Federal Court refuses to strike out liquidators’ preference claims despite prolonged delay

The Federal Court of Australia has refused to summarily dismiss unfair preference claims brought by the liquidators of Modco Residential Pty Ltd, despite finding a clear failure to prosecute the proceeding with due diligence, instead allowing the matter to proceed under tight procedural supervision while ordering indemnity costs against the plaintiffs.

Modco Residential was a Perth-based boutique builder founded in 2020 by Yusuf Khan and Cynthia Lu, which specialised in fast, steel-framed homes but entered voluntary administration and later liquidation in 2023 with nearly $9 million in debt. The company left many homes unfinished and faced allegations of unpaid subcontractors and premature, unconscionable demands for progress payments.

Modco Residential and its liquidators, Richard Albarran and Cameron Shaw of Hall Chadwick, commenced “mothership” proceedings against a group of trade creditors alleged to have received voidable preference payments prior to the company’s collapse. The defendants included various construction and subcontracting entities engaged in residential building projects.

Certain defendants applied under rule 5.23 of the Federal Court Rules 2011 (Cth) for summary dismissal on the basis that the liquidators had failed to take any meaningful steps to advance the litigation for an extended period. Following joinder orders made in May 2025, the proceeding effectively stalled, with no substantive activity for approximately 10 months.

Evidence before the Court showed repeated attempts by the defendants’ solicitors to engage with the liquidators’ legal representatives, including emails and telephone messages that went unanswered. Even after the filing of the dismissal application and further communications from both the defendants and the Court, there was no response until the eve of the hearing.

The liquidators attributed the delay to disruptions within their legal team, including the departure of key personnel and a law firm partnership split that resulted in changes to contact details and internal dislocation. However, Justice Banks-Smith found the explanation inadequate, particularly given the continuing responsibilities of the liquidators as officers of the Court to ensure the proceeding was properly managed.

The Court held that the threshold for enlivening the dismissal power had been met, confirming that the liquidators had failed to prosecute the claim with due diligence. However, the key question was whether dismissal was appropriate in all the circumstances, having regard to the interests of justice.

In declining to terminate the proceeding, the Court placed weight on the length of the delay, which it characterised as not inordinate in the broader context of commercial litigation, and on the fact that at least part of the delay appeared attributable to the liquidators’ solicitors rather than the liquidators themselves. Justice Banks-Smith found that striking out the claims at this stage would be unduly harsh and would deny the plaintiffs the opportunity to properly ventilate their claims.

Instead, the Court ordered that the matter proceed on an expedited basis, with directions for document disclosure, referral to mediation before a registrar, and a further case management hearing within weeks to ensure compliance. The Court also noted that the quantum in dispute may ultimately be disproportionate to the cost of a full trial, implicitly encouraging resolution.

Notwithstanding the refusal to dismiss the proceeding, the Court took a firm stance on the plaintiffs’ conduct. Finding that the defendants had been left with little choice but to bring the application, and had acted appropriately throughout, Justice Banks-Smith ordered the plaintiffs to pay the defendants’ costs on an indemnity basis.

Read the decision here.

• CP Kennedy, counsel, and RA Law Group, solicitors, for Modco Residential and its liquidators, Richard Albarran and Cameron Shaw of Hall Chadwick

• IMO Matthews, counsel, and Chew+Matthews, solicitors, for the Second, Sixth and Ninth Defendants