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Article Summary
A statutory demand is a powerful mechanism under the Corporations Act 2001 (Cth) that allows creditors to compel payment of debts exceeding $4,000 within 21 days, failing which the company is presumed insolvent.
This process is swift and avoids drawn-out disputes, but safeguards exist for companies through section 459G, which permits applications to set aside demands.
One key defence is the "offsetting claim" under section 459H, which allows a company to assert a genuine counterclaim, set-off, or cross-demand against the creditor.
The claim must be bona fide, arguable, and supported by evidence, though it does not need to be proven at trial.
If successful, the offsetting claim reduces the substantiated debt, and if that amount falls below the statutory minimum, the demand must be set aside.
The affidavit supporting the application is crucial, as it provides the factual foundation of the claim and must be filed and served within the strict 21-day timeframe.
Courts emphasise genuineness, good faith, and monetary quantifiability in offsetting claims, rejecting speculative or illusory assertions.
While offsetting claims can be strategically valuable in negotiations, unsuccessful applications carry cost risks. In this article our statutory demand lawyers explain in a lot more detail.
Table of Contents
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.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
