Should I Pay a Statutory Demand or Fight It in NSW?
Key Takeaways
Whether to pay a statutory demand or fight it in NSW turns not on whether the debt is owed but on whether a genuine dispute or offsetting claim can be evidenced within 21 days.
A statutory demand is not a court order, but if the company fails to comply (as defined in section 459F of the Corporations Act 2001 (Cth)) and the creditor applies to wind it up within three months, the court must presume the company is insolvent under s 459C(2)(a).
Setting aside under section 459G of the Corporations Act requires the application and its affidavit to be filed and served within 21 days of service. There is no extension.
The threshold for a genuine dispute is deliberately low — but it must be supported, not merely asserted.
Introduction
On a construction account the evidence is usually already on file (variation correspondence, payment schedules, defect reports), but a demand founded on an adjudication determination leaves far less room to dispute.
A supplier's statutory demand lands at your registered office while you are holding back payment over defective work. The company has 21 days. If it does nothing, the creditor can apply to wind it up, and if it applies within three months the court must presume the company is insolvent. For a construction company, that is no longer a problem about one invoice. It puts every live project at risk.
The short timeframe is deliberate: a statutory demand is designed to force a decision quickly. That decision turns on two questions that are easily confused: whether the debt is genuinely disputed, and whether the cost of proving that is lower than paying.
This guide gives NSW construction companies a decision framework. It covers when the 21 days start, the test the court applies, the construction grounds that tend to succeed, and the point at which paying stops being a concession and becomes the rational commercial outcome.
What a statutory demand does in NSW
The demand itself does nothing except open a 21-day window. Under s 459E of the Corporations Act 2001 (Cth), a creditor owed at least $4,000 that is due and payable may serve a demand requiring payment within 21 days. Service on a company is governed by s 109X. The regime applies only to companies: individuals, including sole-trader builders, are dealt with under the Bankruptcy Act 1966 (Cth) instead.
What matters is what happens if the window closes without a response.
The consequence of doing nothing
Section 459F of the Corporations Act defines when a company has failed to comply. If the creditor applies to wind the company up within three months of that failure, s 459C(2)(a) requires the court to presume the company is insolvent unless the contrary is proved. The Federal Court's guidance on winding up sets out how that presumption operates in a winding-up application. From that point the dispute stops being about the invoice: solvency becomes the issue, and a company that is solvent but disorganised can find itself in a winding-up application it should never have faced.
For a construction company the stakes are higher. A winding-up order ends the company's ability to perform its contracts, and the application alone can unsettle principals, sureties and subcontractors on live projects. Licensed contractors should also consider the effect on their NSW contractor licence and their Home Building Compensation Fund financial eligibility, both of which depend on the company's financial standing.
How the 21 days actually run
The 21 days start on service, and service is not always the day the demand reached you.
The period begins on service of the demand, not on the date it was signed or posted. For a company, service is ordinarily effected at its registered office, so establish the service date immediately rather than assuming it. Section 109X of the Corporations Act also permits personal delivery to a director who resides in Australia, but leaving a demand at a business address that is not the registered office, or with someone who is not a director, may not be valid service, and the answer affects when the clock started. A posted demand is generally presumed to be served on the seventh working day after posting unless the contrary is shown.
The 21 days run from service, and there is no extension. Filing and serving an application under section 459G of the Corporations Act within that period is the only step that holds off the consequences of non-compliance. Once an application is on foot, the time for compliance is extended until it is decided, and if the demand survives in whole or in part, the company ordinarily has 7 days to pay the amount the court fixes. The affidavit must set out every ground the company intends to rely on, because grounds not raised within the 21 days generally cannot be added later.
The practical mistake is to spend the period negotiating. Negotiation is worth attempting, but in parallel with the application, not instead of it. A matter that settles on day 14 has cost the company only the preparation already done; a matter that fails to settle on day 21 with no application filed has lost the set-aside route altogether. A properly framed without-prejudice offer, such as a Calderbank offer, can also protect the company's costs position if the matter runs.
If the 21 days have already passed
Where the period has already passed, the question changes from challenge to damage control.
The set-aside route is closed, and the options that remain are narrower:
Pay or settle before the creditor applies. If the debt is paid, or compromised in writing, before a winding-up application is filed, the creditor has nothing left to rely on. Any settlement should record that the creditor will not rely on the demand.
Prepare to prove solvency. The presumption of insolvency can be rebutted, but the burden falls on the company. It needs current financial evidence, such as management accounts, a cash-flow forecast and proof that debts are being paid as they fall due, not assurances.
Expect other creditors to step in. Paying the applying creditor after a winding-up application is filed does not always end the proceeding, because another creditor may apply to be substituted.
Obtain insolvency advice. Where solvency is genuinely in doubt, the directors' priority shifts to their duties during financial distress, including whether voluntary administration or the safe harbour provisions offer a better outcome.
If a winding-up application relies on the failure to comply, section 459S of the Corporations Act prevents the company from opposing it on any ground it relied on, or could have relied on, in a set-aside application, unless the court grants leave, and leave is available only if the ground is material to proving that the company is solvent.
Fighting the demand: the set-aside analysis
The three paths
Path | When it fits | What it requires |
Pay | Debt undisputed, funds available | Nothing further; the demand is spent |
Negotiate | Debt partly conceded, relationship worth preserving | A commercial agreement; the clock still runs |
Apply to set aside | Genuine dispute or offsetting claim | s 459G application plus affidavit within 21 days |
Only the third path holds off the consequences of non-compliance once the 21 days end, and it is the only one that requires a court. Negotiating is not an alternative to it: the clock keeps running while the parties talk.
A decision framework
Work through these questions in order, and stop at the first one that gives a clear answer.
When was the demand served, and was service valid? If the date cannot be fixed, treat the earliest possible date as day 0.
Is any part of the debt disputed, or does the company have an offsetting claim such as variations, defects, liquidated damages or back-charges? If not, go to question 5.
Can the dispute be proved with documents that exist now? A dispute that rests on recollection alone is unlikely to meet the test.
Once the disputed amount and any offsetting claim are taken out, is what remains below $4,000? If so, the demand must be set aside. If not, the court may vary it, and the company should be ready to pay the varied amount.
Is the company solvent, and can it pay without preferring this creditor over others? If there is any doubt, obtain insolvency advice before paying, negotiating or filing.
Would the cost of the application exceed the amount genuinely in dispute? If so, paying or settling is usually the cheaper outcome.
The genuine dispute test
The third path turns on a single test. Under section 459H of the Corporations Act, where the court is satisfied there is a genuine dispute about the existence or amount of the debt, or an offsetting claim, it calculates the substantiated amount of the demand: broadly, the undisputed portion less any offsetting claim. If that amount is below the $4,000 statutory minimum, the demand must be set aside. If it is $4,000 or more, the court may instead vary the demand, and the company will ordinarily need to pay the varied amount within 7 days after the application is determined unless the court orders otherwise. The threshold is low: the dispute need only be bona fide, and not spurious, hypothetical or misconceived. A party holding a rational ground for disputing the debt can generally meet it. In practice, that means a real argument the company can point to documents for.
But the words doing the work are genuine and supported. A demand cannot be set aside on an assertion of dispute alone. What is required is evidence — the contract, the ledger, the correspondence, and where relevant an expert quantification. That evidence must be in the affidavit filed within the 21 days. The court looks at whether the affidavit shows a genuine dispute; it does not decide the dispute itself, and it will not wait for evidence the company plans to obtain later.
Genuine dispute grounds for a construction statutory demand
These are the grounds that most often support an application to set aside a statutory demand in construction, with the document that proves each one:
Disputed variations. The creditor has claimed variations the company never directed, did not approve in writing, or values differently. Evidence: the variation clause, the directions issued (or not issued) and the correspondence about price.
Defective work and back-charges. The company has paid, or will need to pay, another contractor to fix the creditor's work. Evidence: defect notices, photographs, rectification quotes or invoices and, where the amount is contested, an expert's quantification.
Liquidated damages and delay. The creditor finished late and the contract entitles the company to liquidated damages. Evidence: the programme, the date for practical completion, extension of time claims and responses, and the liquidated damages rate.
Payment schedules and under-certification. The company served a payment schedule under the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act) stating a lower amount and its reasons. Evidence: the payment claim, the payment schedule and proof of the date it was served.
Contractual set-off. The subcontract lets the company deduct amounts owed to it. Evidence: the set-off clause and a reconciliation of the account.
Each of these can go to the amount of the debt, support an offsetting claim, or both. An offsetting claim need not arise from the same contract, but it must be genuine and it should be quantified.
Example: A civil subcontractor serves a demand for $68,000, its final progress claim. The head contractor's payment schedule certified $41,000, citing $15,000 of unapproved variations and $12,000 of rectification costs for failed compaction. If the affidavit exhibits the schedule, the variation correspondence, the test results and the rectification invoice, the disputed and offset amounts total $27,000, and the question becomes whether the remaining $41,000 should stand. On those numbers the court would likely vary the demand rather than set it aside, so the head contractor should be ready to pay the varied amount within 7 days of the decision.
Where the company did not serve a payment schedule in time, the position is very different. The SOP Act restricts the cross-claims and defences a respondent can raise when the claimant sues for the unpaid amount, and those restrictions can sharply narrow what the company can rely on in a set-aside application. That situation needs advice on day one.
Where the demand follows an adjudication determination
Many construction statutory demands are founded on an adjudication determination under the security of payment regime in New South Wales, often after the adjudication certificate has been filed as a judgment debt. The room to dispute these demands is much narrower.
The regime is designed to keep money moving. It prevents a respondent from re-arguing the construction contract in proceedings to enforce an adjudicator's decision, and the courts have generally been unwilling to let a set-aside application become a back door for re-running the adjudication. An argument that the adjudicator got the valuation wrong will rarely succeed. Whether the company can rely on an independent offsetting claim, such as liquidated damages or defects outside the adjudicated claim, depends on the facts and on how the court treats that claim, and should be assessed before the company commits to a strategy.
The company's real options usually lie elsewhere. It can challenge the determination for jurisdictional error in the Supreme Court of NSW, pursue its full contractual entitlement in final proceedings, or pay and recover later. Each runs on its own timetable, and none of them pauses the 21 days.
When the answer is to pay
Paying is the right outcome more often than the litigation instinct suggests. It is usually the rational answer where:
the debt is undisputed and the company has the funds;
the account is a single clean invoice with no cross-claim;
the cost of the application and its affidavit would exceed the amount genuinely in dispute; or
a payment plan can be agreed on commercial terms and recorded in writing before day 21.
Where the company's solvency position would not withstand scrutiny in a winding-up application, the analysis changes. The set-aside process does not resolve solvency, but paying one creditor is not automatically safe either: if the company later goes into liquidation, the payment may be challenged by the liquidator as an unfair preference. Directors of a construction company facing insolvency should obtain advice on their duties, including whether safe harbour protection is available, before deciding whether to pay, negotiate or apply.
Directors should also check whether they have personally guaranteed the debt, as suppliers' credit applications commonly require. Setting the demand aside does not release a personal guarantee, and a creditor that cannot use the statutory demand route may turn to the guarantor instead.
Practice note: The creditor's own conduct sometimes creates the dispute. A demand that misdescribes the debt, names the wrong creditor, or improperly combines debts may engage section 459J of the Corporations Act as well as s 459H. Those defects are worth recording separately, but s 459J permits a demand to be set aside for a defect only where substantial injustice would otherwise be caused, so they rarely carry an application alone.
Warning: Part payment while maintaining a dispute needs care. A creditor may point to it as evidence that the debt, or part of it, was admitted, so any payment should be documented as made without admission of the balance.
What it costs and how long it takes
Merlo Law does not publish a fee range, because the cost depends on the evidence. The components, though, are predictable:
Filing fee. The application is filed in the Supreme Court of NSW or the Federal Court and attracts a filing fee under that court's current schedule — $1,443 for a company filing at the individual rate, or $3,949 at the corporation rate, under the fee schedule current from 1 July 2026. Fees change on 1 July each year, so confirm the amount on the court's current fee schedule before filing.
Time to hearing. In the Supreme Court of NSW, a set-aside application is placed in the Corporations Registrar's List and made returnable on any Monday to Thursday under the Corporations List practice note, and the parties must agree a timetable that makes it ready for hearing promptly after the first return date. The practical window is short: the compliance clock is suspended only while the application is on foot, and a winding-up application cannot be filed until the set-aside application is decided, so expect the hearing to be sought within weeks rather than months. Confirm current listing practice when filing.
The affidavit. This is usually the largest component. A single disputed variation backed by clear correspondence is a modest exercise; a contested defects claim that needs an expert's quantification is substantially more.
Adverse costs. A company that loses the application will ordinarily be ordered to pay the creditor's costs. Conversely, a creditor that serves a demand for a debt it knows is genuinely disputed risks paying the company's costs.
That is the comparison the decision turns on: the likely cost of the application, plus the risk of an adverse costs order, against the amount genuinely in dispute.
If you are the one serving the demand
Subcontractors and suppliers should treat a statutory demand as a tool for undisputed debts, not a shortcut through a disputed account. A demand served for a debt the creditor knows is genuinely disputed is likely to be set aside, possibly with an adverse costs order.
In construction, the usual alternatives are:
a payment claim and, if it is not paid, adjudication under the SOP Act, which is built for disputed progress claims;
enforcing an adjudication determination as a judgment debt, after which a statutory demand becomes a much stronger tool; and
a claim under the Contractors Debts Act 1997 (NSW), which can let an unpaid subcontractor holding a judgment or adjudication certificate recover from money the principal owes the head contractor.
The order in which you use these matters more than speed. Our team advises subcontractors and suppliers on commercial debt recovery across all three routes.
Key cases
These decisions underpin the principles in this guide.
David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 265 at 276–277: the 21-day time limit for an application under s 459G cannot be extended. The application and supporting affidavit must be filed, and copies served on the person who served the demand, within that period.
Graywinter Properties Pty Ltd v Gas & Fuel Corporation Superannuation Fund (1996) 70 FCR 452 at 459–460: the supporting affidavit filed and served within 21 days must disclose facts supporting the application; a bare assertion that the debt is disputed is insufficient. Once that threshold is met, the supporting evidence may be supplemented later.
Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 at 787–788: a genuine dispute involves a “plausible contention requiring investigation”, raising much the same considerations as the “serious question to be tried” criterion. The court determines whether the dispute is genuine, not its ultimate merits.
Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd (1997) 76 FCR 452 at 464: a genuine dispute must be bona fide and truly exist in fact. The grounds for alleging it must be real, not spurious, hypothetical, illusory or misconceived.
How Merlo Law can help
Merlo Law acts for NSW construction companies served with statutory demands, and for subcontractors and suppliers deciding whether to serve one. These matters are decided in the first days: establishing the service date, assembling the evidence and filing within the window.
If your company has been served, send us the demand, the date and method by which it arrived, and the payment claims, payment schedules and correspondence for the account. Promptly on receipt — and always before the 21 days are substantially spent — we will tell you whether there is a genuine dispute or offsetting claim worth filing on, and what the application is likely to cost against the amount at stake. If you are the creditor, send us the account and any adjudication determination, and we will advise whether a statutory demand, adjudication or a Contractors Debts Act claim is the right first step.
We act through our commercial law advice team and, where proceedings are required, through court proceedings. Where the debt arises from a construction account, the underlying position may also call for construction payment dispute advice. The earlier we see the demand, the more of the 21 days remain to build the evidence.
Conclusion
The decision turns on whether a genuine dispute can be evidenced in time, not on whether one is felt. Where it can, a set-aside application filed and served within the 21 days is the only step that protects the company from the presumption of insolvency. Where it cannot, paying — or settling on commercial terms — is usually the cheaper outcome, and the solvency question is the one that must not be left unexamined.
FAQs
Should I pay a statutory demand or fight it?
Fight it if a genuine dispute or offsetting claim can be evidenced and filed within 21 days. Pay, or negotiate terms, if the debt is undisputed and funds are available, or if any dispute is real but the cost of the application would exceed the amount genuinely in dispute.
Is a statutory demand a court order?
No. It is a creditor's demand that opens a 21-day window. It becomes dangerous only if the window closes without payment or a set-aside application.
What happens if I ignore it?
The creditor may apply to wind up the company and, if it does so within three months, the court must presume insolvency under section 459C(2)(a) of the Corporations Act unless the company proves it is solvent. The dispute then shifts from the debt to solvency.
What is the minimum debt for a statutory demand?
$4,000, under section 459E of the Corporations Act, and debts may be combined to reach it provided each is due and payable.
How much does it cost to fight a statutory demand?
It depends on the size of the account and the evidence required. The firm does not publish a fee range, because every matter is different and a published estimate would not match your circumstances. The written costs disclosure you receive before engaging sets out how the fee will be calculated and what will move it.
Does a statutory demand apply to me as a sole trader?
No. Statutory demands under the Corporations Act apply only to companies. An individual builder or sole trader faces a bankruptcy notice under the Bankruptcy Act, which runs under a different regime with its own thresholds and timeframes.
This guide is for informational purposes only and does not constitute legal advice. For advice tailored to your specific circumstances, please contact Merlo Law
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