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We have previously set out the importance of responding promptly and appropriately if your company has been served with a statutory demand. Once a statutory demand has been validly served on a debtor company, the time is ticking to respond. A company has 21 days from the date the statutory demand is served to apply to set it aside or to pay the debt in full.

It is common for companies to argue they have an offsetting claim which would either reduce (or in some instances, extinguish) the amount the creditor is claiming in the statutory demand.

What Does the Legislation Say?

The Corporations Act defines offsetting claims in section 459H(5). An offsetting claim comes about when one party is issued with a statutory demand by another party but has a genuine claim against the issuer of the demand by way of counterclaim, set-off or cross demand.

For a valid offsetting claim, there needs to be ‘mutuality’ between the offsetting claim and the statutory demands, which could be mutual credits, debts or other dealings between the two entities.

How Does an Offsetting Claim Work?

Consider you are a tenant corporation who receives a statutory demand from the landlord for unpaid rent of $40,000. Both the rent and the amount of the rent is not in dispute. The money is due and owing. You do however believe there is an offsetting claim relating to items that the landlord should have maintained at the leased property. What do you do?

The first step is to obtain legal advice immediately as time is of the essence and there is a strict timeframe to respond or deal with the statutory demand. If your lawyer agrees you have an offsetting claim, then at first instance this will be raised in urgent correspondence with the creditor or their solicitor. It may be that the other side will agree to set aside the statutory demand. If they don’t, then you need to make an urgent application to the court. Affidavit evidence will also accompany your application.

What Does the Court Consider?

Some questions that the Court will ask when deciding whether to allow an offset include:

  • Is it bona fide, real and not false? (Edge Technology Pty Ltd v Lite-On Technology Corporation [2002] NSWSC 471)
  • Is the claim fanciful?
  • Do the facts show the existence of the debt (the offsetting claim) or is the offsetting claim hypothetical?
  • Is the offsetting claim being raised in good faith?

Once the Court has weighed this up, they will make a decision as to whether you are entitled to set the statutory demand aside or vary the statutory demand.

On occasions, the creditor will try to show that a ‘special arrangement’ existed between the parties showing that there was a clear intention that the debt (referred to in the statutory demand) would not be varied or reduced. The court will also consider this as evidence.

Key Takeaways

Whether a party can vary or challenge a statutory demand depends on the specific facts of each case. It’s important that when served with a statutory demand that your party seeks legal advice immediately. The timeframe to comply is short and failure to do so can result in the company deemed insolvent and being wound up. If you’d like to speak with a lawyer about your options regarding offsetting a statutory demand, get in touch with us on 1300 544 755.

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