Statutory Demands in QLD - 3 Fatal Flaws That Will Sink a Developer's Offsetting Claim
- John Merlo
- Nov 3
- 14 min read
For a property developer in Queensland, few documents are as immediately threatening as a statutory demand. It's not a mere invoice; it's a formal legal instrument under the Corporations Act 2001 (Cth) that can trigger the liquidation of your company. In an industry governed by a dense framework including the Building Act 1975 and the Domestic Building Contracts Act 2000, and facing immense pressure—with ASIC data showing 2,142 construction firms entering insolvency in the nine months to March 2024 alone—understanding this threat is paramount.
This article exposes the three most common and fatal flaws developers make when trying to defend against a statutory demand with an offsetting claim, providing a tactical guide on what not to do.
Key Takeaways
The 21-Day Deadline is Absolute: Once you receive a statutory demand, you have only 21 days to file a court application to have it set aside. Missing this deadline means your company is legally presumed to be insolvent.
Vague Claims are Worthless: An offsetting claim must be genuine, fully detailed, and quantifiable with credible evidence. A simple assertion of a dispute without proof will be dismissed by the court.
Calculation is Critical: Your offsetting claim must reduce the net amount owed to the creditor to below the statutory minimum (currently $4,000). Any miscalculation can be fatal to your application.
Process is Not a Suggestion: The Corporations Act 2001 sets out strict procedural rules for affidavits and applications. Minor errors or omissions can lead to your entire case being thrown out.
The Statutory Demand: A Developer's High-Stakes Reality
A statutory demand is a formal, written request from a creditor for payment of a debt. In the high-stakes construction industry, this is a powerful tool used by subcontractors and suppliers to force a developer's hand. If your company owes a debt of at least $4,000, a creditor can serve you with this demand.
It is crucial to understand that this is not a court order itself, but it is a formal precursor to a winding-up application. If not addressed correctly and within the strict timeframes, it carries a legal presumption of insolvency, which can be the first step towards the forced liquidation of your company and the end of your project. The threat of corporate insolvency is very real.
The 21-Day Countdown: Why Every Second Counts
The moment a statutory demand is served on your company, a 21-day countdown begins. This is arguably the most critical deadline in Australian corporate law. Within this period, you must either pay the debt or file an application in court to have the demand set aside. This deadline is inflexible and cannot be extended by agreement between the parties. Failure to act within this window removes nearly all of your defensive options and hands the creditor a significant advantage.
The court has no discretion to extend this time, meaning that if your application is filed on day 22, it is invalid, and your company is legally presumed to be insolvent.
The 21-day period to apply to set aside a statutory demand is one of the most rigid deadlines in Australian corporate law. This is not a guideline. If your application is not filed with the court and served on the creditor within 21 days of you receiving the demand, your company is presumed insolvent. This is a legal status, not just an assumption, and it gives the creditor the green light to apply to have your company wound up. There are no extensions.
The Presumption of Insolvency: More Than Just a Threat
If the 21-day period expires without payment or a court application, the "presumption of insolvency" is triggered. In a legal context, this means the law presumes your company is unable to pay its debts as and when they fall due. This completely shifts the burden of proof. Instead of the creditor having to prove you are insolvent, the burden falls entirely onto your company to prove that it is, in fact, solvent.
This is a notoriously difficult, complex, and expensive task once the presumption is active, often requiring extensive financial reports and expert evidence. It's a defensive position no developer wants to be in.
The Offsetting Claim: Your Primary Shield Against Liquidation
While the statutory demand is a powerful weapon for a creditor, the Corporations Act provides a crucial shield for the debtor company: the offsetting claim. This is often a developer's most effective tool for having a demand set aside. An offsetting claim is a genuine counterclaim you have against the creditor that can reduce the amount of their alleged debt.
For developers, this frequently arises from a dispute in construction, such as claims for defective work, costs to complete, liquidated damages for delays, or even disagreements over the grounds for terminating construction contracts. However, simply stating you have a claim is not enough; it must meet a specific legal threshold under section 459H of the Act to be effective.
Defining an Offsetting Claim Under the Corporations Act
Section 459H of the Corporations Act defines an offsetting claim as a genuine claim that the debtor company has against the person who served the demand. This can be a claim for a specific, calculated amount (a liquidated sum) or a claim for damages that needs to be assessed, such as the cost to rectify defective work (an unliquidated sum).
The key is that the claim must be one your company can pursue against the creditor, effectively creating a running account between the two parties where your claim "offsets" theirs.
What Constitutes a "Genuine" Offsetting Claim?
The courts have established a clear test for what makes a claim "genuine." It doesn't mean you have to prove your claim to finality as you would in a full trial. Instead, the court only needs to be satisfied that your claim is not spurious, vexatious, or clearly without substance.
It must be plausible and have a sufficient prospect of success to warrant further investigation. You need to show there is a serious question to be tried, supported by evidence that goes beyond mere assertion.
The Critical Link Between Your Claim and the Creditor's Debt
It is absolutely essential that the offsetting claim is a counterclaim against the specific creditor who issued the demand. You cannot use a claim against a third party, even a related company or a different subcontractor on the same project, to offset the debt. The court will only consider the financial relationship between the two parties directly involved in the statutory demand. This focuses the dispute squarely on the net amount owed between your company and the creditor, preventing the process from becoming entangled in unrelated commercial grievances.
Fatal Flaw #1: The Vague Claim Supported by Weak Evidence
The single most common reason an offsetting claim fails is a lack of specific, credible evidence. A developer might genuinely believe they are owed money for rectification costs arising from a flawed subcontractor agreement, but if they cannot substantiate this with clear documentation—such as reports filed with the Queensland Building and Construction Commission (QBCC)—the court will see it as a desperate attempt to delay payment. This is where many developers fatally undermine their own defence.
Any claim of defective work or an unapproved contract variation must be backed by solid proof, not just allegations in builders contracts.
Why "She'll Be Right" Evidence Fails in Court
Courts are inherently skeptical of vague, unsupported assertions, especially in the context of a statutory demand where the risk of a company manufacturing a dispute to avoid a legitimate debt is high. A judge needs to see objective proof that a triable issue exists; a simple statement that "the work was defective" is insufficient.
Without credible evidence, a claim is merely an allegation. An allegation is not enough to convince a court to set aside a statutory demand. The "she'll be right" attitude might work on a construction site, but it is a recipe for disaster in a courtroom.
Assembling an Ironclad Evidence Dossier
The process of defending a statutory demand begins with assembling an ironclad dossier of evidence. This involves gathering all relevant documents that support your offsetting claim. This includes the contract itself, any correspondence (emails, letters, site instructions) that demonstrates a pre-existing dispute, expert reports from engineers or building consultants detailing the defects, photographic and video evidence, and quotes from other contractors for the cost of rectification.
This evidence must be organised logically and presented clearly in the supporting affidavit. A skilled building and construction lawyer is invaluable in this process, ensuring the evidence is not only compelling but also admissible and correctly presented to the court.
The Perils of Unquantified Claims
A claim must not only be genuine but also quantifiable. The court needs to be able to put a dollar figure on your offsetting claim to determine if it reduces the creditor's debt below the statutory minimum. A vague claim for "damages" without a calculated amount is worthless. This is a critical error that can sink an otherwise valid defence.
Illustrative Example: Imagine a developer, "Project Co," receives a $150,000 statutory demand from a concrete contractor. Project Co's director knows the contractor's work was riddled with defects that will cost a fortune to fix. In their affidavit, they state they have an offsetting claim for "defective works and associated delays"; however, they fail to attach any quotes for the rectification work or an engineer's report. The court, unable to place a value on this claim, deems it unquantified. The demand stands, and Project Co is now presumed insolvent, all because they failed to translate a real-world problem into a legally sufficient, quantified claim.
Fatal Flaw #2: Miscalculating the Claim and Falling Short
The second fatal flaw is a failure of mathematics and legal precision. The entire purpose of the offsetting claim is to show the court that, when your counterclaim is subtracted from the creditor's debt, the remaining amount falls below the statutory threshold.
A simple error in calculation or a misunderstanding of what can be included—such as confusing a provisional sum with a prime cost item in the original payment claim—can render your entire application invalid. This is not just about the numbers; it's about ensuring your company's financial covenant with its creditors is managed with precision.
The "Net Indebtedness" Test Explained
The court performs a simple but crucial calculation known as the "net indebtedness" test. It takes the amount claimed in the statutory demand and subtracts the value of your substantiated offsetting claim. If the resulting figure—the net amount you owe—is less than the statutory minimum (currently $4,000), the court is legally required to set the demand aside. This is why accurate quantification is non-negotiable. Even if you have a genuine claim, if it only reduces the debt from $100,000 to $5,000, the demand will likely stand.
How Unrelated Claims Can Invalidate Your Defence
A common but fatal mistake is attempting to "bundle" all your commercial grievances into one offsetting claim. The claim must directly relate to the specific creditor who issued the demand. You cannot try to offset a debt you owe to Creditor A with a claim you have against Creditor B, even if they worked on the same project. This principle is absolute.
A common mistake is attempting to use a dispute from one project to offset a debt on another, or trying to use a claim against a related company of the creditor. The offsetting claim must be a direct financial counterclaim between your company and the specific legal entity that issued the demand. Introducing unrelated issues will not only fail but may also damage your credibility before the court.
Getting the Numbers Wrong: A Common but Costly Mistake
Developers can easily miscalculate their offsetting claim. This often happens by including costs that are speculative or not yet incurred, such as estimated future losses from project delays. Another frequent error is failing to account for GST correctly in the calculations.
Furthermore, grossly over-inflating the value of the offsetting claim can be viewed very poorly by the court. If a claim for $200,000 in rectification work appears to be supported by only flimsy evidence, a judge may see it as a disingenuous tactic to frustrate a creditor rather than a genuine calculation, which can harm the credibility of your entire case.
Fatal Flaw #3: Ignoring Strict Procedural Requirements
The final fatal flaw has nothing to do with the merits of your claim and everything to do with legal procedure. The process for applying to set aside a statutory demand is governed by strict rules under the Corporations Act. The courts show little tolerance for non-compliance.
A developer can have a perfectly valid, well-evidenced, and correctly calculated offsetting claim, only to have it dismissed because their court application or supporting affidavit was filed incorrectly or out of time. This is not the arena for procedural shortcuts, especially when the consequences involve terminating a contractor relationship and facing potential liquidation. Accessing proper legal services is not a luxury; it's a necessity.
Filing Your Application: The Section 459G Minefield
The formal process to challenge a statutory demand is initiated by filing an originating application with the court under section 459G of the Corporations Act. This document formally asks the court to set the demand aside. However, filing the application alone is not enough. It must be accompanied by a supporting affidavit that lays out all the evidence for your offsetting claim or genuine dispute.
Crucially, both of these documents must be filed with the court and served on the creditor who issued the demand within the strict 21-day window. Failure to complete any of these steps in time is fatal to the application.
The Dangers of a Defective Supporting Affidavit
The affidavit is the single most important document in your application. It is your sworn testimony, and it must contain all the evidence you intend to rely on. All expert reports, quotes, correspondence, and photographs must be attached to (as annexures or exhibits) or detailed within the affidavit.
A critical rule the courts enforce is that you cannot raise new grounds or introduce new evidence later that was not included in your initial affidavit. If you forget to include a key piece of evidence, you generally cannot add it later. This is why getting the affidavit right the first time with the help of seasoned litigation lawyers is absolutely crucial to success.
When Does an Issue Become a "Genuine Dispute"?
It's important to understand the difference between an "offsetting claim" and a "genuine dispute," which is a separate but related ground for setting aside a demand. A genuine dispute attacks the validity of the creditor's debt itself. For example, you might argue that the work was never completed according to the contract, so the debt claimed in the demand is not actually due and payable. An offsetting claim, by contrast, often implicitly accepts that the creditor's invoice might be valid on its face, but seeks to cancel it out with a counterclaim (e.g., "Yes, your $100,000 invoice for work is correct, but we have a $120,000 counterclaim for the defects you left behind"). Both can be used to set aside a demand, but they are legally distinct concepts that must be properly articulated in your affidavit.
Beyond the Flaws: Strategically Deploying Your Offsetting Claim
Avoiding these fatal flaws is the foundation of a successful defence. Once you have a grasp of the pitfalls, you can move on to strategically and proactively building your case. This involves more than just gathering documents; it requires a clear legal strategy from the moment the demand arrives.
This is where seeking expert legal advice on commercial disputes becomes essential. A dispute lawyer can navigate the complexities of construction law, including issues related to the BIF Act or matters that might otherwise be heard at QCAT, ensuring your response is both legally compliant and strategically sound.
Engaging Legal Counsel: Your First and Most Important Step
Upon receipt of a statutory demand, your first call should be to a lawyer specializing in construction and commercial litigation. A lawyer will immediately assess the validity of the demand itself for any technical defects. They will then work with you to identify and gather the evidence needed for your offsetting claim, manage the drafting of the complex court documents, and ensure all procedural deadlines are met.
Engaging a qualified professional, such as a solicitor recognized by the Queensland Law Society, is a vital first step in protecting your company from a winding-up application.
Expert insight authored by John Merlo: "The 21-day window is unforgiving. The single biggest mistake a developer can make is trying to handle this themselves to 'save money.' By the time they realise they are out of their depth, the deadline has often passed. The cost of engaging a lawyer on day one is insignificant compared to the cost of having your company wound up. It is a non-negotiable first step."
Can You Use a BIF Act Claim as an Offset?
An adjudicated decision under the Building Industry Fairness (Security of Payment) Act can create complexities and significantly affect your payment rights under the BIF Act. If a creditor has an adjudication certificate for a certain amount, that amount is typically due and payable and can form the basis of a statutory demand. While you must pay the adjudicated amount, you may still be able to raise a separate, genuine offsetting claim for other matters not covered by the adjudication.
For example, you could bring a counterclaim for defects that fall under the defects liability period, as these are often separate from the progress payment dispute decided by the adjudicator.
Navigating the Court Process to Set Aside the Demand
The initial court hearing is typically brief. A judge or registrar will assess your application and affidavit to determine if you have raised a genuine dispute or a plausible offsetting claim. The possible outcomes are that the demand is set aside (your best-case scenario), your application is dismissed (the worst-case scenario, which allows the creditor to proceed with a winding-up application), or the demand is varied. This high-stakes Federal or Supreme Court process is vastly different from other forums where building disputes are often resolved, such as the Queensland Civil and Administrative Tribunal (QCAT). While many of the underlying contractual disputes may be matters heard in QCAT under normal circumstances, a statutory demand elevates the conflict to a much more severe and urgent legal arena.
Conclusion
The statutory demand is a serious threat which escalates a payment dispute into an existential crisis for a company. For Queensland property developers, navigating this threat requires avoiding the three fatal flaws: presenting a vague, unevidenced claim; miscalculating the net debt; and failing to adhere to strict legal procedures. Your offsetting claim is a powerful shield, but only if deployed with precision and strategy under the rules of the Queensland Building and Construction Commission Act 1991 and broader corporate law.
Given the catastrophic consequences of failure, the path forward is clear: treat every statutory demand with the seriousness it deserves and engage expert legal counsel immediately. Protecting your project and your company depends on it. Explore Merlo Law's expertise or browse our publications for more insights into the complex web of construction law.
FAQs
What is the very first thing I should do if I receive a statutory demand?
The very first thing you must do is note the exact date you received it and immediately contact a lawyer specializing in commercial litigation and construction law. The 21-day deadline to act is absolute and starts from the moment of service. Do not delay, negotiate with the creditor, or attempt to handle it yourself.
Can I get an extension on the 21-day deadline for a statutory demand?
No. The 21-day period is a strict, non-extendable deadline set by the Corporations Act. Neither the creditor nor the court has the power to grant an extension. If you miss it, your company is legally presumed to be insolvent.
What kind of evidence is most effective for an offsetting claim?
The most effective evidence is objective, quantifiable, and from a third party. This includes expert reports from engineers or quantity surveyors detailing defects and estimating rectification costs, formal quotes from other licensed contractors for the remedial work, and clear contractual correspondence (like emails or formal notices) that shows the dispute existed before the statutory demand was issued.
What happens if my offsetting claim is less than the debt claimed?
If your offsetting claim is genuine but only reduces the debt to an amount that is still above the statutory minimum (currently $4,000), the court has the discretion to vary the demand to the lower amount. You would then have a short period (usually 7 days) to pay this reduced amount to avoid the presumption of insolvency. If you fail to pay the varied amount, the demand stands.
Is a statutory demand the same as a BIF Act payment claim?
No, they are different legal instruments. A payment claim under the Building Industry Fairness (Security of Payment) Act (BIF Act) is a specific process for resolving progress payment disputes in the construction industry. A statutory demand is a tool under the Corporations Act related to corporate insolvency. However, an unpaid adjudication decision from a BIF Act claim can be used by a creditor as the basis for issuing a statutory demand.
Can I ignore a statutory demand if I know my company is solvent?
Absolutely not. Ignoring a statutory demand is one of the worst possible actions. Even if your company is solvent, failing to respond within 21 days creates a legal presumption of insolvency. This allows the creditor to file a winding-up application, forcing you into a costly and difficult court battle to prove your solvency.
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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