Who's the boss in a corporate group? Due diligence tips for lenders
IMO Mosaic Brands Limited [2025] NSWSC 959 ("Mosaic Brands")
Priority entitlement to the proceeds of realisation of circulating assets, particularly in the context of a corporate group, can be important for lenders and can turn on the identification of which company in the group is the true employer of its staff. From the perspective of a secured creditor, if the group's circulating assets are owned by companies other than the "true" employer of the group's staff that circumstance can confer significant benefits when it comes to the distribution of the proceeds of realisation of those assets.
As was the case in Mosaic Brands, the resolution of that issue was of significance in a competition between the secured creditor of companies in the group and the employees who worked for it.
The group's parent company was Mosaic Brands Limited.
The contracts of employment were between the employees and a wholly-owned subsidiary of the group's parent company, Noni B.
Relevantly, so far as concerned the relationship between the group and its employees, the circumstances of that relationship were summarised as follows:
[33] … the employment contract for each employee … was on the Mosaic Brands' letterhead but referred to an offer of employment with Noni B. Standard superannuation forms also generally refer to Noni B as the employer entity of the Employees. Other employment related documents such as the pre-employment health forms and an employee handbook were also on the Mosaic Brands letterhead. Various employment related policies have been identified by the Receivers and all of them are on Mosaic Brands letterhead and refer to Mosaic Brands as the entity responsible for employment and associated decisions. …
[34] … Noni B had no bank account and did not carry on any business activity except for being the nominated employer of the Employees and entering into leases in respect of certain retail stores; Noni B did not generate any revenue and there is no record of it having any intercompany loans with, or liabilities owing to, the other members of the Mosaic Group. Although Noni B was the holder of the relevant workers' compensation insurance policy, Mosaic Brands paid all employee-related liabilities from a bank account held with ANZ Bank (which was … titled "Noni B" but was Mosaic Brands' bank account).
It was also the case that the arrangements for hiring, disciplinary and other decisions concerning employees were made by the parent company; Mosaic Brands.
Having regard to the following principles the court held that the true employer of the staff in the Mosaic Group was Mosaic Brands and not Noni B:
- (a) " … [whether the employer of the Employees was Mosaic Brands or Noni B], for purposes of Part 5.6 of the Act, is to be determined as a matter of substance and the totality of the relationship between the parties should be considered…. A person may be an employee of a company even where he or she has an employment contract with a different company in the same corporate group. The Courts have also accepted that the true employer of an employee is not necessarily the company nominated as the employer in the written contract of employment." Mosaic Brands at [24];
- (b) " … matters that are relevant to assessing the identity of the true employer relevantly include whether the company paid the employees' remuneration; whether the employer of record had assets or revenue from which it could meet the employees' entitlements; whether the employer of record had any purpose other than to be an employer of record; and whether the employer of record exercised practical and legal control and direction over the employees …"; Mosaic Brands at [29]; and
- (c) " … the Court may have regard to whether the suggested arrangement had an 'intelligible business objective' which is 'consistent with the financial and administrative organisation of the business'. … there would exist an intelligible business objective in a single employer entity within a group, at least where that entity on-charges the cost of employee services to other group entities, and there is either a payment structure or an accounting structure so that it is in a position to meet its obligations to employees on an ongoing basis. … there is no such intelligible business objective where the suggested employing entity would, at all times, be incapable of meeting those obligations, which are in fact met by another entity which is the only entity that has the capacity to meet them."; Mosaic Brands at [31].
So, what are the due diligence tips for lenders to corporate groups who are taking security to support that lending?
As a preliminary matter it might be noted that there is nothing inherently objectionable to an arrangement under which the staff of a corporate group are all employed by an "employer subsidiary"
However, if that arrangement is to withstand scrutiny, the "employer subsidiary" should:
- (a) be the employer nominated in the contracts of employment with each member of staff;
- (b) have its own bank account from which salaries, wages and all other payments which are required to be made as an incident of the employment of the members of staff are made. Those payments will include superannuation contributions, workers compensation insurance and other like payments;
- (c) have assets or an income from which those payments are made. That income should include on-charges which the "employer subsidiary" makes to the other companies in the group and to which it supplies staff. Those on-charges should be in respect of the costs it incurs on account of those staff whilst they are engaged by those other companies; and
- (d) be responsible for determining the terms and conditions on which its staff are employed, including their remuneration. The "employer subsidiary" should also be responsible for hiring, firing and disciplining staff.
If the above factors are not met, then the employer subsidiary may need to be grouped with the asset holding entities.
