Case analysis: Paramount Licensing Inc v Batty and Another Company - confirmation of the nature of the company voluntary arrangement and the role of the supervisor

In Paramount Licensing Inc v Batty and another company [2024] EWHC 3287 (Ch), the court considered the nature of a company voluntary arrangement (CVA) as a statutory contract and the duties of the supervisor.

The resulting decision contains important reminders of the limits of the court’s powers in this area and highlights the risks for insolvency practitioners taking on the role of supervisor.

Background

London Resort Company Holdings Limited (the Company) was incorporated in 2011 with the objective of developing and operating a "Disneyland-style" theme park in Kent. The Company owned four parcels of freehold land on which the park was proposed to be built (the Site). In 2021, the Site was designated as a Site of Special Scientific Interest (SSSI), thereby rendering it unlikely that the Company would obtain the necessary development consent.

In early 2023, the Company proposed a CVA to compromise its unsecured debts in return for the issue of shares in the Company. The CVA was approved, although 23.3% of creditors, including Paramount Licensing Inc (the Applicant), voted against it. The Applicant opposed the proposal on the basis that the likelihood of any return to creditors in the circumstances was highly remote: it depended on the Company obtaining planning permission to build on a designated SSSI, obtaining £3.5bn investment to do so, and ultimately making sufficient profit to pay dividends to shareholders. In May 2023, the Applicant issued an application to challenge the CVA (the Challenge Application) pursuant to s.6 of the Insolvency Act 1986 (the Act), on the basis that (among other things) certain of the debts which were relied upon to approve the CVA were shams or were artificially inflated, and that without the votes in respect of such debts, the CVA would not have passed. The Applicant also alleged material irregularities and misrepresentations in the CVA proposal itself.

Prior to the hearing of the Challenge Application, the Applicant became aware of other events, including the transfer (for no value) by the Company of one of the parcels of land comprising the Site. The Applicant maintained that the Company had irremediably breached certain fundamental terms of the CVA, had ceased to trade and was disposing of its assets in order to put them out of the reach of creditors. Accordingly, under the terms of the CVA, the supervisor was required to terminate the CVA and petition for a winding up order, but had failed to do so.

The Applicant therefore filed a further application pursuant to s.7(3) of the Act in October 2024 (the s.7(3) Application), seeking an order to compel the supervisor to terminate the CVA. In response, the Company issued a cross-application seeking a declaration from the court that the CVA was stayed pending the outcome of the Challenge Application.

The High Court decision

The Company’s cross-application

• The cross-application was dismissed. The Company itself did not have standing to apply for relief under s.7(3) (as it did not claim to be a "person dissatisfied" with an action of the supervisor) and could not apply under s.7(4) as only the supervisor may make an application under that section.
• Even if the Company did have the standing to apply, the effect of a CVA is to establish a statutory “contract” between the Company and creditors entitled to vote, and accordingly (just as the court cannot rewrite a contract) the court does not have the power to amend or modify the terms of a CVA.
• For the same reason, the court could not "stay" the CVA as it is not a set of legal proceedings which can be stayed by the court under its CPR powers. The judge considered that the request for a stay was effectively “a request for a variation by the back door”.

The s.7(3) Application

• The court found that the Company had breached the terms of the CVA on several grounds, including having failed to issue shares within the initial 12-month term of the CVA, and having disposed of part of the Site for no consideration and without the supervisor’s knowledge or consent.
• The Company was also in breach because it had, on the evidence, ceased to trade during the course of the CVA, and appeared unlikely to ever resume trading. The terms of the CVA required the Company to carry on trading in a manner likely to enhance the profitability and solvency of the Company (and therefore ultimately to enable the payment of dividends).
• The terms of the CVA provided that, in the case of irremediable breach, the supervisor was obliged to issue a certificate of termination and to petition for winding up of the Company without further recourse to creditors. The court found that at least three irremediable breaches of the CVA had occurred. The court therefore made an order declaring the Company to be in irremediable breach and ordering the supervisor to issue a certificate of termination forthwith.

Key takeaways

The role of supervisor

• The primary duty of a supervisor is to implement the CVA in accordance with the Act, the Insolvency (England and Wales) Rules 2016 and the terms of the CVA itself. The supervisor is an officer of the court, and obliged to act in accordance with the ethical duties that such role imposes (the rule in Ex p.James (1873-74) L.R. 9 Ch. App. 609.).
• The judge observed that had the supervisor performed his duties properly and in accordance with the terms of the CVA, the s.7(3) Application would not have been necessary. The terms of the CVA required him to terminate the CVA in the case of irremediable breach, and made it clear when such a breach would be deemed to occur. The judge was critical of the supervisor’s conduct and suggested that he had failed to properly perform his duties or understand his role in the context of the CVA.
• While this judgment did not address costs, insolvency practitioners taking on the role of supervisor should ensure they fully understand both the terms of the CVA and the wider responsibilities of the role. There is a clear risk of an adverse costs order being made against them if their action (or inaction) necessitates a s.7(3) application.

The CVA as a statutory contract, inability to stay or suspend

• As the judge in this case noted, the concept of a CVA as a statutory contract is not a new one. In Re Alpa Lighting Ltd [1997] BPIR 341 the Court of Appeal held that the right of a supervisor to seek directions under s.7(4) did not include the right to invite the court to amend an arrangement.
• The inability of the court to vary a CVA (or indeed suspend it, pending determination of a challenge) reinforces the need to get the terms right from the get-go. As the present case makes clear, once the CVA is approved it forms a binding contract with creditors and must be implemented in accordance with its terms. The court has no power vary it, even if those terms subsequently become difficult or disadvantageous to implement.
• Nor can a CVA be stayed or suspended pending the outcome of any challenge. This gives rise to potential difficulties in "unwinding" the CVA should any challenge prove successful. This is an issue which the Act itself anticipates, giving the court broad powers in s.6(6) to make supplemental directions including “in particular, directions with respect to things done under the voluntary arrangement since it took effect”.
• The lack of finality (due to the ability of creditors to challenge a CVA) might act as a significant disincentive to use the CVA procedure at all. In any event, this case underscores the crucial importance of ensuring that proper procedures are followed with respect to the decision procedure (including with regards to admission of votes), to reduce the risk of challenge on this front.

Conclusions

The use of a CVA in this case appears to have been misconceived from the outset. It was almost inevitable from the outset that it would need to be terminated. At the time when the CVA was proposed, the Company seemingly had no prospect of ever completing the development or making a profit, and therefore the more appropriate course would have been for it to enter administration or liquidation. Nevertheless, the case is a very useful reminder of the law relating to CVAs which should serve as a warning, particularly for potential supervisors – ignore the terms of the CVA at your peril.