will be successful, as were that to be the case they would lose their investment.’

…

In my judgment, the failure of the Company to carry on trading during the course of the CVA is a breach of paragraph 73 of the proposal and condition 50 of the standard terms. On the evidence before me, it is clear that by the time of the hearing on 10 October 2024, considerably more than 30 days had elapsed since that breach first occurred; in reality, at least several months and quite possibly over a year had passed since the date of the breach. On the expiry of the 30 day period, by operation of paragraph 56 of the proposal, the breach became irremediable and the supervisor, Mr Batty, was required to issue a certificate of termination and to present a winding up petition.

Conclusion

In conclusion, the Court said there were three breaches of the CVA that were not remedied within the required 30 days provided, meaning the Supervisor was obliged to terminate the CVA.

As a result, the Court ordered the CVA’s termination and said:

It is in my judgment regrettable that in the face of (at least) three serious and irremediable breaches of the terms of the CVA, the supervisor failed to comply with his obligations under paragraph 56 of the proposal to issue a certificate of termination and to present a winding up petition. It is clear from the evidence before me that he was warned repeatedly in correspondence by the Applicant’s solicitors about the breaches and their consequences under the terms of the CVA and yet failed to act. It is clear from the receipts and payments accounts in evidence that this was not due to lack of funds. The supervisor was in funds to take action but failed