Modco Mothership Proceedings – To Join or Not To Join?

Modco Mothership Proceedings – To Join or Not To Join?

In the recent case of Modco Residential Pty Ltd (in liq) v Nextruss Steel Pty Ltd [2025] FCA 518, Australia’s Federal Court granted an application by Liquidators seeking leave for joinder of multiple Defendants in proceedings under r. 9.02 of the Federal Court Rules 2011 (Cth).  The Liquidators had commenced their claims as “mothership” proceedings against nine Defendants alleging unreasonable director-related transactions against two Defendants and unfair preference payments against the other seven.

BACKGROUND

On 9 December 2024, the Liquidators of Modco Residential Pty Ltd (in liq) (Modco) filed a statement of claim against nine Defendants for unreasonable director-related transactions and unfair preference payments.

Later, the Liquidators dismissed their unfair preference claims against the Fourth and Seventh Defendants before they had filed defences, and elected not to pursue their unreasonable director-related transaction claim against the Third Defendant, a company in liquidation.

At the time of filing their application for joinder, the Liquidators’ claims against the remaining Defendants were:

1. An allegation that Modco made payments totalling $1,076,496.66 to the First Defendant constituting unreasonable director-related transactions within the meaning of s.588FDA of the Corporations Act 2001 (Cth) (Corporations Act). It had not, and has not, filed a defence; and
2. An allegation that the Second, Fifth, Sixth, Eighth and Ninth Defendants each received unfair preference payments from Modco pursuant to s. 588FA of the Corporations Act, being voidable pursuant to s. 588FE. All four Defendants had filed defences.

By pursuing all nine claims by way of single originating process, the Liquidators commenced a “mothership” or “mother” proceeding, without first addressing the operation of rule 9.02 of the Federal Court Rules 2011 (Cth) (Rules) concerning the joinder of parties, which provides (our bold):

1. Two or more persons may be joined (as applicants or respondents) in any proceeding:
   1. If separate proceedings by or against each of them would give rise to a common question of fact or of mixed fact and law; or
   2. If all rights to relief claimed in the originating application are in respect of, or arise out of, the same transaction or series of transactions; or
   3. By leave of the Court.
   4. Leave under paragraph (1)(c) may be granted before or after the originating application is filed.
   5. If 2 or more persons are joined under subrule (1), the Court may at any stage of the proceedings order that proceedings by or against any party or parties be conducted separately.[1]

MODCO’S APPLICATION FOR LEAVE FOR JOINDER

Modco’s Liquidators filed an application seeking leave for joinder in the proceedings under rule 9.02(1)(c) of the Rules.

Justice Banks-Smith of the Federal Court of Australia in Perth granted leave, retroactively taken to have been granted on 9 December 2024, against each of the parties joined in the originating process, save for the Third Defendant (against which an unreasonable director-related transaction claim was made, but not pursued due to its liquidation).

Her Honour found that:

1. As all rights to the Liquidators’ relief against the Defendants did not arise out of the same transactions or events, rule 9.02(1)(b) was not satisfied[2];
2. For each of the seven unfair preference claims, there was a common issue as to the date of insolvency of Modco, with those claims satisfying rule 9.02(1)(a)[3];
3. However, in relation to the unfair director-related transaction claim against the First Defendant, insolvency is not an element of a claim under s.588FDA of the Corporations Act[4];
4. As a result, rule 9.02(1)(a) was not satisfied for all eight Defendants against which proceedings had or were continuing, and therefore leave was required to pursue those claims in the one Mothership proceeding under rule 9.02(1)(c).
5. It was appropriate that leave to join eight Defendants to the proceedings be granted under rule 9.02(1)(c). Justice Banks-Smith found there remained sufficient overlapping factual issues relating to Modco’s liquidation to justify as a matter of efficiency the claims against the remaining Defendants proceeding together.

KEY TAKEAWAYS FROM MODCO’S CASE

In considering whether to commence a claim as “mothership” proceedings, the following factors should be considered:

1. A compelling factor in the Judge granting leave to join the First Defendant despite being the sole remaining party pursued for unreasonable director-related transactions (satisfying neither rule 9.02(1)(a) or 9.02(1)(b)) was the Liquidator’s intention to seek default judgment as its next step against that party. Caution should otherwise be exercised in citing this case as authority for leave being granted for claims of both preference payments and unreasonable director-related transactions proceeding together.
2. The precedent case on mothership proceedings is Dudley (Liquidator) v RHG Construction Fitout & Maintenance Pty Ltd [2019] FCA 1355 (Dudley), which was the first case to consider rule 9.02 following the introduction of the Rules in 2011. There have been only a handful of cases deciding this issue since, with Modco the most recent.
3. Modco’s Solicitors submitted that in Dudley, the Court found that upon a sensible reading of the words, section 51(2) of the Federal Court of Australia Act 1976 (Cth) authorises the Court to cure an irregularity or defect of failing to comply with rule 9.02 of the Rules, and there is no suggestion a Court lacks power to prevent Plaintiffs from proceeding against Defendants if it is appropriate to do so[5]. Her Honour appears to have accepted this submission.
4. In Dudley, two of the Defendants sued by the Liquidators brought an application under rule 9.08 of the Rules seeking orders they be removed as parties to the mothership proceedings. In that case, the Court ordered those Defendants be removed by reasons of the Liquidators’ failure to comply with rule 9.02, but suspended the operation of the order for 30 days to allow the Liquidators to regularise the claims so they did not fall outside the limitation period.
5. In contract, in this Modco case, the four Defendants neither consented nor opposed the application for leave for joinder.
6. As the Judge in Dudley stated, “For good reason, in other cases Liquidators who have commenced mothership proceedings have applied promptly for orders validating the steps they have taken” [6].

LOOKING FOR SUPPORT?

If you or your client wishes to commence mothership proceedings, or has already done so, early steps should be taken to seek the Court’s leave for joinder of the Defendants, if there is no common question of fact or mixed fact and law, the relief does not arise out of the same transactions.  We here in Rostron Carlyle Rojas Lawyers’ Insolvency division would be delighted to assist you with those mothership proceedings, and determining whether leave is required or not. Contact us today to discuss.

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