Katies and Noni B owner allegedly left directors uninsured

Tis the season to be merry, except if you’re a director at clothing retailer Mosaic Brands.

The clothing group, which went into administration in late October with debts of at least $249 million, apparently did not have directors and officers insurance, according to two sources who could not be identified for confidentiality reasons.

It is highly unusual for a publicly listed company to not pay for such insurance, which exists to protect directors and management against the peril of being sued, if they are found to have failed in their duties and responsibilities.

Mosaic Brands owns Rivers, Katies, Noni B and Rockmans.

Mosaic, which owns brands such as Katies, Noni B, Millers and Rivers, continues to trade while in administration. It owes money to its shopping centre landlords, among them Scentre and Vicinity, almost 3000 staff, hundreds of suppliers and its lenders.

FTI Consulting is managing the administration of Mosaic and is also running the sale process of the group, which is also unusual. KPMG, which was appointed the receiver and manager to Mosaic, would typically run the sale process, but it and the secured lender, HilCo, have asked FTI to do that.

Meanwhile, KPMG is operating Mosaic, which has 700 stores. It has the unenviable task of trying to manage the retailer’s furious supplier network. Mosaic’s suppliers are being asked to continue to supply the retailer with clothing and footwear, through its busiest trading period of the year, even though they are owed tens of millions of dollars.

Before Mosaic was put into administration, management had asked suppliers in Bangladesh, China, India and Australia to accept contracts with deferred payments extending in some instances to over three years and to accept a third or half of what they were owed.

KPMG has stabilised Mosaic’s operations and secured stock from suppliers to ensure the retailer can trade through the Black Friday and Christmas sales period. However, it is unclear if those supplier relationships will be reparable in the long term after the business is sold.

The explanation for why FTI, as the administrator, is also selling the business is because it was doing work for Mosaic from late September reviewing its cash flows and forecasts, and potential planning for voluntary administration. During that time, FTI gained information about the historical financial performance of the business, its inventory, store profitability and also its messy corporate structure.

Still, FTI doing the sale process means KPMG forgoes fees it would have otherwise earned.

As FTI continues its investigations, it will have to determine when Mosaic became insolvent and if there was potential insolvent trading. Insolvent trading can be pursued only if a liquidator is appointed to a company.

Under the Corporations Act, directors have a positive duty to prevent a company from trading while insolvent. A board will place a company into voluntary administration if there is a risk of insolvent trading.

Richard Facioni was Mosaic’s chairman for a decade.Credit: James Alcock

It is this sort of challenge among many facing boards, which underlines why directors and officers insurance is important. Such challenges also quash the notion that a director’s seat on a public company is an easy role, or that directors are there to be flattering corporate baubles.

The sale process for Mosaic has progressed to second round offers, which are due by December 13. There are said to be four parties interested in the business. It is unclear if those four parties include the private retailing giant Spotlight, which owns Harris Scarfe, and Alquemie group, which owns retail brands such as General Pants Co and Ginger and Smart.

Spotlight is a Mosaic shareholder and there are connections between Mosaic and Alquemie.

Richard Facioni, who was Mosaic’s chair for a decade, is also executive chairman and founder of ACTA Capital, a private equity firm, which manages Alquemie.

Alquemie appointed Scott Evans as its chief executive after he retired from being Mosaic’s CEO for a decade.

When Evans was replaced as Mosaic’s CEO, he informed suppliers in a letter that he would still be “running the sourcing and production side of Mosaic” with other colleagues, “for many years to come”.

Mosaic has struggled in recent years and it was caught on the back foot during the COVID-19 pandemic, when it had to shut its stores and rapidly improve its online shopfront. It was badly hit because its demographic is mostly budget-conscious older women. In 2020, the company recorded a $170.5 million loss despite $736.8 million in revenue.

The company’s revenue has since fallen further, and it has cycled in and out of profitability. In February, when Mosaic revealed its half-year accounts to December 31, 2023, its earnings were up 38 per cent to $5.38 million. In announcing those results, Evans said: “This result marks a key turning point for Mosaic Brands.”

In August, when this masthead spoke to Evans to ask about the group’s financial difficulties, he said: “I was there for 10 years and I left at the end of February after posting a really good announcement. I don’t know what’s happening in the business.”

Any acquirer of Mosaic will have to think about how it positions the business with budget-conscious Australian customers. It faces tough competition from Kmart and Big W and online retailers such as Temu and Shein.

It is likely that it won’t be until January that creditors of Mosaic learn of its fate. If it does continue with a new owner, it undoubtedly will exist in a shrunken format.

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