The Subcontractor's 21-Day Playbook for Defeating a Statutory Demand
- John Merlo
- 4 days ago
- 14 min read
The arrival of a statutory demand is a serious escalation in any payment dispute. It's not just another invoice or letter of demand; it is a formal legal document issued under the Corporations Act 2001 (Cth) that carries severe consequences. Importantly, statutory demands can only be issued to companies, not to individuals or sole traders.
For a subcontractor company, it means a head contractor or developer is alleging you owe them a debt of at least $4,000 and is prepared to wind up your company if you don't pay.
This section will break down the legal basis of a statutory demand and explain why the 21-day compliance period is one of the most unforgiving deadlines in Australian corporate law.
Key Takeaways
The 21-Day Deadline is Final: The 21-day window to apply to set aside a statutory demand is absolute. Missing it means your company is presumed insolvent, and winding-up proceedings can begin.
Your Counterclaim is Your Defence: A genuine, quantifiable offsetting claim for defects, delays, or back-charges is your primary legal tool under the Corporations Act 2001 to challenge the demand.
Evidence is Everything: You must immediately gather and organise all contracts, emails, site diaries, photos, and expert reports that prove and quantify your counterclaim.
Immediate Legal Advice is Non-Negotiable: This is a complex and high-stakes legal process. Engaging a construction lawyer on day one is critical to meeting the deadline.
The Ticking Clock: What is a Statutory Demand?
The arrival of a statutory demand is a serious escalation in any payment dispute. It's not just another invoice or letter of demand; it is a formal legal document issued under the Corporations Act 2001 (Cth) that carries severe consequences. For a subcontractor, it means a head contractor or developer is alleging you owe them a debt of at least $4,000 and is prepared to wind up your company if you don't pay.
This section will break down the legal basis of a statutory demand and explain why the 21-day compliance period is one of the most unforgiving deadlines in Australian corporate law, directly impacting subcontractor rights.
Understanding the Presumption of Insolvency
The core purpose of a statutory demand is to create a legal presumption that a company is insolvent if it fails to act within 21 days. This is not a suggestion; it is a powerful legal tool. If you fail to either pay the debt or apply to a court to have the demand set aside within that timeframe, your company is, by law, presumed to be unable to pay its debts.
This presumption of insolvency provides the creditor with the legal grounds to apply to the Federal Court or the Supreme Court of Queensland to have your company wound up and a liquidator appointed. At that point, you lose control of your business, its assets, and its future.
The Unforgiving 21-Day Rule
The 21-day deadline to respond to a statutory demand is absolute and cannot be extended by the parties or the court after it has expired. Time is counted from the day after the statutory demand is served on the company (not including the day of service itself) and runs until 11:59 PM on the 21st day. For example, if served on Monday 1 May, day 1 is Tuesday 2 May, and the deadline expires at midnight on Monday 22 May.
This strictness is a deliberate feature of the law, designed to bring payment disputes to a head quickly and prevent companies from endlessly delaying payment of legitimate debts. However, it creates a high-pressure situation for the recipient. Failure to act decisively within this window removes nearly all of your defensive options. You cannot simply ask for more time or wait to see if the creditor is serious.
The clock starts the day you are served, and it does not stop.
What Makes a Statutory Demand Valid?
Before panicking, you and your lawyer should immediately check the demand for any technical defects. To be valid, the demand must meet the strict requirements of Section 459E of the Act. This means it must be in writing, specify the debt and its nature, and be signed by or on behalf of the creditor.
Crucially, it must be accompanied by an affidavit that swears the debt is due and payable. Any errors in these formal requirements could be grounds to have the demand set aside on a technicality, but you should never rely on this as your primary strategy. The main defence for most subcontractors lies in proving a genuine dispute or an offsetting claim.
Your Best Defence: Weaponising an Offsetting Claim
Receiving a statutory demand does not mean you have to pay. The Corporations Act provides a powerful defence for subcontractors who have a legitimate counterclaim against the creditor. This is known as an "offsetting claim." In the construction industry, these claims are common and typically arise from disputes over defective work, delays caused by the head contractor, or other back-charges.
This section explains how to identify, value, and leverage your offsetting claim as a legal shield against a winding-up application. Your counterclaim for issues like defects and rectification or delay costs is your most effective weapon.
Defining an Offsetting Claim in Construction
An offsetting claim, under Section 459H of the Act, is a genuine counterclaim, cross-demand, or set-off that you have against the creditor. The purpose is to show the court that when your claim is deducted from theirs, the resulting amount is less than the statutory minimum (currently $4,000).
Common construction examples are powerful tools here. This could include the cost you will incur to rectify defects caused by another trade, liquidated damages you are entitled to for delays caused by the head contractor's poor site management, or the value of approved variations that have not been paid.
What Constitutes a "Genuine Dispute"?
The legal test for a "genuine dispute" is critical to understand. You do not need to prove your entire case with the certainty required at a final trial. You merely need to show the court that your claim is based on plausible and believable grounds. The dispute must be real and not spurious, vexatious, or wholly misconceived. This is contrasted with a frivolous or vexatious claim that is clearly designed to simply delay a legitimate payment.
If you can point to specific clauses in the contract, email correspondence about the issue, and a reasonable calculation of your loss, you are well on your way to establishing a genuine dispute.
Warning: The Peril of Inflating Your Claim
A common mistake is to exaggerate the value of your offsetting claim. The court will scrutinise your calculations. If your claim is found to be baseless or significantly inflated, your application to set aside the demand will likely fail, and you could be ordered to pay the creditor's legal costs. Your claim must be genuine, substantiated, and calculated in good faith.
The 21-Day Emergency Action Plan for Subcontractors
The moment a statutory demand is served, the clock starts ticking. You have 21 days to file and serve a court application to have it set aside. There is no time to waste. This action plan provides a week-by-week breakdown of the critical steps you must take to build your case and meet the deadline. Success depends on disciplined, urgent action from day one, including immediate legal advice and thorough evidence gathering. The goal is a successful court application for setting aside the statutory demand, supported by strong affidavit evidence.
Week 1 (Days 1-7): Triage, Legal Engagement, and Evidence Gathering
The first week is a sprint, not a marathon. You must immediately cease all non-essential work and dedicate your full attention to responding to the demand.
Your first call should be to engage a building and construction lawyer who specialises in these disputes. Provide them with a copy of the statutory demand and its accompanying affidavit immediately. While they review the legalities, your urgent task is to begin a comprehensive evidence-gathering mission. You need to locate, scan, and organise every relevant document: the head contract and any subcontracts, all approved and disputed variations, the complete email chain relating to the project, site diaries, meeting minutes, progress reports, photographs of the alleged defects, and any expert reports you may have already commissioned.
Week 2 (Days 8-14): Quantifying the Claim and Drafting the Affidavit
This is the week where your defence takes shape. You will work closely with your lawyer to create a detailed, itemised list of every defect, delay, back-charge, and unpaid variation that forms your offsetting claim. It is not enough to simply state "the work was defective." You must assign a credible dollar value to each item. This may involve getting quotes from other contractors for rectification work or calculating delay costs based on the terms of your contract.
This detailed quantification is then used as the foundation for drafting the critical affidavit that will support your court application. This document is your sworn testimony and the primary piece of evidence the court will review.
Expert Insight from John Merlo
"The affidavit is the most important part of your application. It is your sworn testimony and the primary evidence the court will consider. Every assertion you make about your offsetting claim must be backed by clear, concise evidence attached as an exhibit. A well-drafted affidavit tells a compelling story of why the demand is unjust, while a weak one can doom your case before you even get to court."
Week 3 (Days 15-21): Finalising, Filing, and Serving
The final week is about execution. You will meticulously review the final court application and your affidavit with your lawyer, ensuring every statement is accurate and every piece of evidence is correctly referenced. Once you are satisfied, you will sign the documents. Your lawyer will then handle the logistics of filing the application with the appropriate court, which in Queensland is typically the state Supreme Court or the Federal Court.
However, filing is not the final step. The crucial final act is serving the filed, court-stamped documents on the creditor or their lawyers. This must be completed before the 21-day deadline expires. Failure to serve in time is a fatal error.
Why is an Affidavit So Critical to Your Success?
In a statutory demand dispute, you don't typically get to argue your case in person initially. The court makes its first assessment based entirely on the documents you file. The most crucial of these is your affidavit in support. It is your opportunity to present your sworn evidence and persuade the judge that you have a genuine offsetting claim.
A poorly prepared affidavit, lacking in detail or evidence, is the fastest way to have your application dismissed. Proper legal drafting that adheres to court rules is essential.
Structuring Your Narrative for the Court
A strong affidavit should tell a clear, chronological story that is easy for a busy judge to follow. It should begin with the background of the project and the key terms of the contract. From there, it should detail the issues that arose, explaining the nature of the defects or the cause of the delays.
Finally, it must present a clear and logical calculation of your offsetting claim, showing how you arrived at the final figure. Using clear headings, short sentences, and numbered paragraphs makes the document more persuasive and easier to digest, which is vital when a judge may only have a limited time to review your case.
The Art of Exhibiting Your Evidence
An affidavit is made up of your sworn statements, but its power comes from the evidence that backs them up. The process of "exhibiting" your evidence is how you connect your words to the proof.
For example, when you state that the head contractor approved a variation via email, you would say something like, "A copy of the email from the project manager dated 5 June 2023 is attached and marked as Exhibit A." This critical email is then physically attached or bundled with the affidavit as "Exhibit A." This allows the judge to easily cross-reference every statement you make with the corresponding document, transforming your claims from mere assertions into substantiated facts.
Swearing and Affirming: The Final Step
The final step in preparing your affidavit is having it sworn or affirmed before a qualified witness, such as a lawyer or a Justice of the Peace. This is a formal legal process. By signing it in their presence, you are swearing under oath (or affirming) that the contents are true and correct to the best of your knowledge.
This act transforms the document from a simple statement into formal, sworn evidence for the court. It is crucial to understand the gravity of this step; knowingly making a false statement in an affidavit is a serious criminal offence with severe penalties.
Avoiding Catastrophe: Common Mistakes That Invalidate Your Claim
The path to setting aside a statutory demand is narrow and fraught with potential missteps. The strict rules and tight deadline leave no room for error. With corporate insolvencies in the construction sector on the rise—ASIC reported construction insolvencies in the 2023-24 financial year—the stakes have never been higher. ASIC insolvency statistics show this is a leading cause of company failure.
Avoiding these common mistakes, which can lead to fatal errors and subcontractor insolvency, is just as important as taking the right steps. A failure in serving documents or proving a genuine dispute can be catastrophic.
Failing to Serve the Application in Time
A devastatingly common mistake is believing that filing the application with the court is enough. This is only half the battle. The Corporations Act is crystal clear: you must also serve the filed application on the creditor within the same 21-day period.
This means a physical copy of the court-stamped documents must be delivered to the creditor or their nominated legal representative. Failure to do so is a fatal error. The court has no discretion to overlook this; if you file on day 20 but don't serve until day 22, your application will be thrown out, and the presumption of insolvency will stand.
Miscalculating the Offsetting Claim
Consider a subcontractor who, in their haste to assemble a defence, includes the cost of rectifying defects that fall outside the contractual defects liability period. At the court hearing, the creditor's lawyers easily point to the contract dates, proving that this part of the claim is invalid. The judge agrees and strikes it from the calculation. Suddenly, the subcontractor's remaining offsetting claim is no longer large enough to reduce the creditor's debt below the $4,000 threshold. The court has no choice but to dismiss the application, leaving the subcontractor exposed to a winding-up application.
Ignoring the Demand or Attempting to Negotiate
Perhaps the most catastrophic mistake is to ignore the demand or try to negotiate a settlement without filing a court application. Many subcontractors believe a statutory demand is just a bluff and that a few phone calls will resolve the issue. This is a dangerous assumption.
The 21-day clock does not stop for negotiations, no matter how promising they seem. By the time you realise the creditor won't budge and is serious about proceeding, the deadline will have passed. At that point, it's too late. Your company is presumed insolvent, and you have lost your legal right to challenge the demand.
Warning: The Negotiation Trap
Do not assume a "without prejudice" conversation or a settlement offer will pause the 21-day deadline. It will not. You must file and serve your application to set aside the demand to protect your position. You can and should continue to negotiate, but only from the safety of having your court process underway. Don't risk your company's future—contact a dispute lawyer immediately to manage this dual process correctly.
What Happens After You've Filed Your Application?
Successfully filing and serving your application within 21 days prevents the creditor from winding up your company—for now. It initiates a court process where a judge will decide the fate of the demand. This final section outlines the possible outcomes of your application, from the initial court hearing to potential costs orders, and how the underlying QCAT dispute might proceed from here after the demand is set aside or varied.
The Initial Court Hearing
The first court date is often a brief hearing, sometimes called a directions hearing. You will likely not give verbal evidence. Instead, the judge will review the affidavit evidence filed by both you and the creditor. The creditor will have had an opportunity to file their own affidavit in response to yours, attempting to disprove your offsetting claim.
The court's primary goal at this stage is not to conduct a full trial, but to determine if there is a genuine dispute or a plausible offsetting claim that warrants the demand being set aside.
Potential Outcomes: Set Aside, Varied, or Dismissed
There are three main outcomes from the hearing. The best-case scenario is that the judge agrees you have a genuine offsetting claim that equals or exceeds the demand, and the demand is set aside. In this case, the creditor is usually ordered to pay your legal costs. The second outcome is that the demand is varied. This happens if the judge finds you have a genuine claim, but it only reduces the debt, not eliminates it. The demand will be changed to the new, lower amount, which you must then pay.
The worst-case scenario is that your application is dismissed. The judge finds you do not have a genuine dispute, the presumption of insolvency is activated, and the creditor can proceed with a winding-up application. You will almost certainly be ordered to pay their legal costs.
Life After the Demand: Resolving the Underlying Dispute
It is crucial to remember that setting aside the demand doesn't make the underlying payment dispute disappear. It simply removes the immediate threat of liquidation. You and the head contractor still need to resolve the fundamental conflict over defects, delays, and payment.
The next step is often to pursue your claim through other legal channels. This could involve using your security of payment rights under the BIF Act to seek a rapid adjudication or, for many domestic and commercial building disputes in Queensland, by resolving the matter in QCAT. Having the statutory demand set aside strengthens your position for these future negotiations and proceedings.
Conclusion
A statutory demand is a legal ambush which has the outcome of forcing a swift and often brutal conclusion to a payment dispute. For a subcontractor, it represents an existential threat to your company. However, it is not an unconquerable threat. The Corporations Act provides a clear defensive path through a genuine offsetting claim based on the realities of construction work—defects, delays, and variations.
The key to survival is speed, precision, and expert guidance. The 21-day deadline is absolute, making immediate action non-negotiable. Your success hinges on your ability to rapidly gather evidence, accurately quantify your counterclaim, and present it persuasively in a sworn affidavit.
Attempting to navigate this high-stakes process without a specialist litigation lawyer is a risk that can lead to the loss of your business.
By understanding the rules and acting decisively, you can turn a statutory demand from a death warrant into a catalyst for resolving the underlying dispute on fair terms.
FAQs
What is the absolute first thing I should do if I receive a statutory demand?
The very first thing you should do is note the exact date you received it and immediately contact a building and construction lawyer. Do not delay, do not try to negotiate with the creditor first, and do not ignore it. The 21-day clock has started, and every hour counts.
Can I get an extension on the 21-day deadline?
No. The 21-day period for filing and serving an application to set aside a statutory demand is fixed by the Corporations Act and cannot be extended by the court or by agreement with the creditor once it has expired. The only way to stop the clock is to file and serve your application within the 21 days.
What if my offsetting claim is for unliquidated damages (e.g., delay costs not yet calculated)?
You can still use an offsetting claim for unliquidated damages, but you must be able to provide a plausible and credible estimate of the amount. This means you need to show the court a clear basis for your calculation, such as contract rates for liquidated damages or preliminary costings from an expert. A vague, unsupported figure will not be accepted.
Does a statutory demand affect my credit rating?
The demand itself is not typically reported to credit agencies. However, if you fail to have it set aside and the creditor proceeds to obtain a court judgment or successfully applies to have your company wound up, those events will be public record and will severely damage your company's credit rating and your ability to trade.
What is the difference between a statutory demand and an adjudication decision under the BIF Act?
A statutory demand is a tool under the federal Corporations Act to prove insolvency. An adjudication decision is a determination of a payment dispute under Queensland's Building Industry Fairness (Security of Payment) Act 2017. A key difference is that an adjudication certificate can be registered as a court judgment, which can then be used as the basis for a statutory demand without the need for an accompanying affidavit. This makes a demand based on an adjudication decision much harder to challenge.
Can I still trade while I am challenging a statutory demand?
Yes. Simply receiving a statutory demand or filing an application to set it aside does not, by itself, stop you from trading. However, you should be aware that if the dispute becomes public, it may affect your relationships with suppliers and financiers. If your application fails and a winding-up application is filed, your ability to trade will be severely restricted.
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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