Court orders special purpose liquidators amid conflict concerns in Mosaic Brands wind down

The Federal Court of Australia has issued a key decision in the liquidation of Mosaic Brands after a major creditor challenged the integrity of the creditor voting process and the independence of the incumbent liquidators. The dispute centred on whether employee claims were validly admitted across the group’s deed of cross guarantee structure, whether the chair was required to use a casting vote to replace the liquidators, and whether the existing team could impartially investigate potential insolvent trading and adviser liability claims that may arise from Mosaic’s lengthy period of financial distress.

In its detailed ruling, the Court upheld the liquidators’ administration of the creditor vote, finding that the Mosaic Group’s employees had been contingently admitted as creditors of all guarantee entities before the liquidation resolutions were passed, consistent with both the practical operation of the cross guarantee and the disclosed approach in pre-meeting communications. These admissions meant the vote to replace the liquidators failed on creditor numbers despite passing on value. Justice Moore also declined to compel the chair, Vaughan Strawbridge of FTI Consulting, to exercise a casting vote in favour of replacement, noting the absence of any overwhelming imbalance that would justify overriding the employee vote.

The Court nevertheless accepted that a reasonable apprehension of conflict existed in relation to Mr Strawbridge’s ability to oversee investigations into potential insolvent trading claims and related adviser exposures. Deloitte, where Mr Strawbridge had been a partner until late 2020, had undertaken substantial forecasting and strategic analysis for Mosaic in 2020, work that may be scrutinised as part of any director defence or cross-claim. Although the evidence suggested Mr Strawbridge’s personal involvement in that work was limited, the Court held that his former partnership status created a credible possibility of personal exposure or testimonial involvement that a fair-minded observer could view as compromising his impartiality in assessing or prosecuting such claims.

Given the advanced stage of the liquidation, the liquidators’ accumulated knowledge, and the significant funding already secured to pursue creditor recoveries, the Court declined to remove the FTI team (Mr Strawridge, Kathryn Evans, David McGrath, and Kate Warwick) entirely. Instead, it directed the appointment of special purpose liquidators to investigate and, if warranted, pursue claims against directors, Deloitte, and Hamilton Locke (the Mosaic Group’s lawyers at the time), except where a claim is demonstrably disconnected from the period before Mr Strawbridge’s departure from Deloitte.

No specific special purpose liquidators have been appointed at this time.

Read the decision here.

Robert Dick SC and Bronte Lambourne of Banco Chambers (instructed by King & Wood Mallesons) represented the liquidators, while Marcus Pesman SC of Queen’s Square Chambers and Michael Rose of 9 Wentworth Chambers (instructed by ERA Legal) acted for the creditor, Shaoxing Newtek Imp & Exp Co Ltd.