Second Holdco undertaking
60 In the afternoon of 12 November 2020, GetSwift tendered a different undertaking. There have been some slight amendments to that document since then and it is convenient to set out the undertaking taking into account those amendments (second Holdco undertaking):
GetSwift Technologies Limited (Holdco) undertakes to the Court that, until such time as any adverse judgment, including, but not limited to, any award of damages, compensation and/or penalties, in each of the Webb proceeding (FCA proceeding no. NSD 580 of 2018) and the ASIC proceeding (FCA proceeding no. VID 146 of 2019), and any order under s 91 of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) in respect of the ASIC proceedings, has been satisfied, including a final determination of damages in respect of all group member claims in the Webb proceeding, or each of the proceedings are otherwise resolved on a final basis (by way of settlement or discontinuance), including the final resolution of any relevant appeal proceedings resulting therefrom, Holdco will indemnify GetSwift Limited (GetSwift) in respect of any liability in respect of pecuniary penalties or other monetary liabilities that may be ordered against GetSwift in any adverse judgment in the Webb proceeding and in the ASIC proceeding, inclusive of any pre or post-judgment interest and costs orders, and in addition any order against GetSwift under s 91 of the ASIC Act in respect of the ASIC proceeding.
This undertaking will take effect immediately upon commencement of the Implementation Date (as that term is defined in the proposed scheme of arrangement between GetSwift and its members under section 411 of the Corporations Act 2001 (Cth)).
For the avoidance of doubt, Holdco submits to the jurisdiction of the Federal Court of Australia for the purposes of any action to enforce this undertaking.
61 The second court hearing was stood over to the next day to allow consideration of the second Holdco undertaking.
62 On 13 November 2020, senior counsel for Mr Webb, Ms Collins SC, indicated that Mr Webb was satisfied with the second Holdco undertaking and that on that basis he withdrew his opposition to the Court making orders under s 411(4)(b).
63 Mr Halley advised that ASIC did not accept that an undertaking such as the second Holdco undertaking would address its concerns as a contingent creditor because:
(a) Although he could not point to any provision of Canadian law which would prevent a judgment obtained in this Court based on the second Holdco undertaking from being enforced in Canada, Mr Halley submitted that there is a prospect that it may not be effective to indemnify ASIC because Holdco would have its own liabilities, its own assets, its own commitments and any ability of Holdco to meet any obligations of GetSwift in Australia would have to be subject to those considerations. The indemnity provided by the second Holdco undertaking would not be secured or rank ahead of other creditors or other arrangements that Holdco had entered into. Holdco can operate in quite a different manner to how the GetSwift Group operates today. In effect, GetSwift can be allowed to "wither on the vine", without any re-charging of capital through fundraising.
(b) If, however, GetSwift remains the listed holding company (that is, the "economic entity"), all economic activity will be conducted under its umbrella. Enforcement issues remain the same as those that ASIC expected to face when it commenced the ASIC proceeding. While GetSwift is listed in Australia and is the primary economic entity, GetSwift's directors have duties and its two principal shareholders (Messrs Macdonald and Bane) have an incentive to bring assets on-shore and conduct its operations so that GetSwift avoids winding up and maintains its value. ASIC does not have assurance that, if the scheme is implemented, the directors of GetSwift as a proprietary company subsidiary of Holdco would have the same incentive to bring assets on-shore or at least make them available to creditors here for the purposes of satisfying debts.
(c) Where some $100 million has been raised by an Australian listed company and a trial has been held in relation to ASIC's claims that there were contraventions of the continuous disclosure provisions and the misleading and deceptive conduct provisions of the Corporations Act at relevant times, ASIC is concerned that "if this all goes offshore, that is, the economic entity", then effectively the ability to recover any pecuniary penalties or costs orders is compromised and will not be able to be met satisfactorily under the second Holdco undertaking.
(d) It might make a difference if Holdco provided an indemnity directly to ASIC, but that was a matter on which Mr Halley would require instructions.
64 Senior counsel for GetSwift, Mr Sheahan QC, made the following submissions orally and in written submissions.
65 First, although ASIC has an interest in opposing approval of the scheme on the basis that it is a contingent creditor, it has provided no evidence as to the value of its contingent claims. ASIC must be able to prove some material prejudice to it consequent on the operation of the proposed scheme.
66 Second, the fact that the shareholders might agree to exchange their GetSwift Shares for Holdco shares and future capital raisings might be conducted through Holdco and not GetSwift is something on which creditors of GetSwift have no say, since GetSwift Shares are not the property of GetSwift.
67 Third, contingent creditors have no "right" to the proceeds of any future capital raising. That is a threshold issue. The willingness of shareholders to dilute their interest in return for capital is not something in which creditors have a legitimate interest. In any event, the position of contingent creditors is likely to be improved by the scheme. As explained in the scheme booklet, one of the objectives of the scheme is to enable Holdco (and the GetSwift Group generally) to access greater capital in the North American market that is "more familiar with and more likely to invest in earlier to mid-stage technology companies, which may lead to a re-rating of the GetSwift Group and a stronger market capitalization and valuation over time". The greater ability of Holdco to raise capital or debt, the greater the prospect that the GetSwift Group, including GetSwift, will remain a going concern. In turn, the ability of the GetSwift Group to continue to operate as a going concern provides a greater prospect that GetSwift will be in a position to satisfy any judgment that may in the future be awarded to ASIC or Mr Webb.
68 Fourth, statements in section 6.5 of the scheme booklet indicate that, should the scheme be approved, Holdco currently intends to continue to operate the business of GetSwift and does not intend to make any material changes to the business of GetSwift. Holdco has expressed its current intention not to redeploy or transfer any of GetSwift's assets, other than the movement of cash among subsidiaries in the ordinary course of business for purposes such as working capital and projects.
69 Fifth, in response to a question put by the Court concerning why the impact of the loss of GetSwift's capacity to raise capital directly was not relevant to whether contingent creditors would be materially prejudiced, having regard to the fact that GetSwift is an early to mid-stage technology company with a significant cash burn and it has never reported a profit in the five years of its existence so that its business model requires continued access to capital, Mr Sheahan made the following submissions:
(a) All creditors deal with companies on the basis of the balance sheet as it exists; future prospects are not something ever assured to a creditor, much less a contingent creditor.
(b) The only considerations of "public policy" or "commercial morality" which are relevant for the purpose of s 411(4) of the Corporations Act are those which find a basis in the text and purpose of that Act: see CSR Limited, in the matter of CSR Limited [2010] FCAFC 34; (2010) 183 FCR 358 (Re CSR Limited) at [51] (Keane CJ and Jacobson J). In Re CSR Limited, the relevant policy of the Corporations Act was to be found in s 256B, dealing with capital reductions. Relevantly, the policy reflected in s 256B was that a reduction in capital may occur notwithstanding that it may involve an increase in the abstract risk to those with claims against the company: Re CSR Limited at [48] and [66]. The proposition that any increase in the level of risk of non-payment is unacceptable was specifically rejected in Re CSR Limited at [48]. GetSwift's proposed scheme does not involve a capital reduction and there is nothing in the Corporations Act which might inform the exercise of the discretion under s 411(4) in a case such as this. The authorities cited by ASIC for the proposition that a Court should not approve a scheme unless it is clearly satisfied that contingent creditors are not worse off by reason of the implementation of the scheme (being the same as those referred to at [54] above and In the matter of Stork ICM Australia Pty Ltd [2006] FCA 1849; (2007) 25 ACLC 208) are all cases which involved reductions of capital.
(c) The only capacity of GetSwift affected by the scheme is the capacity to raise capital. That issue is addressed by the second Holdco undertaking. The prospect that ASIC would not be paid if GetSwift was not able to do so has not been shown to be a realistic one. There would be no benefit to Holdco, as the new parent company, in allowing GetSwift to fail to meet any judgment debt. To do so would likely lead to GetSwift entering into a form of insolvent administration; which would undoubtedly lead to the end of the operation of the GetSwift Group as a going concern and an insolvency practitioner taking control of GetSwift's assets, including GetSwift's shares in the GetSwift Group's operating subsidiaries.
(d) There is a lack of commercial reality in what appears to be the basis of ASIC's submissions: that is, that Holdco would allow GetSwift to be wound up rather than ensure that it is able to pay a penalty of indeterminate amount and costs which may amount to a few hundred thousand dollars. GetSwift Group and its assets will continue to be owned by GetSwift and they continue to have value. The LDA Agreement, which will be vested in Holdco if the scheme goes ahead, will provide a source of equity capital which will enable Holdco to ensure that its only currently existing asset of any value, namely GetSwift, does not go into liquidation.
(e) It would also be uncommercial for Holdco to allow GetSwift to become insolvent having regard to the terms of the novated LDA Agreement which GetSwift, Holdco, LDA and LDA LLC entered into on 4 November 2020. There has been no drawdown under the US$45 million (said to be A$63 million) facility to date. The commitment period ends on 7 March 2023. These features of the LDA Agreement are relevant:
(i) LDA's obligations to subscribe for Holdco shares is subject to the "Capital Call Conditions" set out in cl 3.3 which include that representations and warranties made in the LDA Agreement remain true at any time a capital call is made. One of the ongoing warranties is set out in cl 6.5(c) and that is to the effect that neither Holdco nor any of its subsidiaries "is insolvent, has committed an act of bankruptcy, proposed a compromise or arrangement … taken any proceedings to have itself declared or, to its knowledge, had any proceeding taken to declare it bankrupt or wound-up … [or] to have a receiver appointed of any part of its assets".
(ii) It is an event of default if any of the warranties is found to have been false and misleading in any material respect when made or becomes false or misleading or if any of the events mentioned in cl 6.5(c) occur: cl 14.2.
(iii) Clause 10.4 of the LDA Agreement requires Holdco to use reasonable endeavours to ensure that no business decision is taken that will or is likely to cause a material adverse effect on Holdco. A material adverse effect means any effect on the business, operations, financial condition or (in so far as they may reasonably be foreseen) prospects of Holdco and its subsidiaries that is material and adverse to Holdco and its subsidiaries taken as a whole.
So unless Holdco wishes to give up entirely the value of this enormously attractive source of at call capital worth US$45 million, it has to put GetSwift in funds to enable it to satisfy a judgment debt in Australia, if it can. And the obvious source of its ability to do so is to call on the LDA Agreement to create the funds to permit such a judgment debt to be satisfied.
(f) ASIC's desire that GetSwift should remain an Australian listed company, rather than be a subsidiary of a Canadian listed company, is "almost incoherent" in the absence of some suggestion that there is material difficulty in enforcing a judgment against Holdco in Canada and in the absence of any basis for concluding that GetSwift would not be able to satisfy any order that was made against it in the ASIC proceeding.
70 Sixth, Mr Sheahan responded to the Court's question of whether it is consistent with the due administration of justice for an Australian listed company which is the subject of significant regulatory litigation to seek to re-domicile out of Australia during a hearing on liability and before any penalty has been decided.
71 Mr Sheahan submitted that questions related to the due administration of justice come down to whether implementation of the scheme will stand in the way of enforcement of ASIC's rights and full recovery of whatever its rights might be. The way concerns about the administration of justice are vindicated is by seeking an asset preservation order against defendants to constrain them from dealing with their assets if that is thought to be necessary. As matters stand, ASIC has no basis in evidence in these proceedings for suggesting to the Court that there is any plan for making the assets of the GetSwift Group not amenable to satisfy any order that is made in the ASIC proceeding. There is no asset preservation order being sought nor has ASIC suggested a basis for thinking there might be a ground for one.
72 In response, Mr Halley submitted that:
(a) The existence of the LDA Agreement does not remove concerns as to whether GetSwift would be allowed to become insolvent in the face of the award of substantial penalties or judgments in the ASIC and Webb proceedings. While GetSwift's insolvency might mean that Holdco would lose the benefit of the LDA Agreement, it would commercially still be available to Holdco to develop businesses outside the GetSwift Group and raise capital from sources other than LDA.
(b) ASIC's concern and interest in this case is not simply limited to its legal costs incurred with respect to the civil penalty case; ASIC would not be intervening to save legal costs. This case raises a fundamental question of how it is that companies listed on the ASX can be held accountable for serious contraventions of continuous disclosure laws if, at the "pointy end", they can move offshore and then leave the creditors, contingent creditors, the Commonwealth, ASIC and others to have to rely on indemnities provided by offshore corporations in circumstances where, upon implementation of the scheme, that offshore corporation has no assets and no liabilities other than GetSwift Shares.
(c) While Mr Sheahan sought to minimise the amount that might be recovered in the ASIC proceeding, there are 20 claimed contraventions for each of which the maximum penalty is $1 million. Further, ASIC's costs are not in the order of a couple of hundred thousand dollars; Mr Finney has estimated that costs incurred in the Webb proceeding on a party/party basis is $4 million to 30 September 2020 (being slightly less than 70% of total legal professional fees and disbursements incurred by Mr Webb).
(d) GetSwift is subject to ongoing significant cash burn and the LDA Agreement is one of the bases on which the directors are satisfied it may continue as a going concern (as disclosed in Appendix 4C filed with the ASX on 30 October 2020) but the LDA Agreement is being novated for the benefit of Holdco if the scheme is implemented.
(e) The Court should not accept that the resolution of the Webb proceeding and the ASIC proceeding will happen quickly, given that the Judge who presided in the liability phase of the ASIC proceeding will only deliver judgment after the appeal on the question of whether that Judge should preside in the Webb proceeding has been determined. The Webb proceeding will have to be heard, the penalty phase of the ASIC proceeding will have to be heard if ASIC is successful on the question of liability and judgment in the Webb proceeding and the penalty phase of the ASIC proceeding will need to be delivered. Accordingly, it is likely that Holdco will be conducting its operations for at least a year or more before those proceedings are resolved.
(f) As a matter of commercial reality, there is the prospect of a substantial amount of time for change in the structure and operations of Holdco and the statements in section 6.5 of the scheme booklet are statements of current intention only.
73 The proceedings were stood over to Monday, 16 November 2020. At that time the Court indicated that it would publish reasons subsequently but it was not minded to refuse to make orders under s 411(4)(b) of the Corporations Act on the basis that having regard to Holdco's willingness to provide the second Holdco undertaking, it had not been demonstrated that there is a real or practical risk, as opposed to a theoretical risk, that as a result of implementation of the scheme, the contingent creditors will be materially prejudiced in relation to the receipt of any amount to which they may become entitled pursuant to the Webb proceeding or the ASIC proceeding or in relation to ASIC's investigation costs.
74 Mr Halley then raised, for the first time, ASIC's concern that a Canadian court might not give effect to a judgment of the Federal Court of Australia enforcing an undertaking in the form of the second Holdco undertaking on the basis that it is direct or indirect enforcement of a penalty imposed in a foreign jurisdiction. The second court hearing was stood over to 26 November 2020 to allow ASIC and GetSwift to obtain expert evidence and provide written submissions on that issue.