Offsetting Claims in Statutory Demands: Time is of the Essence

Date: May 18, 2015
Document Type: Article

Opening the mail to find a creditor’s statutory demand, threatening to wind up your company if a debt is not paid within 21 days, is not a pleasant occurrence for any director. The task becomes even more repugnant if the creditor listed in the demand actually owes your company money too. This is known as an offsetting claim, and is dealt with in section 459H of the Corporations Act 2001 (Cth) (the Act).

What should I do first?

If you believe the amount in the creditor’s statutory demand is inaccurate, either because there is a genuine dispute about the debt, or because the creditor owes your company money, which hasn’t been taken into account, you must first make an application to the Court, seeking to set aside the demand. The timeframe for this is extremely strict; such an application must be made, and served on the creditor, within 21 days of receipt of the demand. You will need to provide relevant information to support your application, such as detailed accounts showing the financial relationship between the companies.

How does an offsetting claim work?

If the Court is satisfied that there is a genuine dispute about part, or all, of the debt listed in the demand, or that there is an offsetting claim because the creditor owes your company money also, it will use a specific formula to calculate the correct amount of the debt. This formula is set out below:

Admitted total – Offsetting total = Actual Amount of Debt

If the “new” amount of the debt, as determined by the Court, is less than the statutory threshold of $2,000, the Court must set aside the demand.

However, if the actual debt is $2,000 or more, the Court may make an order that the demand in the “new” amount takes effect, as varied, from the date of service of the original demand. This means that if it has now been more than 21 days since the demand was first served – even though it contained an amount that has now been amended – the creditor may commence winding up proceedings against your company if you do not immediately pay, or make arrangements to pay, the outstanding debt.

Lessons to be learnt

  • Given the strict legislative requirements surrounding statutory demands and winding up proceedings, companies receiving statutory demands are advised to seek legal advice immediately.  
  • If you believe that you may have an offsetting claim, but acknowledge that part of the debt is properly due and payable, you should consider paying this admitted part of the debt immediately, to prevent adverse action down the track.
  • Your company should maintain current and accurate financial records, as these will be of great assistance in demonstrating your company’s financial situation and relationship with the creditor.

This article is based on the law as at May 2015. The law may have changed by the time you read this article. For more information about statutory demands or offsetting claims, please contact our office.

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