Unfortunately, I just don't think this is possible on CD32 because of the way the game is coded.
There is one way I can free up memory, which means it 'might' be possible.
The backgrounds are AGA sprite backdrops. For whatever reason, John Twiddy included ALL of the backdrops into ONE file that is preloaded at the start. Had John done it so that each backdrop was a separate file to be loaded when needed, over 400K could be saved from memory.
Clearly, A1200 was the focus machine for System 3, and CD32 was not.
I won't say it won't happen, but it will take a lot of work to get it working in 2meg of chip ram. Actually thats a lie, the machine might have 2meg of chip ram, but AmigaDOS has to be active somewhere in memory for loading files using the system, and Putty Squad is all hard coded.
Its not impossible, but its a lot of work, so when I have time, I might well revisit it and see what I can do.