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The $25 million penalty that the Federal Court has demanded from collapsed retailer Mosaic Brands will go unpaid, with initial allegations of insolvent trading and director breaches remaining unpursued after the retailer collapsed with debts of nearly $200 million.
Even before the operator of low-budget brands Rivers, Millers, Katies and Noni B appointed administrators in October last year, the clothing and footwear business had fallen foul of regulators several times and had been battling ACCC allegations of consumer law breaches.
Creditors voted for liquidation on July 2 this year. On August 28, the Federal Court found Mosaic Brands had accepted payments for orders that weren’t delivered on time or not delivered at all and ordered it to pay a $25 million penalty.
Mosaic Brands appointed administrators in October last year. Companies in liquidation cannot pay penalties or fines.Credit: Louise Kennerley
The following day, the liquidators said fines against a company in liquidation could not be disbursed. “This penalty will remain unpaid,” FTI Consulting liquidator Vaughan Strawbridge said in a statement.
“Mosaic Brands is in liquidation and has no funds; and in any event, penalties and fines are generally unable to be claimed against an insolvent company when it is in liquidation under section 553B of the Corporations Act 2001 [Cth].”
Consumer watchdog, the Australian Competition and Consumer Commission, instituted proceedings against Mosaic Brands in March last year. The Federal Court ultimately found 736,000 orders did not arrive in the specified delivery time and over 4000 items never arrived at all.
“The ACCC is monitoring the liquidation process and would have to seek leave of the court to enforce the penalty orders,” a spokesperson for the regulator said in a statement. The ACCC declined to clarify further.
When contacted for comment, Federal Court Justice Michael Wigney said: “Judgment is currently reserved, and the reasons will be published in due course.”
Several suppliers from China, India and Bangladesh were left distressed and millions out of pocket by Mosaic’s “common practice of delaying creditor payments”, the liquidators said. Before it collapsed, Mosaic Brands attempted to renegotiate contract terms with suppliers, and in some instances asked them to accept payment terms of one-third of what they were owed.
Some described Mosaic as a “predator”. Omar Chowdhury, managing director of Bangladeshi garment manufacturer Hydroxide Knitwear, said some factory workers were on the verge of suicide.
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In a report to creditors, FTI Consulting suspected that the company may have been trading unlawfully and directors could be potentially liable for breaches of duty.
However, the liquidators said further funding was required to properly investigate and pursue these findings, which never emerged.
“Our preliminary view is the Mosaic Group was likely insolvent as at 31 December 2020 and remained so up until the time of our appointment on 28 October 2024,” FTI Consulting’s second report to creditors said.
One or more company directors may have breached their duties, including failure to exercise reasonable care and diligence, failure to act in good faith, keep proper books and records, lodge annual reports with corporate regulator ASIC, and duty to prevent insolvent trading, the report claimed.
Since late December 2020, the company had racked up about $196 million in unsecured debts. The liquidators estimate that a potential insolvency trading claim could recover between $38 million and $77 million before costs and funding.
While company directors indicated they would rely on safe harbour protections, which guard directors from personal liability for insolvent trading if they are actively taking specific steps to secure a better outcome for the company, they may not be exempt from responsibility.
“Our view is that it is not clear whether the Safe Harbour eligibility criteria were met at all times and further investigation is required,” the liquidators said.
The liquidators’ report considers the directors of the company to be Richard Facioni, David Wilshire, Quentin Gracanin and former The Iconic boss Erica Berchtold.
Facioni, who was chairman of Mosaic Brands, is also the founder and executive chairman of Alquemie Group, which operates General Pants.
The youth retailer recently fended off its second winding-up order from suppliers attempting to recoup outstanding invoices, and is currently facing a claim by a third supplier, ADT Securities, for more than $22,000 for the installation of security systems.
Alquemie Group has offloaded most of its brands, including Surfstitch, and Ginger & Smart. Alquemie’s partnership with National Geographic ended earlier this year. It has an ongoing partnership with Lego, which has 22 stores across the country, and recorded profit increases to $11 million in 2024.
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