Sections 433 and 561 of the Corporations Act 2001 (Cth) provide that employee entitlements owing in a winding up must be paid first from proceeds obtained from dealing with circulating assets even those assets are subject to a circulating security interest. In practice, this requires employee claims to be paid from circulating assets (such as trading stock and debtors) before the competing claims of secured creditors.
Difficulties often arise in the winding up of large corporate groups, where the group structure involves multiple entities performing different functions all as part of the one business unit. Documentation might be poor and employees may work for the broader group as opposed to one specific entity. This can cause complexity where receivers, administrators or liquidators make recoveries from dealing with circulating assets in one estate, which may use employees who may be formally employed by another entity in the corporate group.
In the matter of Mosaic Brands Limited (admins apptd) (recs and mgrs apptd) [2025] NSWSC959 (Mosaic Brands) is the latest New South Wales Supreme Court case to consider this issue. The case concerned an application by receivers for declaratory relief that Mosaic Brands Ltd, as the group’s ultimate parent company, was in fact the true employer of a number of employees who worked across the broader group.
Mosaic Brands Case
Background
Mosaic Brands Ltd (Mosaic Brands), the ultimate parent company of several Mosaic entities within the Mosaic Group, operated a fashion retail business comprising nine clothing brands and a network of 663 stores across Australia and New Zealand, in addition to an e-commerce platform. This included such well-known brands as Millers, Rivers, Rockmans and Katies.
Receivers were appointed to the Mosaic entities and, after an unsuccessful attempt to sell the business and after a short trade on position, resolved to close all stores. The closure process was completed on 10 April 2025. The receivers realised approximately $205 million from the sale of inventory owned by Mosaic Brands (inventory being a circulating asset as defined in section 340 of the PPSA). While this sum was sufficient to cover all outstanding employee entitlements, it was insufficient to pay both the employee entitlements and the amounts owed to Mosaic Brands’ secured creditors. Uncertainty was raised in this by the fact that the “named employer” in the employment contracts that were used for most of the employees was Noni B Holdings Pty Ltd (Noni B), another entity within the Mosaic Group, rather than Mosaic Brands, which was the entity that actually owned the inventory.
The receivers therefore sought a determination as to whether Noni B or Mosaic Brands was the true employer of these employees.
Principles
In his judgment, Black J confirmed that the determination of the true employer is a matter of substance, requiring consideration of the totality of the relationship between the parties. The factors relevant to identifying the true employer include:
- which company paid an employee’s remuneration;
- whether the employer on record had assets or revenue which could be drawn or used to pay employees’ entitlements;
- whether the employer on record had any purpose other than to be an employer on record; and
- whether the employer on record exercised practical and legal control and direction over the employees (although this will be given limited weight where the putative employers are part of the same group).
Determination
In Mosaic Brands, Black J accepted the receivers’ submissions and declared that Mosaic Brands was the true employer of the employees. His Honour’s conclusion was based on the following facts:
- “Noni B” was the named employer in all of the employment contracts (except two), payslips, and superannuation forms;
- the employment contracts were issued on Mosaic Brands letterhead but referred to an offer of employment with Noni B;
- pre-employment health forms, the employee handbook, and various employment-related policies were on Mosaic Brands letterhead and referred to Mosaic Brands as the entity responsible for employment and related decisions;
- Mosaic Brands paid all employee-related obligations directly from a bank account held in its name;
- Noni B had no bank account of its own;
- Noni B conducted no business activities other than being the nominated employer of the employees and entering into leases for certain retail stores;
- Noni B generated no revenue and did not hold any assets to meet its obligations to the employees;
- there was no record of Noni B having intercompany loans with, or liabilities to, other Mosaic Group entities;
- there was no labour hire arrangement in place between Noni B and Mosaic Brands; and
- the employees of the Mosaic Group carried out work that was, in substance, for the benefit of Mosaic Brands as the operating and revenue-generating entity.
Key Takeaways
Employer SPVs and intergroup labour supply arrangements will not be upheld in a liquidation where they are undocumented and do not reflect how a group has operated in practice. In such cases, the Court will closely examine which entity actually bears and performs the responsibilities of the employer before determining how any proceeds obtained on the sale of its circulating assets ought to be dealt with.
Receivers and liquidators must be alive to these issues, particularly where FEG may look at these assets to reimburse them for employee entitlements paid by the Australian taxpayers.
If you would like to discuss this article with us, please contact David Greenberg, partner, or Mengting Wang, Associate on (02) 9261 5900.