Offsetting Claim – Setting Aside Statutory Demands
A creditor’s statutory demand is one of the most powerful tools available under the Corporations Act 2001 (Cth).
It provides a summary process by which a creditor may require a company to pay a debt of $4,000 or more within 21 days of service, failing which the company is presumed to be insolvent under s 459C(2)(a), which says:
(2) The Court must presume that the company is insolvent if, during or after the 3 months ending on the day when the application was made:
(a) the company failed (as defined by section 459F) to comply with a statutory demand.
This presumption enables the creditor to apply to the court for orders that the company be wound up in insolvency.
The mechanism is intended to be swift and conclusive, avoiding protracted disputes about debts in winding-up proceedings.
However, this summary process is balanced by safeguards for companies. Division 3 of Part 5.4 of the Act, particularly s 459G, allows a company served with a statutory demand to apply to the court to have it set aside. It says:
(1) A company may apply to the Court for an order setting aside a statutory demand served on the company.
(2) An application may only be made within the statutory period after the demand is so served.
(3) An application is made in accordance with this section only if, within that period:
(a) an affidavit supporting the application is filed with the Court; and
(b) a copy of the application, and a copy of the supporting affidavit, are served on the person who served the demand on the company.
The most common grounds for setting aside a statutory demand are:
- There is a genuine dispute about the existence or amount of the debt (s 459H(1)(a));
- The company has an offsetting claim (s 459H(1)(b)); or
- There is some other defect or reason that justifies setting aside the demand (s 459J).
The focus in this article is on the defence of the “offsetting claim”.
This is part 2 of our statutory demand lawyers, four-part series on setting aside statutory demands:
- Part 1 – Genuine Dispute
- Part 2 – Offsetting Claim
- Part 3 – Defect in the Demand
- Part 4 – Some Other Reason
Section 459H – Offsetting Claims
Section 459H provides:
(1) This section applies where, on an application under section 459G, the Court is satisfied of either or both of the following:
(a) that there is a genuine dispute between the company and the respondent about the existence or amount of a debt to which the demand relates;
(b) that the company has an offsetting claim.
The legislation defines an “offsetting claim” as a genuine claim that the company has against the creditor, whether by way of counterclaim, set-off, or cross-demand, even if it does not arise from the same transaction or circumstances as the debt relied upon by the creditor. In s 459H(2), “offsetting total” means:
(a) if the Court is satisfied that the company has only one offsetting claim–the amount of that claim; or
(b) if the Court is satisfied that the company has 2 or more offsetting claims–the total of the amounts of those claims; or
(c) otherwise–a nil amount.
In this article, our statutory demand lawyers explain the defence of “offsetting claim” in greater detail.
The Importance of Offsetting Claims
The ability to raise an offsetting claim is crucial because the statutory demand procedure is not designed to adjudicate complex disputes.
A statutory demand is not a forum for determining the merits of cross-claims or counterclaims in detail.
Instead, the company needs only to show that the claim is “genuine” — that is, not frivolous, vexatious, or spurious.
As the courts have repeatedly emphasised, the company does not have to prove the claim will succeed at trial; it must simply demonstrate that there is a serious and arguable basis for it.
In Spencer Constructions Pty Limited v G & M Aldridge Pty Limited [1997] FCA 681, the Court discussed whether a dispute is “genuine”, and said:
In our view a “genuine” dispute requires that … the dispute be bona fide and truly exist in fact … the grounds for alleging the existence of a dispute are real and not spurious, hypothetical, illusory or misconceived.
Following Spencer Constructions Pty Limited, the Court in Edge Technology P/L v Lite-On Technology Corp [2000] NSWSC 471 said at [25]:
25 I adopt the approach of the Full Federal Court in Spencer Constructions Pty Limited v G & M Aldridge Pty Limited … that a genuine dispute requires that “the dispute be bona fide and truly exist in fact” and that the “grounds for alleging the existence of a dispute are real and not spurious, hypothetical, illusory or misconceived”. The same applies to the counter-claim or set-off. One asks: Is it bona fide, is it real and not spurious?
In Grandview Ausbuilder Pty Ltd v Budget Demolitions Pty Ltd [2019] NSWCA 60, Bell P; White JA concurring, said at [8], the Court confirmed the purpose of recognising offsetting claims:
The establishment of an offsetting claim for the purposes of s 459H does not, of course, constitute a finding that the claim is a good one, or that it has been made out. It represents nothing more than a finding that there is a serious question as to the existence of an offsetting claim or an issue deserving of a hearing as to whether the company has such a claim against the creditor and that a claim is made in good faith and is arguable and not frivolous or vexatious.
At [48], the Court explained the procedure and test for validity:
The test whether an offsetting claim exists is the same as for a genuine dispute, that is to say, the claim must be bona fide and truly exist in fact and that the grounds for alleging the existence of the dispute are real and not spurious, hypothetical, illusory or misconceived. The issue is whether the offsetting claim is bona fide, real and not spurious.
The Court emphasises that establishing an offsetting claim does not mean the claim is proven, only that it raises a serious question that must be tried.
The mechanism protects companies from being wound up based on a statutory demand where there is a genuine cross-claim that reduces or extinguishes the debt.
The claim must be objectively arguable and supported by particulars; not speculative or manufactured after service of the demand.
In Maniotis v Valimi Pty Ltd [2002] VSCA 91, O’Bryan AJA explained at [43]:
The expression “a genuine claim” means, I consider, an authentic or bona fide claim. “Genuine” means: truly what something is said to be; authentic (the New Oxford Dictionary of English 1998 ed.). When the definition of “offsetting claim” was inserted in s.459(5) in 1992, a question arises whether the definition is complete or allows an additional requirement that the offsetting claim must also be effective or enforceable at the relevant time.
Then continues at [45] to say:
The expression “a genuine claim” means, I consider, an authentic or bona fide claim. “Genuine” means: truly what something is said to be; authentic (the New Oxford Dictionary of English 1998 ed.). When the definition of “offsetting claim” was inserted in s.459(5) in 1992, a question arises whether the definition is complete or allows an additional requirement that the offsetting claim must also be effective or enforceable at the relevant time.
The court sets out how s 459H operates — the company must establish it has an offsetting claim when applying to set aside a demand.
The definition ensures that genuine reciprocal claims are considered, even if stayed or not immediately enforceable, so long as they truly exist and are bona fide.
In Re Wallace Building Systems Pty Ltd [2024] VSC 767, Hetyey AsJ said at [37]:
In the case of an offsetting claim, the following additional principles are applicable:
(a) a genuine offsetting claim ‘means a claim on a cause of action advanced in good faith, for an amount claimed in good faith’…
(b) there must be some evidence to indicate the nature of the offsetting claim and the way in which it is calculated, including any loss which is said to arise;
(c) whilst it is not necessary to the offsetting claim to the last ‘dollar and cent’, the evidence should be sufficient for the Court to make an estimate of the amount of the offsetting claim, which must be capable of being quantified in monetary terms; and
(d) in practical terms, there must be a mutuality in the identity or capacity of the creditor who served the demand and the person who has the offsetting claim.
The Court confirms that under s 459H, the Court must consider offsetting claims when determining whether to vary or set aside a statutory demand.
The explanation shows that offsetting claims are designed to prevent a presumption of insolvency where the debtor company has a genuine, quantifiable claim against the creditor.
The claim need not be proven but must be genuine, bona fide, and supported by sufficient evidence to be credible.
In Hooker Cockram Ltd v Minesco P/L [2001] VSC 356, Warren J said at [14]:
… a purpose of the statutory demand procedure has been, and is, to provide a simple and inexpensive means of identifying, and, similarly, achieving the winding up of, insolvent companies.
In Pravenkav Group Pty Ltd v Diploma Construction (WA) Pty Ltd (No 3) [2014] WASCA 132, Newnes & Murphy JJA, Edelman J said at [43], [57]–[58]:
It is not correct to suggest that a supporting affidavit under s 459G(3) must be one which enables the court to determine whether the offsetting claim is equal to or exceeds the amount of the statutory demand … it is, in any event, unnecessary for the initial supporting affidavit itself to contain all the material upon which the quantum of the offsetting claim can be determined.
The Court confirms that an initial affidavit needs only to support the application; detailed quantification of the offsetting claim can be supplied later.
Offsetting claims prevents a company from being presumed insolvent where genuine reciprocal claims exist, even if they are not yet precisely quantified.
The focus is on genuineness and good faith, not strictness.
In Summary
Offsetting claims are an essential safeguard in statutory demand proceedings.
The process is designed as a quick test of solvency, not a forum to adjudicate complex disputes or resolve the full merits of cross-claims.
To defeat a demand, a company does not need to prove its claim will succeed at trial — it only needs to show that the claim is genuine, meaning it is bona fide, arguable, and not frivolous or speculative.
The law requires that an offsetting claim must truly exist, be raised in good faith, and be supported by sufficient evidence and particularity so the court can see it is not fanciful.
If the claim reduces the substantiated amount of the demand below the statutory minimum, the demand must be set aside. This ensures that companies are not presumed insolvent where genuine reciprocal claims exist.
Importantly, an offsetting claim does not have to be precisely quantified or immediately enforceable; it is enough that the claim is real, credible, and capable of estimation.
Affidavits supporting the application must outline the basis of the claim with adequate detail, but exact dollar-and-cent precision is not required.
The purpose of this safeguard is to prevent statutory demands being used oppressively as a debt collection device, ensuring that only uncontested debts can trigger the presumption of insolvency.
Must be a Genuine Offsetting Claim
An “offsetting claim” is defined broadly. It includes any genuine claim that the company has against the creditor, whether by way of counterclaim, set-off, or cross-demand, and irrespective of whether it arises from the same transaction or from unrelated dealings.
This wide definition ensures that legitimate reciprocal obligations can be considered in determining whether a company is truly indebted to the extent alleged.
In Re Duncan; Ex parte Modlin [1917] NSWStRp 77, Street J said:
It is not necessary for the judgment debtor in applications under this section to show that there are reasonable grounds for believing that he will establish his cross-action. All that a debtor need show in this respect is that he has a bona fide claim which he is fairly entitled to litigate.
In Scanhill Pty Ltd v Century 21 Australasia Pty Ltd [1993] FCA 618, Beazley J said:
It is noteworthy that the references to the requirement of the existence of a “genuine dispute” or “genuine claim” are similar to the test propounded by Street J in Re Duncan; Ex parte Modlin (supra) … In my opinion the test to be applied for the purposes of s459H is whether the court is satisfied that there is a serious question to be tried that the applicant has an offsetting claim.
In Intag Microelectronics Pty Ltd v Awa Ltd (1995) 18 ACSR 284, Young J refers to the judgment of Master McLaughlin in Advance Ship Design Pty Ltd v Ryan (1995) 16 ACSR 129 and said:
I agree with what the learned master there said, that “The mere fact that the plaintiff has filed process does not mean that the plaintiff has a claim in” the amount claimed. The claim must be one which the court can see, without looking too deeply at the issues that may arise, has some real chances of success.
In John Shearer Limited and Arrowcrest Group Pty Ltd v Gehl Company [1995] FCA 1789 in their joint decision, Von Doussa, Hill & Tamberlin JJ said:
In order to show that an offsetting claim is genuine it must be put forward in good faith. There must be something more than a mere assertion.
In Ozone Manufacturing Pty Ltd v Deputy Commissioner of Taxation [2006] SASC 91, Debelle J said:
The test whether an offsetting claim exists is the same as for a genuine dispute, that is to say, the claim must be bona fide and truly exist in fact and that the grounds for alleging the existence of the dispute are real and not spurious, hypothetical, illusory or misconceived. The issue is whether the offsetting claim is bona fide, real or not spurious.
In Britten-Norman Pty Ltd v Analysis & Technology Australia Pty Ltd [2013] NSWCA 344, the Court (citing Thomas J in Re Morris Catering (Australia) Pty Ltd (1993) 11 ACSR 601) said:
… The specified limits of the court’s examination are the ascertainment of whether there is a ‘genuine dispute’ and whether there is a ‘genuine claim’ … The essential task is relatively simple — to identify the genuine level of a claim (not the likely result of it) and to identify the genuine level of an offsetting claim (not the likely result of it).
In Pravenkav Group Pty Ltd v Diploma Construction (WA) Pty Ltd (No 3) [2014] WASCA 132, the Court said:
An offsetting claim is genuine if it truly exists in fact and is bona fide arguable on the basis of facts asserted with a sufficient particularity to enable the court to determine that the claim is not fanciful.
In Grandview Ausbuilder Pty Ltd v Budget Demolitions Pty Ltd [2019] NSWCA 60, the Court said:
An offsetting claim is genuine if it truly exists in fact and is bona fide arguable on the basis of facts asserted with a sufficient particularity to enable the court to determine that the claim is not fanciful.
In the Queensland Supreme Court case of Childcare Providers Pty Ltd v Bright Horizons Australia Childcare Pty Ltd [2017] QSC 307, Holmes CJ said:
The test for whether an offsetting claim is genuine under s 459H(1)(b) is not different from that for whether there is a “genuine dispute” under s 459H(1)(a). Various adjectives have been used to express the idea of what is, and is not, genuine; for example, whether:
“The claim [is] bona fide and truly exist[s] in fact and … the grounds for alleging the existence of the dispute are real and not spurious, hypothetical, illusory or misconceived.”
The test for a genuine offsetting claim is the same as that for a genuine dispute: the claim must be real, bona fide, and credible.
The focus is on whether there is substance to the claim, not on predicting its outcome.
This ensures the statutory demand process is not misused as a debt collection tool where legitimate reciprocal claims exist.
Distinction from a Genuine Dispute
The concept of an offsetting claim must be distinguished from a genuine dispute under s 459H(1)(a).
A genuine dispute goes to the existence or amount of the creditor’s debt — for example, contesting whether goods were delivered or whether services were performed correctly.
By contrast, an offsetting claim accepts that a debt may be owing but asserts that the creditor is also liable to the company in an amount that can offset, in whole or part, the statutory demand.
The courts have explained that while both grounds share the requirement of being “genuine,” their operation differs.
In Construction Management Services Pty Ltd v Bidnia Group Pty Ltd [2008] NSWSC 1152, the Court said:
Defective work may sound in damages for breach of warranty or for negligence, but it provides no basis for any suggestion that there has been a total failure of consideration. The contract price is payable, and there is no genuine dispute in respect of the debt. The only real question is whether there is any offsetting claim for damages for breach of warranty or negligence.
In Britten-Norman Pty Ltd v Analysis & Technology Australia Pty Ltd [2013] NSWCA 344, the Court said:
The specified limits of the court’s examination are the ascertainment of whether there is a ‘genuine dispute’ and whether there is a ‘genuine claim’ … The essential task is relatively simple — to identify the genuine level of a claim (not the likely result of it) and to identify the genuine level of an offsetting claim (not the likely result of it).
This makes clear that genuine dispute and offsetting claim are two separate but parallel inquiries.
In Grandview Ausbuilder Pty Ltd v Budget Demolitions Pty Ltd [2019] NSWCA 60, the Court said:
The test whether an offsetting claim exists is the same as for a genuine dispute, that is to say, the claim must be bona fide and truly exist in fact and that the grounds for alleging the existence of the dispute are real and not spurious, hypothetical, illusory or misconceived.
This recognises that the threshold test is identical, but the subject matter differs — one is about the creditor’s debt, the other about the debtor’s cross-claim.
In Re Wallace Building Systems Pty Ltd [2024] VSC 767, Heytey AsJ set out separate principles for each ground:
“Section 459H(1) … applies where … the Court is satisfied of either or both of the following: (a) that there is a genuine dispute … about the existence or amount of a debt … (b) that the company has an offsetting claim … The principles set out above apply equally … In the case of an offsetting claim, the following additional principles are applicable: (a) a genuine offsetting claim means a claim on a cause of action advanced in good faith, for an amount claimed in good faith…”
This clearly distinguishes the two limbs of s 459H(1) and then articulates separate requirements for offsetting claims.
Effect on the Statutory Demand
Where an offsetting claim is established, s 459H(2) directs the court to deduct the amount of that claim from the amount of the debt in the demand.
This calculation produces the “substantiated amount”. If the substantiated amount falls below the statutory minimum, currently $4,000, s 459H(3) mandates that the statutory demand must be set aside.
The practical effect is that a company with a legitimate counterclaim can prevent a creditor from relying on the presumption of insolvency.
The offsetting claim need not arise from the same contract or transaction, and courts have recognised claims such as damages for breach of contract, restitution, or misrepresentation as capable of offsetting the creditor’s demand.
Legislative Basis: Section 459H
The statutory authority for setting aside a statutory demand based on an offsetting claim is found in s 459H of the Corporations Act. The section provides:
(1) This section applies where, on an application under section 459G, the Court is satisfied of either or both of the following:
(a) that there is a genuine dispute between the company and the respondent about the existence or amount of a debt to which the demand relates;
(b) that the company has an offsetting claim.
(2) The Court must calculate the substantiated amount of the demand by:
(a) taking the amount of the debt to which the demand relates; and
(b) subtracting the amount of any offsetting claim.
(3) If the substantiated amount is less than the statutory minimum, the Court must set aside the demand.
This section establishes both the company’s right to seek relief and the mandatory obligation of the Court to set aside a demand where the statutory minimum is not met once an offsetting claim is considered.
What Constitutes a Valid Offsetting Claim?
The claim must be a Counterclaim, Set-off, or Cross-demand
The definitions of the words “Counterclaim”, “Set-off,” and “Cross-demand” have been given some consideration by the Courts.
In Re a Bankruptcy Notice (1934) 1 Ch 431, Lord Hanworth MR said:
I turn, therefore, to what to my mind is the wider word, ‘cross-demand’. If a cross-demand is only to be interpreted as meaning something which could have been introduced into the action by way of counterclaim, it adds nothing to the word ‘counterclaim’. ‘Cross-demand’ seems to me to be a word introduced in order to give a wider ambit to the meaning of these claims, something that would not be described, certainly, as a set-off, something that could not have been brought in the action, something that still lies outside a counterclaim, but is of a nature which can be specified and which is of such a nature that it equals or exceeds the amount of the judgment debt. I do not desire to say what ‘cross-demand’ may include, but it is not difficult to say that it does not include a claim of such uncertain nature as appears in these Chancery proceedings.
So, “Counterclaim” and “Set-off” have been defined more narrowly than “Cross-demand”, which has been defined with “considerable width”.
In John Shearer Ltd v GEHL Co (1995) 60 FCR 136, narrowing what is meant by “cross demand” said:
The word ‘cross-demand’ is a word of considerable width. While the words ‘counterclaim’ and ‘set-off’ are technical words, the meanings of which are confined, the same is not true of the word ‘cross-demand’. That is not a technical term. Thus in Re A Bankruptcy Notice … Lord Hanworth MR [said] … I turn, therefore, to what to my mind is the wider word, “cross-demand”. If a cross-demand is only to be interpreted as meaning something which could have been introduced into the action by way of counterclaim, it adds nothing to the word “counterclaim”. “Cross-demand” seems to me to be a word introduced in order to give a wider ambit to the meaning of these claims …’
The court concluded:
It would seem to follow that … a cross-demand will include any claim for damages which exists at the time the application to set aside the statutory demand is made, which is for a monetary amount capable of quantification whether or not it arises out of the same transaction or circumstances as the debt to which the statutory demand relates.
In John Shearer Limited and Arrowcrest Group Pty Ltd v Gehl Company [1995] FCA 1789 in their joint decision, Von Doussa, Hill & Tamberlin JJ said at [28]:
The word “cross-demand” is a word of considerable width. While the words “counterclaim” and “set-off” are technical words, the meanings of which are confined, the same is not true of the word “cross-demand”. That is not a technical term.
Then went on to say:
It would seem to follow that in the context of the Law … a cross-demand will include any claim for damages … which is for a monetary amount capable of quantification whether or not it arises out of the same transaction or circumstances as the debt to which the statutory demand relates.
In Maniotis v Valimi Pty Ltd [2002] VSCA 91, Eames JA said at [6]:
An “offsetting claim” is defined in s.459H(5) to mean “a genuine claim that the company has against the respondent by way of counterclaim, set-off or cross demand (even if it does not arise out of the same transaction or circumstances as a debt to which the demand arises)”.
A counterclaim and set-off are narrow, technical defences confined to claims that can be raised directly in existing proceedings.
At the same time, a cross-demand is broader and includes any genuine, quantifiable monetary claim, even if unrelated to the original debt or transaction.
Courts have recognised “cross-demand” as deliberately broad in scope, extending beyond the limits of counterclaim and set-off to displace a statutory demand where the debt is equalled or exceeded.
Must be a Monetary Demand
A cross-demand may consist of any claim in debt or damages, provided it is capable of being quantified in monetary terms and can be relied upon to offset the amount claimed in a statutory demand.
In Chase Manhattan Bank Australia Limited v Oscty Pty Limited [1995] FCA 1208, Lingren J said:
Only a claim which is capable of being quantified as an amount of money can qualify as an “offsetting claim”.
In 96 Factory Bargains Pty Ltd v Kershel Pty Ltd [2003] NSWSC 146, Barrett J said:
[W]hile the definition of “offsetting claim” in s.459H(5) refers, in general terms, to a claim “by way of counterclaim, set-off or cross-demand”, it is clearly contemplated by the section as a whole that the claim must be one capable of being quantified in money terms.
In BMG Poseidon Corp Pty Ltd v Adelaide Bank Limited; In the Matter of BMG Poseidon Corp Pty Ltd (No 2) [2009] FCA 404, Foster J said:
The expression offsetting claim is defined in s 459H(5) … Although the expression may well include an unliquidated claim, that claim must be capable of being quantified as an amount of money.
In the matter of J Group Constructions Pty Ltd [2015] NSWSC 1607, Robb J determined that the Applicant’s cross demand was:
not a cross-claim for a money sum which will exceed or reduce the amount of the demand. The cross-claim must be capable of being quantified in money terms before it can qualify as a genuine offsetting claim
These authorities make it clear that, to operate as an “offset” against the sum claimed, the cross-demand must be a claim capable of monetary quantification so that it can be applied against the amount specified in the statutory demand.
Strict Timeframe for Applications
The procedure for setting aside a statutory demand is governed by s 459G of the Corporations Act.
A company must file and serve its application to set aside the demand, along with a supporting affidavit, within 21 days of service.
The statutory period is strict; the Court has no power to extend time or excuse non-compliance.
In David Grant & Co Pty Ltd v Westpac Banking Corporation [1995] HCA 43 who said:
The court may make an order extending the period for compliance with the statutory demand. If the company applies “in accordance with section 459G” to set aside the demand, then an order extending the time for compliance may be made.
And then went on to say:
The requirement in s 459G that the application to the court for which it provides be made only within 21 days after service of the demand … These reasons lead also to the rejection of the reliance by the appellants upon s 70 … However, the Law does not confer a power to extend the period within which an application may be made under s 459G.
The reason for the strictness of the interpretation of the legislation is because of the intention of the legislature when drafting the Corporate Law Reform Act 1992 (CTH).
This principle was reaffirmed in Queensland in CPR Solutions Mackay Pty Ltd v Zammit Earthmoving Pty Ltd [2020] QSC 165, citing David Grant, the Court said:
In providing that an application to the court for an order setting aside a statutory demand ‘may only’ be made within the twenty-one day period there specified and that an application is made in accordance with s 459G only if, within those twenty-one days, a supporting affidavit is filed and a copy thereof and of the applications are served, sub-ss (2) and (3) of s 459G attach a limitation or condition upon the authority of the court to set aside the demand.
The 21-day period commences from the date of effective service of the statutory demand.
Section 109X(1) of the Corporations Act states (inter alia):
(1) For the purposes of any law, a document may be served on a company by:
(a) leaving it at, or posting it to, the company’s registered office; or
(b) delivering a copy of the document personally to a director of the company who resides in Australia or in an external Territory …
However, 109X(3) of the Corporations Act states:
(3) Subsections (1) and (2) do not apply to a process, order, or document that may be served under section 9 of the Service and Execution of Process Act 1992.
Section 9 of the SEPA says (inter alia):
(1) Service of a process, order or document under this Act on a company is to be effected by leaving it at, or by sending it by post to, the company’s registered office.
(2) Without limiting the operation of subsection (1), a process, order or document may be served on a company by delivering a copy of it personally to a director of the company who resides in Australia.
This is just a legislature’s way of stating the same thing, but making it twice as hard to obtain the answer.
Documents are served by 109X, and originating applications (such as setting aside a statutory demand) are served under Section 9 of SEPA.
Further, you can serve by email – Can You Serve a Statutory Demand by Email in Australia?
Requirement for a Supporting Affidavit
Section 459G(3) requires that the application to set aside a statutory demand must be accompanied by an affidavit filed and served within the statutory period.
The affidavit is not a mere formality; it is the primary vehicle by which the company must disclose the facts constituting its offsetting claim.
In Re Wallace Building Systems Pty Ltd [2024] VSC 767, the Court said at [34]:
As a condition of the Court’s jurisdiction, the plaintiff’s affidavit made in support of an application under s 459G of the Act within the 21-day statutory period must contain sufficient facts to support its case. The affidavit must also identify expressly, or by necessary or reasonable inference, the grounds upon which the statutory demand is sought to be set aside … If it does, then that affidavit may be supplemented by evidence filed outside the statutory period. If it does not, then there is no jurisdiction to consider material filed beyond that period.
Eventcepts Pty Ltd v Creative Talent Management Pty Ltd [2017] VSC 457 (Santow J, citing Bell Construction Services):
Clearly enough, s 459G(3)(a) makes mandatory that the affidavit supporting the application, which by definition included annexures, be filed with the Court. Equally clearly s 459G(3)(b) requires inter alia that ‘a copy of’ the supporting affidavit be served on the person who served the demand on the company. Section 459G thus mandates identity between the affidavit filed and the affidavit served.
In Pravenkav Group Pty Ltd v Diploma Construction (WA) Pty Ltd (No 3) [2014] WASCA 132 (discussing Graywinter):
His Honour said that in an application that alleges a ‘genuine dispute’ about the existence or amount of a debt (s 459H(1)(a)) the supporting affidavit must ‘disclose facts showing there is a genuine dispute between the parties. A mere assertion that there is a genuine dispute is not enough. Nor is a bare claim that the debt is disputed sufficient’.
These authorities together establish that:
- The s 459G affidavit is jurisdictional and must be filed and served within the 21-day period.
- It must set out the factual basis for the offsetting claim, not mere assertions.
- If inadequate, the defect cannot be cured by later affidavits; supplementation is allowed only if the initial affidavit sufficiently supports the application.
Affidavit Sufficiency and the Rule in Graywinter
The statutory framework under s 459G(3) of the Corporations Act 2001 (Cth) requires that an application to set aside a statutory demand must be accompanied by an affidavit filed and served within the prescribed period.
This affidavit is not a procedural formality; it is the jurisdictional foundation of the application.
The courts have consistently emphasised that the affidavit must contain factual material sufficient to support the grounds relied upon, particularly where the company asserts a “genuine dispute” or “offsetting claim.”
The leading authority is Graywinter Properties Pty Ltd (ACN 051 373 570) v Gas & Fuel Corp Superannuation Fund (ACN 004 295 345) [1996] FCA 822. In that case, the Federal Court held that:
In a s 459H(1)(a) case, the affidavit must in my view disclose facts showing there is a genuine dispute [or offsetting claim] between the parties. A mere assertion that there is a genuine dispute is not enough. Nor is a bare claim that the debt is disputed sufficient. It follows from the fact that the affidavit need not go into evidence, which is the customary function of an affidavit, that it may read like a pleading.
The principle in Graywinter has since been treated as the benchmark for assessing affidavit sufficiency under s 459G.
The strictness of this approach flows directly from the legislative structure.
Section 459H(1) requires the Court to be satisfied of a genuine dispute or offsetting claim.
Without factual material disclosed in the affidavit, the Court has no evidentiary basis to exercise its power.
Consequently, the application will fail even if further evidence could be adduced at a later stage, because the jurisdictional precondition has not been satisfied.
In practice, Graywinter serves as a warning: affidavits must be carefully drafted to disclose the factual foundation of the dispute or offsetting claim, rather than merely conclusions or argumentative assertions.
Failure to comply is fatal to the application.
Practical Issues and Risks
Companies that rely exclusively on offsetting claims without also raising a genuine dispute under s 459H(1)(a) of the Corporations Act take on a considerable risk.
While an offsetting claim may be sufficient to defeat a statutory demand, it must be shown to be genuine and legally enforceable.
If the claim is later found to be illusory or inadequately supported, the company may face the presumption of insolvency under s 459C(2)(a).
In Complete Windscreen Service Nominees Pty Ltd v Nielsen & Moller Windscreens Pty Ltd (1995) 121 FLR 178, the Court cautioned that a company’s application would fail if the claim was inadequately particularised or speculative. The Court said:
An application to set aside a statutory demand is dependent upon certain steps being undertaken within the 21-day period prescribed by s 459G, including the filing and service of a supporting affidavit with the application. If this is not done, then there is no application and no question of any defect or irregularity in connection with the application to which s 467A can apply.
By contrast, raising both a genuine dispute and an offsetting claim maximises the grounds available for setting aside the demand, reducing the risk of failure.
Cost Consequences of Unsuccessful Applications
Unsuccessful applications to set aside a statutory demand can have significant costs consequences.
Courts routinely award costs against companies whose applications are dismissed, particularly when the application lacks credible evidence.
In Centurian Constructions Pty Ltd v Beca Developments Pty Ltd (No 1) (1996) 129 FLR 364, the application failed because service of the summons and affidavit occurred outside the 21-day statutory period. McLelland CJ in Eq held:
An application under s 459G of the Corporations Law and any supporting affidavit must be both filed and served upon the person who served the statutory demand, within 21 days after the demand was served. These requirements must be strictly complied with.
Similarly, in Eventcepts Pty Ltd v Creative Talent Management Pty Ltd [2017] VSC 457, the lack of sufficient evidentiary foundation resulted in both the failure of the application and liability for the creditor’s costs. At the conclusion of the judgment his Honour stated:
The application is dismissed. The plaintiff must pay the defendant’s costs of the application.
These outcomes underline the importance of presenting offsetting claims cautiously and only where there is a firm evidentiary basis.
Strategic Use of Offsetting Claims in Negotiations
Despite these risks, offsetting claims remain a valuable strategic tool.
The existence of a genuine counterclaim can place significant pressure on a creditor to compromise, as the statutory demand procedure is designed to operate only in cases of undisputed debt.
If the substantiated amount is less than the statutory minimum, the Court must set aside the demand.
This strengthens the debtor company’s negotiating position, often leading to settlement or restructuring discussions that avoid the expense and reputational impact of winding-up proceedings.
Key Takeaways – Offsetting Claims
Offsetting claims play a pivotal role in defending companies from the severe consequences of statutory demands.
Under s 459H of the Corporations Act, a company that can demonstrate a genuine counterclaim, set-off, or cross-demand has a statutory pathway to reduce or extinguish the debt alleged in a demand.
This safeguard ensures that creditors cannot exploit the statutory demand procedure to pressure companies into liquidation when reciprocal obligations exist.
Strict compliance with procedural and evidentiary requirements is essential.
Section 459G(3) requires the application and supporting affidavit to be filed and served within 21 days of service of the demand, a timeframe the Court has no power to extend.
Courts will not entertain applications where affidavits contain mere conclusions or lack documentary support, such as contracts, invoices, or correspondence. The statutory regime demands precision and diligence.
Given these strictures, early legal advice is critical. Identifying and articulating offsetting claims requires careful analysis of the company’s contractual, commercial, and evidentiary position.
Properly supported claims can effectively displace the presumption of insolvency, while poorly prepared applications risk dismissal and adverse costs.
In short, offsetting claims are a robust defence against statutory demands, but only when pursued with strict procedural compliance, supported by credible evidence, and advanced with professional care. Early advice ensures that claims are properly pleaded and substantiated, giving companies the best chance of resisting unwarranted winding-up proceedings.
FAQ with Answers – Offsetting Claims
Offsetting claims are a key defence against statutory demands under the Corporations Act 2001 (Cth).
They allow companies to reduce or extinguish a creditor’s claim with a genuine counterclaim, set-off, or cross-demand, preventing unfair insolvency proceedings.
What is a statutory demand under the Corporations Act?
A statutory demand is a formal notice issued by a creditor requiring a company to pay a debt of at least $4,000 within 21 days. If the company fails to comply, the law presumes the company is insolvent under section 459C(2)(a). This presumption allows creditors to apply to wind up the company. Statutory demands are intended to provide a fast and conclusive debt recovery process. Read more here – What is a Creditor’s Statutory Demand?
How can a company set aside a statutory demand?
A company served with a statutory demand can apply to the Court under section 459G of the Corporations Act. The application must be made within 21 days of service and supported by an affidavit. Common grounds include a genuine dispute about the debt, a valid offsetting claim, or another defect justifying the demand being set aside. Strict time limits apply to these applications.
What is an offsetting claim in statutory demand proceedings?
An offsetting claim is a genuine monetary claim a company has against a creditor, whether by counterclaim, set-off, or cross-demand. It may arise from the same transaction as the debt or from different dealings. To succeed, the claim must be bona fide, arguable, and supported by evidence. If accepted, it can reduce or extinguish the debt in the statutory demand process.
How does the Court decide if an offsetting claim is genuine?
The Court considers whether the offsetting claim truly exists and is advanced in good faith. It must not be speculative, spurious, or illusory. The company does not need to prove the claim will succeed at trial, only that it has a serious, arguable basis. Courts consistently require evidence showing the claim is real and capable of affecting the statutory demand.
What happens if an offsetting claim reduces the debt below $4,000?
If an offsetting claim reduces the substantiated amount of the debt below the statutory minimum of $4,000, section 459H(3) of the Corporations Act requires the Court to set aside the statutory demand. This safeguard ensures companies are not wound up based on minor or disputed debts where legitimate counterclaims exist, maintaining fairness in the insolvency process.
What is the difference between a genuine dispute and an offsetting claim?
A genuine dispute challenges the existence or amount of the creditor’s debt, such as whether services were performed or goods delivered. An offsetting claim accepts a debt may be owed but asserts that the creditor is also liable to the company. Both must be genuine, arguable, and supported by evidence, but they operate differently in statutory demand proceedings.
What evidence is needed to prove an offsetting claim?
An offsetting claim must be supported by evidence showing its nature, legal basis, and quantifiable value. This may include contracts, invoices, correspondence, or expert reports. While precise dollar amounts are not required, the claim must be capable of monetary estimation. Unsupported assertions or speculative claims will not satisfy the Court and risk dismissal of the application to set aside a demand.
Can an offsetting claim be unrelated to the creditor’s debt?
Yes. Under section 459H, an offsetting claim does not have to arise from the same transaction as the creditor’s debt. It can be based on separate dealings, provided it is genuine, monetary, and quantifiable. Courts have recognised claims such as damages for breach of contract, negligence, or misrepresentation as valid offsetting claims, even when unrelated to the original debt in dispute.
What is the deadline for filing an application to set aside a demand?
The deadline to file and serve an application to set aside a statutory demand is 21 days from the date of service. This strict timeframe is set by section 459G of the Corporations Act. Courts have no power to extend this period. If the application or supporting affidavit is late, the company loses its right to challenge the demand.
Why is a supporting affidavit essential in statutory demand cases?
A supporting affidavit is a mandatory requirement under section 459G(3) of the Corporations Act. It must be filed and served within 21 days, outlining the facts that establish a genuine dispute or offsetting claim. The affidavit is jurisdictional, meaning if it is missing or inadequate, the application automatically fails. Later evidence cannot cure deficiencies in the initial affidavit.
What is the Graywinter rule in statutory demand proceedings?
The Graywinter rule, from Federal Court authority, requires affidavits supporting an application to set aside a statutory demand to contain sufficient factual detail. Mere assertions that a dispute or claim exists are not enough. The affidavit should read like a pleading, identifying the factual foundation of the offsetting claim. If the affidavit lacks this detail, the Court cannot hear the application.
What are the cost consequences of an unsuccessful application?
If a company fails in its application to set aside a statutory demand, the Court will usually order it to pay the creditor’s legal costs. Costs orders are common where applications are filed late, affidavits lack sufficient evidence, or claims are illusory. This risk highlights the importance of ensuring offsetting claims are properly supported and procedurally compliant from the outset.
What risks exist if relying only on offsetting claims?
A company that relies only on an offsetting claim without raising a genuine dispute faces risks if the claim is later found to be speculative or inadequately supported. If dismissed, the company may be presumed insolvent and exposed to winding-up proceedings. To reduce this risk, companies often assert both a genuine dispute and an offsetting claim when challenging a statutory demand.
Why must an offsetting claim be monetary?
An offsetting claim must be monetary because the Court must deduct its value from the creditor’s debt to calculate the substantiated amount under section 459H(2). Non-monetary claims are not valid offsets. While claims do not need to be liquidated, they must be capable of estimation in money terms, such as damages for breach of contract, restitution, or other financial loss.
How can offsetting claims be used strategically in negotiations?
Offsetting claims can provide leverage in negotiations with creditors. If a company shows a genuine claim that reduces the debt below the statutory minimum, the statutory demand must be set aside. This weakens the creditor’s position and often encourages settlement or restructuring discussions. Properly prepared offsetting claims can therefore prevent winding-up proceedings and support a company’s broader financial strategy.
