A Guide to Setting Aside Statutory Demands by Creditors

Introduction

Statutory demands are a critical aspect of corporate law in Australia, serving as formal notices under the Corporations Act 2001 (Cth) that require companies to pay outstanding debts or risk being presumed insolvent. For business owners, understanding the statutory demand process and the legal grounds for setting aside such demands is essential to protect their company’s financial stability and legal standing.

This guide provides a clear overview of the statutory demand regime, highlighting the importance of timely action and the key legal mechanisms available to challenge a demand, such as genuine disputes, offsetting claims, and addressing defects. By equipping businesses with this knowledge, the guide aims to help Australian companies navigate statutory demands confidently and avoid the severe consequences of non-compliance.

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Understanding a Statutory Demand

What is a Statutory Demand & Its Purpose

A Statutory Demand is a formal, written request for payment issued to a company under Section 459E of the Corporations Act 2001 (Cth).

It serves as a critical tool for a creditor to determine whether a debtor company is solvent. The primary purpose of a Statutory Demand is not merely debt collection but to establish a legal presumption of insolvency.

If a company fails to comply within the specified timeframe, the creditor may rely on that non-compliance as grounds to apply to the court to have the company wound up, a process which involves understanding how creditors’ meetings work in administration and liquidation.

Key Requirements for a Valid Statutory Demand

For a Statutory Demand to be legally valid, it must follow several strict requirements set out in the Corporations Act 2001 (Cth). These formalities ensure the debtor company is clearly informed of the debt and the consequences of non-payment.

The essential elements of a valid demand include:

• In writing and in the prescribed form: the demand must follow Form 509H in the Corporations Regulations 2001.
• Specifying a debt over the statutory minimum of $4,000.
• Requiring payment within 21 days after service.
• Being properly executed by or on behalf of the creditor.

The Critical 21 Day Timeframe to Respond

The Strict Deadline for Taking Action

When a company is served with a statutory demand, it must act within a strict 21-day period as mandated by Section 459G of the Corporations Act 2001 (Cth). This timeframe is absolute, and the courts have no authority to grant an extension for filing an application to set the demand aside.

To challenge the demand, the company must perform two critical actions within this 21-day window:

• File an application with the court to have the statutory demand set aside.
• Serve a copy of the application and its supporting affidavit on the creditor who issued the demand.

Failure to meet this deadline can be disastrous for the company, as the opportunity to challenge the demand is permanently lost. The requirement to both file and serve the necessary documents within 21 days is a strict procedural rule that must be followed precisely.

Consequences of Failing to Respond

If a company does not comply with a statutory demand or apply to have it set aside within the 21-day timeframe, it is legally presumed to be insolvent under Section 459C(2)(a) of the Corporations Act 2001 (Cth). This presumption is a serious matter with significant repercussions.

Once the presumption of insolvency arises, the creditor can rely on it to apply to the court to have the company wound up.

While it is possible for the company to rebut this presumption later in court, the burden of proof is high. Proving solvency at this stage is often difficult and expensive, frequently requiring an expert report from a solvency accountant.

Grounds for Setting Aside a Statutory Demand

Proving a Genuine Dispute Exists

Under Section 459H(1)(a) of the Corporations Act 2001 (Cth), a company can apply to set aside a statutory demand if there is a genuine dispute about the existence or amount of the alleged debt. The threshold for establishing such a dispute is not high; however, the dispute must be bona fide and truly exist in fact.

It cannot be a spurious, hypothetical, misconceived, or illusory claim.

The court’s role is not to resolve the dispute or make final evidentiary findings; instead, it decides whether there is a plausible contention that warrants further investigation.

If there is an arguable case for why the debt is not owed, a genuine dispute will likely be established, even where the creditor’s case appears stronger.

For instance, Jana Pty Ltd [2022] NSWSC 112 showed that a poorly drafted and ambiguous deed could create a genuine dispute over the existence of a debt.

There is an important exception to this principle. If the meaning of a contract is exceptionally clear—“plain as a pikestaff”—the court can determine its meaning.

As seen in One GC MQ Park Pty Ltd [2024] NSWSC 820, where an interpretation argument is plainly wrong, the court may find that no genuine dispute exists and refuse to set the demand aside.

Establishing a Valid Offsetting Claim

A company may also seek to set aside a statutory demand by proving it has an offsetting claim against the creditor under Section 459H(1)(b) of the Corporations Act 2001 (Cth). An offsetting claim is a genuine counter-claim, set-off, or cross-demand the company has against the party that issued the demand.

Key points about offsetting claims include:

• Same transaction or circumstances not required – The claim can arise from different dealings than the debt in the demand.
• The claim must be genuine and capable of monetary quantification.
• If the court finds the claim valid, it will subtract the claim amount from the debt in the demand.
• When the resulting “substantiated amount” drops below $4,000, the court must set the demand aside.

Identifying a Defect in the Demand

A defect in the statutory demand can justify setting it aside. The Corporations Act 2001 (Cth) defines a defect to include any irregularity, misstatement, or misdescription of a debt or person.

Substantial injustice may occur if a defect misleads the company or prevents it from properly assessing its position. Examples of potential defects include:

• Misstatement of the debt – An inaccurate description that prevents the company from identifying the debt and determining if a dispute exists.
• Vague particulars – Where multiple debts are claimed, each must be detailed; a single total without breakdown may be defective.
• Incorrect creditor details – In joint debts, every creditor must be correctly named.

It is important to remember that minor errors often do not invalidate a demand. In matters such as Black Tie Holdings Pty Ltd [2022] NSWSC 781 and TZI Australia Pty Limited [2024] NSWSC 493, incorrect dates or addresses were not held to cause substantial injustice, and the demands were upheld.

Relying on Other Reasons for Setting Aside the Demand

Section 459J(1)(b) of the Corporations Act 2001 (Cth) permits a court to set aside a statutory demand for “some other reason.” This category covers situations outside genuine disputes, offsetting claims, or defects causing substantial injustice.

Circumstances that may fall into this category include:

• Improper purpose – The demand was issued to pressure a clearly solvent company or as an abusive debt-collection tactic.
• Critical affidavit issues – The supporting affidavit is incorrectly signed, dated before the demand, or made by someone lacking direct knowledge of the facts.
• Stay of execution – A court-ordered stay of execution on the judgment debt underlying the demand makes winding-up proceedings oppressive.

The Application Process & Supporting Affidavit

Filing Your Application with the Court

To formally challenge a statutory demand, a company must file an application under Section 459G of the Corporations Act 2001 (Cth).
This filing is the first official step toward having the demand set aside.

The application and its supporting affidavit must be filed and served within the strict 21-day timeframe.
Because the court has no power to extend this period, immediate action is essential to preserve the company’s right to challenge the demand.

The Crucial Role of the Supporting Affidavit

A supporting affidavit is a mandatory and jurisdictional requirement that accompanies the application and must also be served within the 21 days.
Far from being a mere formality, it provides the factual foundation for the company’s challenge.

The contents of the affidavit are governed by the rule in Graywinter Properties Pty Ltd v Gas & Fuel Corp Superannuation Fund [1996] FCA 822.

Under this principle, the affidavit must satisfy the following criteria:

• Disclose the facts that demonstrate a genuine dispute or a valid offsetting claim.
• Go beyond a simple assertion that a dispute exists; a bare claim is insufficient.
• Provide a factual basis for the application, similar to a pleading in other legal proceedings.

If the initial affidavit fails to adequately disclose the grounds for the application, the court may lack jurisdiction to hear the matter.
Such a defect generally cannot be cured by filing supplementary evidence outside the 21-day period, underscoring the importance of a thorough, compliant affidavit from the outset.

Case Studies on Setting Aside Statutory Demands

When a Poorly Drafted Deed Creates a Genuine Dispute

In Jana Pty Ltd [2022] NSWSC 112, the court held that a poorly drafted and ambiguous deed was enough to establish a genuine dispute. The deed’s unclear reference to a “Guarantee Debt” created uncertainty about whether the amount was due when the statutory demand was served.

The court identified several reasons why the ambiguity defeated the demand:

• Bona fide legal issues arose from the deed’s unclear terms.
• The court’s task was only to decide if a dispute existed, not to pick a winner.
• Because the ambiguity was real rather than hypothetical, a genuine dispute was present.

When Contract Interpretation is Too Clear for a Dispute

By contrast, One GC MQ Park Pty Ltd [2024] NSWSC 820 shows that a demand will stand where the contract’s meaning is “plain as a pikestaff.” The company claimed a dispute based on its reading of two contracts, yet the court found that interpretation “plainly wrong.”

Courts usually avoid resolving complex contractual questions during demand hearings, but they will intervene when an argument is:

• “Patently feeble” or without any proper basis; and
• So obviously incorrect that ruling on meaning is straightforward.

Here, the contracts were unambiguous, so no genuine dispute existed and the statutory demand was upheld.

When Alleged Defects Are Not Substantial Enough

Minor errors do not automatically invalidate a statutory demand; only defects causing “substantial injustice” justify setting it aside. This principle was tested in two recent decisions:

• Black Tie Holdings Pty Ltd [2022] NSWSC 781 – an incorrect date and wrong address for service did not mislead the company, so the demand remained valid.
• TZI Australia Pty Limited [2024] NSWSC 493 – a misstated invoice date still left the invoice clearly identifiable, meaning the defect caused no substantial prejudice.

These cases confirm that courts will overlook technical slips unless they materially hinder a company’s ability to respond.

Strategic Considerations & Potential Risks

Using an Offsetting Claim in Negotiations

Presenting a genuine offsetting claim can serve as a powerful strategic tool when negotiating with a creditor.

The following realities often compel a creditor to compromise:

• Credible counterclaims place immediate pressure on the creditor because the statutory demand process should only target undisputed debts.
• Where the claim is sufficiently strong to reduce the substantiated debt below the statutory minimum, the court must set the demand aside.

This prospect markedly strengthens your company’s bargaining position, frequently prompting settlement or restructuring discussions that avert both the cost and reputational harm of winding-up proceedings.

Understanding the Cost Consequences of a Failed Application

It is vital to recognise the financial risks before applying to set aside a statutory demand.

Courts routinely order the unsuccessful party to pay the creditor’s legal costs, and applicants most often face such orders in two scenarios:

• Applications dismissed for lack of credible evidence, leaving the debtor responsible for the creditor’s costs.
• Matters found to be without a firm foundation, which can attract additional financial penalties.

Therefore, claims should be advanced cautiously and only with solid evidence to minimise the dual threat of a dismissed application and liability for the creditor’s costs.

Conclusion

Understanding the grounds for setting aside a statutory demand, from genuine disputes to offsetting claims, is crucial for any Australian business facing a creditor's claim. Adhering to the strict 21-day timeframe is paramount, as failure to act can lead to a presumption of insolvency and severe legal consequences.

For businesses facing these challenges, it is essential to consult with PBL Law Group's experienced business and commercial lawyers for expert assistance in navigating the complexities of the Corporations Act 2001 (Cth) and for tailored advice to safeguard your company's legal and financial standing.

Frequently Asked Questions