Insolvent trading claims and the retail tycoon: SurfStitch collapse shock
Bombshell new allegations in the SurfStitch collapse have been revealed with administrators claiming insolvent trading and exposing a retail tycoon involved in two major brand busts.
The administrators of iconic Australian brand SurfStitch have made bombshell allegations the retailer may have traded while insolvent since 2021, with a new report revealing a dramatic sales collapse and exposing its former director who was also involved in the $367m bust of Mosaic Brands.
The insolvent trading allegations involve the company’s former director and businessman Richard Facioni, whose ASX-listed company Mosaic Brands – which took in Rivers, Katies, Noni B and Millers – is already facing claims of up to $77m after its $367m collapse last year.
Mr Facioni, a long-time deal-maker in the retail industry, is the chairman and on the board of directors of Mosaic Brands which administrators allege may have been insolvent from December 2020.
He is now facing insolvent trading claims of $3.1m for SurfStitch, with a new preliminary creditor’s report revealing sales plummeted for the once popular store over five years from $60m in FY21 to just $7m in FY25.
Mr Facioni vigorously denies any claims of insolvent trading.
“Prior to its recent sale, SurfStitch was part of a larger group and had the support of that group,” a spokesperson for Mr Facioni said.
“Accordingly, it is not accepted that it was trading insolvent, contrary to any such speculation in any report to creditors.
“Any potential claims against Mr Facioni are based on unproven and unsubstantiated assertions, which Mr Facioni will vigorously defend.”
It comes as the previously undisclosed new owners of SurfStitch – revealed to be Best Markets which is part of the multi-vendor gift card company Best Gift Group – put forward a deal to creditors in an attempt to rescue the business.
SurfStitch was sold by its parent company Alquemie Group in May, with buyer Best Markets placing the business into administration on June 6.
Administrators Edwin Narayan and Domenic Calabretta of Mackay Goodwin said it was their opinion that the company had traded while insolvent since June 2021.
This was based on key indicators of poor cash flow, continuing losses, a liquidity ratio – a company’s ability to pay its short-term debts and obligations – of below one, overdue taxes and outstanding trade creditors, they said.
Mr Narayan said there was no claim for insolvent trading against the current director, advisor to Best Markets, Andrew Shub, who had assumed the role since May 31.
Instead they referred to former director Richard Facioni, who was in charge from August 2023 until May this year.
“We have undertaken land title searches conducted in the name of the former director which did not disclose any real property held in his name,” SurfStitch administrator Mr Narayan said.
“We note that the former director may be subject to claims against him regarding potential insolvent trading from the liquidation of Mosaic Brands Limited, and other related entities which include Millers, Noni B, Rivers and Katies.
“The estimated claim is between $38m – $77m.”
Mr Narayan said the preliminary insolvent trading claim amount for SurfStitch was $3.1m.
But he warned these types of claims “may prove costly” to pursue and said directors are able to rely on defences including Safe Harbour protection – a legal safeguard that protects them from personal liability for insolvent trading if they took genuine steps to restructure or improve the company’s financial position.
“Should bankruptcy proceedings be commenced by another creditor there would be the added costs of dealing with a bankruptcy trustee and having to delay the liquidation whilst waiting for a trustee to declare a dividend (of unknown value),” he said.
“The likelihood and commerciality of commencing an insolvent trading action is unlikely to yield a desirable outcome, given the exposure of personal guarantees and personal financial positions of the former director.
“We reiterate that should the company be wound up at the forthcoming meeting of creditors further investigations are expected to be undertaken in relation to insolvent trading and the recoverability of any claim.”
Creditors of the retailer are now staring down mammoth losses of $15m, with News Corp previously revealing stock of the collapsed company was being held hostage by its landlord over unpaid rent.
Sportswear giant Nike Australia, which sold sneakers and clothes on SurfStitch’s website, has also initiated legal proceedings claiming it was owed over $230,000.
SurfStitch, which operated as an online based retailer specialising in surfwear apparel, was founded in 2009 in Queensland.
The company previously established itself as a well-known brand across Australia and expanded into international markets, including in Europe and North America.
It also ventured into digital media, acquiring online platforms targeting surf culture enthusiasts.
As a result of the business’s success, in 2014 it became listed on the Australian Securities Exchange.
The company’s rapid expansion became troublesome, the administrators said, as the media and content division of the business proved difficult to integrate and monetise.
“(SurfStitch) then faced scrutiny surrounding its financial reporting, disclosure obligations, and the performance of its acquisitions,” Mr Narayan said.
“By 2016, SurfStitch faced shareholder class actions, significant writedowns, and regulatory scrutiny.”
SurfStitch entered voluntary administration in 2017 and was sold to Alquemie Retail Group.
Sales for the embattled brand declined every financial year since June 2021, declining from $60m in FY21 to $51m in FY22, $39m in FY23, $29m in FY24 and ultimately $7m in FY25.
Net profit for the company also consisted of continued losses from $1.5m in FY21, $4.4m in FY24 and $1.6m in FY25.
Mr Narayan said the company hadn’t been able to meet lease payments since February this year, and as a result, the landlord repossessed the premises, leaving the business unable to trade.
Alquemie Retail Group sold shares of Surfstitch, luxury women’s fashion designer Ginger and Smart and Alquemie Retail Operations to Best Markets in May.
The new owners decided that voluntary administration was the only option to salvage the business and brand.
The purchase did not include any assets of the company and solely comprised the sale of shares.
Now the new owners are putting forward a deal to creditors – known as a deed of company arrangement – in an attempt to save the business.
Unsecured creditors, totalling $5m in claims from trade creditors ($3,9m), statutory creditors ($228,761) and related party creditors ($826,436), are expected to receive 4.73 cents on the dollar under the proposal.
The deed fund will include a cash contribution totalling $320,000 to be paid over seven instalments until October this year.
The assets and property of the company will be returned to the control of the directors and all creditor claims will be extinguished.
The administrators recommended creditors take the deal, citing a greater return to unsecured creditors than if the company was tipped into liquidation.
“(The deal) removes the uncertainty and risk of pursuing any insolvent trading claim, voidable transactions that would need to be recovered in a liquidation scenario to enable any return to creditors,” they said.
“Should the company enter liquidation, it should be noted that the landlord is claiming
ownership and lien to all the fixtures, fittings and company stock.
“We do not expect any recovery even after damages and good costs are factored in.”
Creditors will vote on whether to accept the deal or place the company into liquidation at a meeting next week.
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