Scio-Fund Sicav-Fis & Anor v Mohammed Reza Aslam Merchant & Anor

This judgment follows the hearing of (a) the applicants’ application of 22 April 2025 under s 262 Insolvency Act 1986 for an order revoking the creditors’ approval of an individual voluntary arrangement in respect of the first respondent given at a meeting held on 24 March 2025; and (b) a bankruptcy petition presented by the same applicants on 5 June 2025 seeking a bankruptcy order under ss 264(1)(c) and 276(1)(b) Insolvency Act 1986. The application and the petition are supported by three witness statements of Keir Merrick, the applicants’ solicitor. Mr Howorth, the second respondent, made a witness statement on 6 June 2025, and late in the day, on 15 December 2025, Mr Merchant, the first respondent, made one too. I had the benefit of oral evidence from Mr Merchant given in cross-examination.

I shall say three things about the evidence. The first is that the respondents’ written evidence is thin: it does not engage adequately in the detail of the applicants’ complaints. The second is that Mr Howorth’s evidence is said to be given on his own behalf and on behalf of Mr Merchant. This is unusual: in a case such as this the office-holder is usually careful to maintain a position of neutrality as between the debtor and his creditors. Mr Howorth has chosen not to be neutral, which reinforces a view, on which I expand later, that he has been less than objective throughout the IVA process with which we are concerned here. The third point is that I found Mr Merchant to be a satisfactory witness. He answered the questions put to him by Ms Innes in a straightforward fashion. I accept that his evidence was truthful, although it does not follow that I accept all that is said on his behalf to flow from that.

Reza Merchant, the first respondent was, and still is, in the business of developing and managing residential property and hotels. In his witness statement he describes himself as a real estate entrepreneur. He is the (or a) founder of Soul Development Services Limited and Soul Development Holdings Limited (sometimes referred to together as “the &Soul companies”) which specialise in something called co-living, the nature of which I need not explore.

The first applicant is an investment fund to which the first respondent is indebted in the sum of £3 million together with interest arising out of a personal guarantee he entered into on 16 May 2019 in support of a facility provided to a company called TC Fumbally Holdco 2 Ltd. The second applicant is an individual creditor in the sum of £500,000 in respect of a loan made on 31 March 2021 which was repayable on 17 May 2021. No repayment was made.

The second respondent was the nominee and is the supervisor of Mr Merchant’s IVA.

For 15 years Mr Merchant carried on business through a group of companies described in his proposal for an IVA as “the Collective Group companies” which pioneered co-living. The companies went into administration in September 2021. Mr Merchant attributes the failure of the Collective Group to Covid. Ms Innes, on the basis of press reports, contends that other factors played a role, but I cannot and do not need to resolve that. Suffice it to note that Mr Merchant became insolvent as a result of being called on under guarantees. In December 2024 the first applicant presented a petition against him seeking a bankruptcy order. That led to Mr Merchant’s proposing an IVA, something he seemed to have been contemplating for some time, to deal with creditor claims amounting to £52,685,816. Mr Merchant’s proposal was finalised in March 2025 and approved by 92.10% of creditors voting at a meeting held on 24 March 2025. The first applicant’s petition was, I presume, subsequently dismissed.

The basis of Mr Merchant’s proposal is set out in paragraph 9:

Paragraph 10 sets out the reasons why a voluntary arrangement is said to be desirable and explains why creditors should approve the proposal by comparing the result if Mr Merchant’s proposal is accepted with that in bankruptcy (nil in the £) (cf Appendix 3). Paragraph 11 states that the proposal is to last for five years and will not be extended. Paragraph 18 gives the estimated amounts of dividends and dates on which they will be paid (at the end of the five year period, April 2030). As we have seen, the dividend to creditors is estimated at 100p in the £, but paragraph 18.3 qualifies this:

Paragraph 32 confirms that “No guarantees are to be provided in relation to the implementation of this proposal/the Arrangement.”

Absent from the proposal is any provision enabling the supervisor to take steps against Mr Merchant if the IVA fails, a matter of which Ms Innes makes complaint. Whilst such a provision is usual, it is not a requirement.

There are a number of appendices. The only ones to which I need to refer are Appendix 1, a statement of affairs which shows that there are no preferential creditors, Appendix 3, whichestimates a return in the IVA of £52,685,816.72 compared to £16,843 in bankruptcy,Appendix 6 (a letter of consent from FF) and Appendix 7 (Business plan), which contains spreadsheets and figures purporting to show how the various developments to be undertaken will generate the cash to provide the proposed dividend to creditors.

The nominee’s report (three and a half pages of six paragraphs) states that in his opinion and that of supporting creditors Mr Merchant’s proposal has a reasonable prospect of being approved because:

Similarly, it concludes:

The applicants challenge the decision to approve the IVA on the basis of material irregularity and ask that it be set aside on the following grounds (set out in summary in paragraph 4 of Ms Innes’s skeleton argument and amplified later):

Section 262 Insolvency Act 1986 provides:

Section 276 Insolvency Act 1986 provides:

In Fender v Commissioners of Inland Revenue [2003] BPIR 1304 His Honour Judge Norris QC, sitting as a High Court Judge, provided a statement of the principles as to what constitutes a material irregularity:

I shall deal with further case law to which I was referred when dealing with the applicants’ case, to which I now turn.

I shall take (1) and (2) together under one heading.

The essence of this complaint is that the effect of agreements entered between and among some of the IVA creditors, Mr Merchant and FF was, on approval of the IVA, to put or leave some creditors (referred to as “standstill creditors”) in a better position than others, including the applicants, in significant respects.

Ms Innes summarises the material terms of the standstill agreements by reference to a draft provided to the first respondent (I shall explain below why she refers to a draft):

She identifies the following features of the agreements:

The standstill agreements to which she refers have not been disclosed and are not in evidence. All that is in evidence is a draft, which is exhibited to Mr Merrick’s first witness statement. It is headed “Override and standstill deed.” Clause 6.3 binds any creditor to the deed to vote for any IVA proposed by Mr Merchant.

I should explain the context that gave rise to the standstill agreements.

In cross-examination Mr Merchant gave evidence that in about 2022-2024 he entered into negotiations with his creditors in the hope of compromising his indebtedness to them. A draft standstill agreement was sent to many or all of his creditors. Some entered into it; others, such as the applicants, did not.

Mr Merrick gives evidence about how they became a matter of contention in Mr Merchant’s IVA in paragraphs 35-36 of his first witness statement. Someone at the first applicant recalled that Mr Merchant had approached them in November 2024 asking them to enter into a standstill agreement, the draft of which is the exhibit mentioned above. The first applicant declined to enter into it.

The first respondent’s late recollection prompted Fieldfisher on 19 March 2025 to seek information about what were described as joint debts in paragraph 8.2 of Mr Merchant’s proposal (headed “Provisions relating to joint debts”). Stephen Brook of the nominee’s firm responded on 23 March 2025:

I do not know what Mr Brook meant by “preferred.” If he was using the term to mean a preference within the meaning of s 340 Insolvency Act 1986, he was right; if he meant “treated better,” he was wrong. (I am not sure what he meant by “implicated” either: if he meant “affected,” again he was wrong.) I have headed this part of my judgment “The differential treatment of creditors” to avoid confusion and make clear what I understand the applicants are complaining about.

On 24 March 2025 Fieldfisher sought more information about the standstill agreements and asked for them to be disclosed. About 25 minutes before the creditors’ meeting the nominee’s firm (I think it was Mr Brook again, but the emails are not entirely clear) responded:

The standstill agreements themselves were not forthcoming and still have not been disclosed.

In my judgment the way in which the standstill agreements were dealt with (or not) in Mr Merchant’s proposal and the nominee’s report amounted to a material irregularity in relation to the creditors’ decision procedure by which the proposal was approved, and the differential treatment of creditors following approval of Mr Merchant’s IVA unfairly prejudices the applicants. I say that for a number of reasons.

Neither the proposal nor the nominee’s report make explicit reference to the standstill agreements. Those words do not even appear in either. The omission of the term is itself remarkable, given the number of creditors who had entered into them in one form or another (a caveat I include because the evidence is that the agreements were substantially similar, but that cannot be checked because they have not been disclosed). Even more remarkable is the failure to disclose the fact that, on their face, they afford the creditors who did sign them rights beyond those available to creditors who did not, just as Ms Innes submits.

Not only did the proposal and nominee’s report fail to deal with them, but, I infer, both Mr Merchant and Mr Howorth appear to have decided to conceal them and/or their nature and effect. I take the following into account in drawing that inference.

None of the foregoing sits well with HHJ Norris’s dicta about the need for a proposal for a voluntary arrangement to be honest and “put all relevant facts before creditors;” the respondents’ approach offends the proposition that a proposal should be “characterised by complete transparency and good faith.” It also demonstrates the nominee’s failure, in discharging his functions in this case, to exercise professional, independent judgment, informed by his qualifications and skills.

The differential treatment of creditors that results from the co-existence of the standstill agreements and Mr Merchant’s IVA also offends the pari passu principle that underpins (albeit with statutory modifications) English law insolvency processes, including that regulating individual voluntary arrangements, just as Ms Innes submits. She cites a passage from the judgment of Malins V-C in McKewan v Sanderson (1875) LR 20 Eq 65:

That that nineteenth century tenet holds good today is apparent from its citation by Patten LJ in his judgment in Gertner v CFL Finance Limited [2018] EWCA Civ 1781 (at [65]) on which Ms Innes also relies:

To be clear, the principle is breached in this case by the fact that some of the IVA creditors obtain or retain, following its approval, additional rights against FF which others do not enjoy. The applicants are put at a disadvantage: their rights are limited to receive whatever might come into the IVA; any rights they have against Mr Merchant are extinguished; they are not replaced by rights against any other person or entity, or the extended rights against FF which the standstill creditors continue to enjoy. Thus, some creditors find themselves (potentially, at least) in a better position than others. That is a derogation from the pari passu principle.

The same point, in my view, also constitutes a breach of the principle that an IVA must be propounded in good faith. Again I set out a passage from Gertner on which Ms Innes relies (see Gertner v CFL Finance [2018] EWCA Civ 1781)):

A theme of the above authorities is the impropriety of making available to a creditor or group of creditors of a collateral advantage that is not accorded to another creditor or group of creditors.

I do not think that the mischief of the differential treatment of creditors whereby some enjoy a collateral advantage over others is vitiated or mitigated by the arguments relied on by Mr Grandjouan and Mr Fitzmaurice (who adopted those of Mr Grandjouan). They are summarised in Mr Grandjouan’s skeleton argument as follows (with minor editorial changes and some additions; it refers to the standstill agreements as “SAs”):

There is some force in some of the points Mr Grandjouan makes; but not enough, in my view, to get Mr Merchant out of the hole he has dug for himself with the assistance of his nominee. My overarching reason for saying so is that, whilst the context and events of the past (2023-2024) are plainly not to be discounted as irrelevant, what primarily matters, it seems to me, is what is set out in the four corners of the debtor’s proposal and the nominee’s report. This is, in the end, a case about a specific IVA, not about prior negotiations. Nothing of what creditors may or may not know or recollect about past events can detract from the obligations of transparency and full and frank disclosure in the IVA itself. Those obligations necessitated disclosure in Mr Merchant’s proposal of the existence and the terms of the standstill agreements and an objective analysis in the nominee’s report of their contents and effect. It is not enough, in my view, to say that the creditors must rely on their recollection, nor simply to assert, as Mr Merchant did in his oral evidence, that all the agreements that were signed were materially the same without spelling out the differences. As I have already noted, Mr Merchant’s reliance on their confidentiality has been treated selectively. A belated offer of disclosure made by Mr Merchant from the witness box came too late.

I reject Mr Grandjouan’s submission that the fact that every creditor of Mr Merchant was offered the opportunity of entering into the (or a) standstill agreement constitutes some sort of foil to the applicants’ case. The offer could and should have been made to all creditors at the same time after full disclosure of all the relevant facts within the IVA and with the benefit of considered comment from the nominee. I make no criticism of Mr Merchant for seeking to come to terms with his creditors without going to the expense and trouble of an IVA; but once he did so, he was bound by the process and the considerations addressed in the case law. Full disclosure and clarity as to what was being proposed would have ensured the equality of treatment and adherence to the pari passu principle that a formal insolvency process requires.

I also reject Mr Grandjouan’s contention that even if all the creditors had been told what they should have been told it would have made no difference to the outcome, which would still have been to approve Mr Merchant’s IVA by a comfortable majority. (He relies on Cadbury Schweppes Plc v Somji in support of that proposition). Leaving aside the question of the extent to which all creditors might have been bound by the standstill agreements to vote in favour of an IVA (for who knows what was tweaked or modified), none of us can be sure how any creditor might have voted if he/she/it had been fully apprised of all the relevant facts.

The fact that the standstill agreements were discussed at the meeting of creditors is something to which I attach only limited weight. The meeting lasted just over 30 minutes. It covered a number of topics. The chairman’s report does not bear out that the discussion was detailed, as Mr Grandjouan contends. In any event, any discussion there was took place against the backdrop of no or inadequate disclosure, which itself limits its value.

A further problem arises from the fact that Mr Howorth now contends that “[t]he IVA supersedes the Standstill Agreements in relation to the First Respondent’s personal liabilities. As such, there is no preference created in the Standstill Agreements” (paragraph 22 of Mr Fitzmaurice’s skeleton argument). I am not sure I understand the point or where it takes us. In my view it simply adds to the confusion: Mr Merchant’s proposal says nothing about any standstill agreements being superseded, and it is hard to see, as regards the first applicant, that something can be superseded when it was never entered into in the first place.

Mr Grandjouan made the point that in Gertner Patten LJ said that “the mere fact that some (but not all) creditors will receive preferential treatment in the form of payment by a third party does not ipso facto constitute a material irregularity in relation to the approval of the IVA.” The irregularities I have described above are, however, in my view, material in the circumstances of this case.

For all the foregoing reasons, the applicants succeed on this issue.

I shall deal next with the fourth basis of the applicants’ challenge.

It used to be the case that a proposal for an IVA had to be “serious and viable” before it could be put to creditors. The requirement goes back to the time when an interim order was a prerequisite to convening a meeting of creditors to consider a proposal and the court acted as a filter to ensure that time and money were not expended in vain by holding a meeting to consider a proposal that was doomed to fail (see, for example,  Hook v Jewson [1997] BPIR 100 and Cooper v Fearnley (No3 of 1994) [1997] BPIR 20). Now that an IVA can be proposed without first obtaining an interim order it falls to the nominee to act as a filter.In a case where an IVA is proposed without an interim order being made s 256A(3) Insolvency Act 1986 provides for the nominee to submit a report to the debtor's creditors stating:

We are beyond the filter stage here, of course, and the nominee is not required to say that the proposal in relation to which he acts is “serious and viable,” simply whether it has a reasonable prospect of being approved and implemented and should be put to creditors for consideration.

The applicants submit that the prospect of a return of 100p in the £ in five years under the terms of Mr Merchant’s proposal is fanciful. I have some sympathy with that view. Mr Merchant’s proposal presupposes the generation in five years out of a development or developments of funds sufficient to allow, after making certain prior payments, the &Soul companies to pay dividends of almost £53 million which FF will then give to the supervisor for distribution to the IVA creditors. At the time Mr Merchant’s proposal was put to creditors FF had simply provided a letter to say it would make that contribution; its commitment has now been fortified by its agreeing to do so in the form of a deed (dated 6 June 2025, some time after approval of the IVA). There remains a missing link, however: nothing obliges &Soul to declare a dividend. Mr Merchant said in his oral evidence that he is relying on investor pressure as assurance of a dividend being declared. He may be justified in that reliance, but it is not hard to imagine the &Soul directors deciding to postpone taking dividends until the IVA has expired, and, as Ms Innes points out, dividends may be diluted if further shares are created. (I leave to one side for the moment Ms Innes’s concerns about the implications for the directors of the companies concerned of their duties to their respective companies: that is a matter for them.)

Apart from those powerful points, Ms Innes offers a persuasive critique of the business plan that is said to underpin Mr Merchant’s proposal.

She draws attention to the disclaimer which precedes it:

When Ms Innes took Mr Merchant to task about the disclaimer, he simply said that it was “standard” in a document of this kind, which may be correct but does not detract from its obvious force in undermining any weight that might be given to the information in the plan that follows.

Ms Innes points out, again with justification, that the business plan itself consists of bare spreadsheets containing figures which, without any narrative, context or analysis, are of little assistance and cannot be said seriously to support the projected net return on which the success of Mr Merchant’s proposal depends. She points out that, on Mr Merchant’s own case, he has no interest in either the &Soul Companies or FF and asks, rhetorically, why FF would be willing to contribute £52 million odd to his IVA, or how such payments would be in FF’s interests. She submits that, in the event of FF’s insolvency, it is likely that a liquidator would seek to claw back any payments it had made.

Mr Grandjouan drew my attention to Mr Merchant’s track record: he had raised considerable sums to fund the Collection Group. It is tempting to dismiss that submission, given that group’s ultimate collapse, but I do not think it is as simple as that; there is some force in Mr Grandjouan’s point.

I share the applicants’ concerns that Mr Merchant’s proposal may well be fanciful, and the business plan supporting it is indeed very thin material on which to base a decision, but, as Mr Grandjouan rightly pointed out in the course of his submissions, I am not a creditor and should not substitute my view for that of the majority. I will be very surprised if Mr Merchant’s IVA results in a payment of 100p in the £ or any payment at all. I agree with the applicants that in that sense his proposal is fanciful. But in spite of that I think it is viable in the sense that it is a viable (possibly the only viable) alternative to bankruptcy, offering the creditors some hope of some return where bankruptcy almost certainly offers none. Put another way, I cannot say that it is has no reasonable prospect of being implemented. In that limited sense it seems to me that it does not give rise to an irregularity, alternatively not to one that can be said to be material to the creditors as a whole; nor does it unfairly prejudice the applicants, as any prejudice they suffer is shared equally by all creditors.

In my view the applicants have failed to make out this complaint. They rely on the fact that &Soul and FF are providing the money for Mr Merchant’s proposal and family connections with those companies as evidence of his having an interest in one or more of those companies. They also rely on website material and press articles.

Mr Merchant’s proposal discloses no direct or indirect interest in or directorship of any company, and in his evidence he denied having any. All the shares in FF are held by Shireen Merchant, Mr Merchant’s mother. FF holds 40% of the shares in Soul Development Holdings Limited, which in turn holds 100% of the shares in Soul Development Services Ltd. Mr Merchant says that he works as an employee, and, whilst the project that &Soul is engaged in is his brainchild, he reports to and is answerable to the board which makes all the important decisions that have to be made.

Ms Innes spent some time cross-examining Mr Merchant on this issue but she did not succeed in eliciting from him any admission that assisted her case. Mr Merchant is described on the &Soul website as founder of the business. He accepted that he was a founder but referred to himself as a co-founder rather than “the” founder. That is what his Linkedin entry says. He accepted that references to &Soul as being “my” company were wrong.

I accept his evidence. I should not make too much of what appears on a website, and use of the first person in an informal context seems to me to be too casual to have much force. I attach no weight to the press articles on which the applicants rely: what appears in the press is rarely of real probative value, and this case is no exception. A conclusion that Mr Merchant has failed to disclose any interest he has in companies or indeed any other assets he might have would require me to draw an inference I do not believe I can properly make on the basis of the evidence I have seen or heard.

Mr Merchant’s having no interest in FF or &Soul also seems to me to be explicable in the light of Mr Merchant’s financial predicament. He has lived under the shadow of possible bankruptcy for some time. Family members and investors would, I think, balk at the idea of giving him a stake in companies which would be at risk if he were to be made bankrupt, and he would in all likelihood have had to divest himself of any he had acquired for the benefit of his creditors to secure creditor approval for his IVA. He and those with whom he has dealings have, I suspect, simply organised matters to avoid those possibilities, as they were entitled to.

This aspect of the applicants’ case also fails.

As I have already indicated, the nominee’s conduct in relation to Mr Merchant’s proposal gives rise to a number of concerns. As HHJ Norris QC said in Fender, “[T]he nominee when discharging any of his functions, has a duty to exercise a professional independent judgment, informed by his qualifications and skills.” The context in which he said that is not the same as the context in this case, but the proposition, I think, applies more generally. In my view the second respondent’s conduct has fallen short of the required standard in a number of respects.

I have already referred to the fact that Mr Howorth’s evidence in this application is given on his own behalf as well as on behalf of Mr Merchant. That itself demonstrates a degree of partiality that is inconsistent with the independence with which a nominee should act. The same partiality has tainted his prior conduct in a number of other respects.

First, in my view, the nominee has been complicit in concealing the nature and effect of the standstill agreements. It is unnecessary to repeat what I have already said about this to make that proposition good.

Secondly, he appears to have done little or nothing to interrogate what was by any standard the flimsy business plan relied on by Mr Merchant. (I say this in spite of the conclusion I reach above: I am now dealing with a different point.) There is nothing in his report to indicate that Mr Howorth took any steps to check the information in the plan: he does not appear to have questioned the values attributed to property or the extent to which any might be subject to any charge or charges; he offers no comment on the cash flow or other figures; he appears not to have asked who would be doing the development work; indeed he seems to have acted as a rubber stamp. Even at this stage he insists in his evidence that Mr Merchant provided a “detailed business plan,” which is plainly not the case, and makes no attempt to explain how he formed a view that it was suitable to put before creditors. Mr Merchant confirmed that the business plan was his own work; he had not sought any outside advice or assistance. I do not go so far as to say that Mr Howorth should have done so. I do say, however, that he should have made clear in his report that he had not taken those or similar steps and given reasons for that approach, at the same time indicating whether he had, at least, interrogated Mr Merchant about the assumptions that he, Mr Merchant, had made.

Thirdly, the nominee appears to have been content initially to rely on nothing more than a letter of intent from FF in support of its commitment to pay into Mr Merchant’s IVA. The letter had no contractual force. It was only after the meeting of creditors that a commitment (such as it is) in the form of a deed was forthcoming. That is another indication of the casual way in which the nominee has approached his duties in this case.

In my judgment the nominee’s failure to discharge his duties in the respects I have identified amounts to a material irregularity within the meaning of s 262 Insolvency Act.

In reaching the conclusions I have I also bear in mind two policy considerations. The first is one on which Ms Innes relies: in Kapoor v National Westminster Bank the Court of Appeal said:

That point was made by Ms Innes in relation to full and frank disclosure but plainly has wider implications. It is apposite in this case precisely because Mr Merchant’s IVA was his escape route from bankruptcy and all that that would mean. The second is, in my view, the need to uphold the integrity of the voluntary arrangement regime by reference to the principles enunciated by HHJ Norris QC in Fender and the other case law touched on above. The voluntary arrangement regime relies on the individual proposing one to play fair by his creditors by making full and frank disclosure and dealing with his or her creditors honestly and in good faith. It also relies on the independence, integrity and professional conduct of the nominee. Misdoing on the part of either can only damage confidence the IVA regime.

I do not pretend to have covered above all the detail of the evidence to which I was taken or to have dealt with all the submissions I heard, but the foregoing is, in my view, sufficient to enable me to conclude that the applicants’ application succeeds. I shall hear counsel for the parties when this judgment is handed down on the relief that should follow from that conclusion.