Modco Residential Pty Ltd (in liq) v Nextruss Steel Pty Ltd (No 2)

This Federal Court decision was a procedural fight inside a larger insolvency recovery case. The plaintiffs were a company in liquidation and its liquidators. They had sued a number of trade service entities, alleging relevantly that those entities had received voidable unfair preference payments.

The issue before the Court was narrower than that underlying insolvency dispute. Three active defendants asked the Court to summarily dismiss the claims against them because the plaintiffs had not been prosecuting the proceeding with due diligence. The Court agreed there had been a real failure to move the case along, but it refused to end the proceeding. Instead, it imposed a tighter path forward, including mediation and a further case management hearing. The plaintiffs still suffered a major setback because they were ordered to pay the defendants' costs of the dismissal application on an indemnity basis.

Modco Residential Pty Ltd had been a residential building company. By the time of this proceeding it was in liquidation, and its liquidators brought what the Court called 'mothership' proceedings against multiple trade service entities. The pleaded allegation, relevantly, was that those entities had received voidable unfair preference payments. That is a familiar insolvency setting. Liquidators seek to recover payments said to have unfairly preferred certain creditors before liquidation.

The case began in the usual way. The statement of claim was filed in December 2024. Defences followed in February 2025, and the plaintiffs filed replies in the same month. A procedural issue then arose because the plaintiffs had started the proceeding without obtaining appropriate joinder. The defendants raised that issue, and the plaintiffs later obtained leave in May 2025.

After the joinder orders on 19 May 2025, the matter appears to have gone dormant. The Court said no steps had been taken to progress the proceeding since that date. That inactivity became the foundation for the later dismissal application.

The second, sixth and ninth defendants eventually forced the issue. On 12 December 2025, their solicitor emailed the plaintiffs' solicitor using the email address on the court record. The email raised concern about the delay and reserved the right to seek dismissal. There was no response. More attempts followed, including further emails and a telephone message left on 28 January 2026 with an identified receptionist. Again, there was no response.

On 30 January 2026, the defendants lodged an interlocutory application for summary dismissal and emailed the application and supporting affidavit to the plaintiffs' solicitor using the address on the court record. After making inquiries, the defendants' solicitor found another email address and re-sent the documents there on 6 February 2026. During February 2026, both the defendants' solicitor and the Court emailed the plaintiffs' solicitor at various addresses, including to notify the hearing date of 17 March 2026. Still, no response was received.

Because of that silence, the defendants and the Court prepared for the hearing on the basis that the plaintiffs might not appear. Then, on 16 March 2026, the day before the hearing, the plaintiffs' solicitor filed what purported to be a notice of change of solicitor. In substance, she remained the solicitor on the record but had changed firms and updated address details. On the hearing day, she filed an affidavit giving general explanations for the delay and non-responsiveness, including staff departure at Hall Chadwick and disruption caused by a partnership split at her former law firm.

The timeline mattered because the Court had to assess whether the delay was serious enough to justify dismissal.

The Court treated the period after the joinder issue was corrected as the relevant period of inactivity. It described the delay, taking into account the period between rectifying the joinder issue and 16 March 2025, as some 10 months. Whatever the precise drafting in that sentence, the Court's reasoning was clear: there had been a substantial period of non-progression, but it was not regarded as inordinate in the overall scheme of litigation.

The defendants relied on rule 5.23(1)(b) of the Federal Court Rules 2011 (Cth), read with rule 5.22(d). In summary, those rules allow the Court to make orders on default, including dismissal, where a party has failed to prosecute a claim with due diligence. The judgment also referred to earlier authorities discussing the principles that apply when a court is asked to dismiss a proceeding for delay or default.

The Court made clear that there are two stages to the analysis. First, has the plaintiff failed to prosecute the proceeding with due diligence? Secondly, if that threshold is met, is dismissal appropriate in all the circumstances? That second question is evaluative. It requires the Court to consider fairness, proportionality and the interests of justice, rather than treating dismissal as an automatic consequence of delay.

The judgment also referred to section 37N of the Federal Court of Australia Act 1976 (Cth). That provision concerns the obligations of parties and their lawyers in relation to the overarching purpose of civil practice and procedure. The Court did not set out the text of section 37N in the extract, but it expressly reminded the plaintiffs and their lawyers that they had obligations under it.

Another rule mentioned was rule 11.09, dealing with a notice of change of address for service. The Court emphasised the importance of the solicitor on the record being readily identifiable and contactable. That was not a side issue. It went directly to the practical administration of litigation and to whether communications from the other side and the Court could reliably reach the responsible legal representative.

The Court found that the plaintiffs had failed to pursue the proceeding with due diligence. That meant the threshold in rule 5.22(d) had been met and the power to consider dismissal was enlivened. So the defendants succeeded on the first step of the analysis.

They did not, however, obtain the final relief they wanted. The Court refused to summarily dismiss the proceeding. A central reason was that dismissal was considered unduly harsh in the circumstances. The Court said the delay, measured from the correction of the joinder issue to the eve of the hearing, was some 10 months and was not inordinate in the scheme of things. The Court also considered that at least some of the delay appeared to rest with the plaintiffs' solicitors rather than the liquidators personally.

Instead of dismissal, the Court chose a case management response. It ordered the proceeding to be referred to mediation before a registrar under rules 1.40 and 28.02, and adjourned the matter to a case management hearing on 9 April 2026. The reasons also indicate that the parties were to confer about document disclosure and that the Court wanted positive steps taken quickly.

Although the plaintiffs kept the proceeding alive, the Court was plainly critical of how the matter had been handled. The affidavit filed by the plaintiffs' solicitor was described as general in nature. The Court said it did not explain why the liquidators, as officers of the Court, had not diligently reallocated the matter or assumed carriage themselves after a staff member left. The Court accepted that a law firm partnership split may have caused some disruption, but it expected contingencies to protect clients' interests, including checking and forwarding emails. The Court also noted that the phone message of 28 January 2026 and the email of 6 February 2026 had in fact been received.

That criticism drove the costs result. The Court held that the defendants had little choice but to proceed as they did and had acted courteously and conscientiously. Because of the lack of communication and the absence of a fulsome explanation, the Court considered this one of those occasions where unreasonable conduct by the plaintiffs or their solicitors justified an indemnity costs order. So, even though the dismissal application itself failed, the plaintiffs were ordered to pay the defendants' costs of and incidental to that application on an indemnity basis.

If your business is defending an insolvency recovery claim, this case shows that prolonged inactivity by the plaintiff can create real procedural leverage. A carefully documented history of unanswered correspondence, missed opportunities to progress the matter and stale pleadings may justify an application under the Federal Court Rules. But the decision also shows the limits of that strategy. Courts are cautious about terminating proceedings outright, especially where a less drastic response can still protect the administration of justice.

If your business, liquidator or adviser is bringing a claim, the message is sharper. Once pleadings close and preliminary issues are resolved, the case needs active supervision. Internal staffing changes, file handovers, firm restructures and email migration problems are not safe assumptions for explaining silence. The Court expected continuity planning. It also expected the solicitor on the record to remain contactable and for address for service details to be updated properly.

The judgment is also a reminder that costs risk does not depend only on who wins the application. The defendants lost on dismissal but won strongly on costs. That is commercially important. A party can preserve the substantive claim yet still suffer a painful procedural costs order because its conduct forced the other side to incur unnecessary expense.

There is another practical point in the reasons. The Court noted that the cumulative amount in issue was likely to be disproportionate to the costs of taking the matter to trial. That is a common feature of multi-party insolvency recovery litigation. Businesses should therefore think not only about legal rights, but also about whether mediation, early disclosure and commercial settlement are more sensible than allowing procedural dysfunction to increase costs for everyone.

The judgment turned heavily on conduct rather than on the merits of the unfair preference claims. Several practical features stood out.

First, the defendants built a record. They sent an initial warning email in December 2025, followed up with more emails, left a phone message in January 2026, then filed and served the interlocutory application. They also re-sent documents to another email address after making inquiries. That pattern helped the Court conclude that the defendants had acted courteously and conscientiously.

Secondly, the plaintiffs' explanation was too general. The affidavit referred to staff departure and a law firm split, but it did not explain the lack of any step in the proceeding over the relevant period, why the liquidators had not reallocated the matter, or why no communication was made with either the defendants' solicitor or the Court between late January and mid-March 2026.

Thirdly, service details mattered. The Court specifically referred to rule 11.09 and the importance of the solicitor on the record being identifiable and contactable. In practice, that means businesses and their lawyers should treat address for service details as an active risk item, not a formality.

Finally, the plaintiffs' late attempt to regularise matters did not erase what had already happened. Filing a purported notice of change of solicitor on the eve of the hearing and then proposing discovery and mediation was enough to save the proceeding from dismissal, but not enough to avoid indemnity costs.

This page is based on the Federal Court of Australia judgment in Modco Residential Pty Ltd (in liq) v Nextruss Steel Pty Ltd (No 2) [2026] FCA 283, delivered by Banks-Smith J on 18 March 2026.

The judgment is detailed on the procedural history, the rules relied on, the Court's reasoning on dismissal, and the indemnity costs order. It gives only limited detail about the underlying alleged unfair preference payments, so this page focuses on the procedural and commercial lessons that are clearly supported by the judgment.