Statutory demands can be issued by a creditor to a debtor company to demand payment of a debt due and owing. Failure to respond to the demand may result in the debtor company facing a winding-up application based on the company's presumed insolvency.
However, there are several avenues available to a debtor company to apply for a court order setting aside a demand. The most common grounds are found in section 459H of the Corporations Act 2001 (Cth), where a company can claim:
- a genuine dispute exists in relation to the debt; and/or
- an offsetting claim exists against the party issuing the demand.
These grounds are often raised in conjunction, given the similar nature of establishing each when applying to set aside a statutory demand.
In this article, we break down what constitutes a genuine dispute and offsetting claim.
What is a genuine dispute?
The test for a genuine dispute was explained in Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785, which requires a company to establish that a "plausible contention requiring investigation" exists. A genuine dispute is also defined as a "serious question to be tried" and "real and not spurious, hypothetical or illusory". The dispute may be in relation to the existence or amount of debt, or one of fact or law.
The courts have said that the threshold for demonstrating a genuine dispute is not high, and the issue will be determined on the balance of probabilities. Once a company shows that even one factor or issue indicates an arguable case in relation to the debt, the court will likely find a genuine dispute exists.
The court's approach in determining whether a genuine dispute exists was set out in Creata (Aust) Pty Ltd v Faull (2017) 125 ACSR 212 at :
"The terms of s 459H of the Corporations Act and the authorities make clear that, on an application to set aside a statutory demand, the applicant is required only to establish a genuine dispute or offsetting claim. The applicant is required to evidence the assertions relevant to the alleged dispute or offsetting claim only to the extent necessary for that primary task. It is not necessary for the applicant to advance a fully evidenced claim. Therefore, the task faced by an applicant is by no means at all a difficult or demanding one."
The courts found that a genuine dispute can exist in the following instances:
- the existence of debt:
- where there is a question as to the existence of the alleged debt
- where there is a question as to whether the alleged debt is actually owed by the company to which the statutory demand is directed.
- concluded agreement:
- where the parties did not intend to be immediately bound by the terms of the agreement or arrangement, which is the basis of the alleged debt
- where the agreement, which is the basis of the alleged debt, is incomplete.
- meaning of a contract:
- where there are clear, arguable alternatives in relation to the meaning of a term or questions regarding the construction of the contract.
- services not provided at all (or without due care and
- where there are questions as to whether a party has provided services with due care and skill, or at all.
- unclear terms of a court judgment or order:
- where the terms of a court judgment or order on which the demand is based, are unclear.
- pending appeal:
- where the statutory demand is based on a judgment and an appeal is pending, the court will not generally set aside the demand without a stay.
Courts have found there will be no genuine dispute where the legal argument in support of an application has no basis, or has been "created or constructed in response to the pressure represented by the service of the statutory demand".
What is an offsetting claim?
In addition to genuine disputes, a company may apply to set aside a statutory demand on the grounds of a genuine offsetting claim according to section 459H(1)(b) of the Corporations Act 2001 (Cth). This may be argued by way of a counterclaim, set-off or cross-demand.
Essentially, the effect of a genuine offsetting claim is to reduce or extinguish the amount claimed in the statutory demand.
Similar to establishing a genuine dispute, the test for a genuine off setting claim requires the court to be satisfied there is "a serious question to be tried".
The court will usually apply the following principles in determining whether a company has a genuine offsetting claim:
- the claim must be for a liquidated or unliquidated sum of money
- if unliquidated, the claim must be genuine and sufficiently able to be quantified to give rise to an offsetting amount which can be deducted from the claimed debt
- the claim does not need to arise out of the same transaction or circumstances as the debt to which the demand relates
- the amount of the offsetting claim will be determined on the date of the hearing of the application
- a partial payment made at or just after service of the demand will not constitute a genuine offsetting claim.
In addition to the above, a company may also, under section 459J(1)(a) of the Corporations Act 2001 (Cth), apply to set aside a statutory demand if there is a defect in the form of the demand that would cause substantial injustice to the debtor company.
Generally, the defect needs to be of a "gross and exceptional character", which would amount to a substantial injustice if not set aside.
Common examples of defective statutory demands may include:
- omission of a signature from the demand
- omitting or failing to specify a proper place for service of a set-aside application
- minor misdescriptions of the names of persons or entities, addresses or dates
- omission of the notes which appear at the bottom of the Form 509H statutory demand
- omission of an accompanying affidavit to support a statutory demand based on a non-judgement debt
- deficiency in the affidavit accompanying the statutory demand, whether formal or substantive
- where the accompanying affidavit is sworn earlier than the demand
- if the accompanying affidavit omits the source of the deponent's knowledge about the debt or misstates the source of that knowledge
- where the demand has been "so grossly inflated as almost exclusively to comprise matters which it should have been obvious from the outset were in genuine dispute between the parties at the time the demand was served".
How can a company apply to set aside a statutory demand?
To set aside a statutory demand, an application and supporting affidavit must be filed in a State Supreme Court or the Federal Court and given to the creditor within 21 days after being served with a statutory demand.
The affidavit should contain the relevant material facts which form the basis of the grounds a company is relying on to prove the existence of a genuine dispute or offsetting claim. The affidavit should also exhibit any relevant correspondence and documents.
A company may also file additional evidence after 21 days, but it must relate to the grounds already identified in the initial affidavit. An affidavit filed outside the 21 days, which raises new arguments, cannot be relied upon.
What happens if a company is successful or unsuccessful?
If an application disputing the debt is successful, the court may make an order to set aside the statutory demand.
Alternatively, if an application to have the amount of the debt amended is successful and the undisputed total amount is $4,000 or greater, the court may vary the statutory demand. If the amended debt is less than $4,000, the court may set aside the statutory demand. In both cases, legal costs may be payable by the creditor by order of the court.
Where an application is unsuccessful, the court will extend the time frame for compliance of the statutory demand to seven days after the application is dismissed.
If you have been served with a statutory demand and need legal assistance with applying to have the demand set aside, please get in touch with a member of our team below.
This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.