On 6 March 2025, Associate Justice Barrett handed down his decision in the matter of Duke Ventures Wellington Street Pty Ltd [2025] VSC 75. In this case, the Court clarified when a debtor can rely on an offsetting claim to set aside a statutory demand in a dispute adjudicated under the Building and Construction Industry Security of Payment Act 2002 (Vic) (SOPA).
Background
On 19 January 2021, Duke Ventures Wellington Street Pty Ltd (Duke) engaged Cobolt Constructions Pty Ltd (Cobolt) under a contract to construct an apartment building. The contract stipulated that in the event of a substantial breach by either party, the other may serve a notice to show cause (show cause notice). A failure to comply with the show cause notice would lead to termination of the contract and if Cobolt failed to comply with a show cause notice, Duke could take the work out of Cobolt’s hands.
The relationship between the parties rapidly deteriorated and both parties issued multiple show cause notices to each other. On 26 September 2023, Duke issued a notice taking the works out of Cobolt’s hands. Days after, the contract was allegedly terminated.
In response, Cobolt applied for adjudication of a progress payment claim it had made in the amount of $295,079.71.
Under section 9(b) of SOPA, Cobolt had the right to a progress payment for works completed under the contract. In accordance with sections 19 and 20 of SOPA, the adjudicator appointed was a natural person with any relevant qualification, expertise and experience. The adjudication was made in favour of Cobolt for approximately half the amount requested.
On 2 February 2024, the Country Court affirmed the adjudicated amount together with fees, interest and costs at $158,422.34.
Duke was served a statutory demand based on the SOPA judgment debt and applied to the Victorian Supreme Court to set it aside on the basis of existing offsetting claims in accordance with section 459G of the Corporations Act.
Submissions
Duke argued that:
it had an offsetting claim, which section 459H(5) of the Corporations Act defines as a ‘genuine claim that a company has against a respondent by way of counterclaim, set-off or cross-demand’;
the offsetting claim was based on rectification costs in relation to defects, liquidated damages for Cobolt’s failure to bring the contract to practical completion, and costs to complete the works under the contract taken out of Cobolt’s hands.
Duke calculated the value of these offsetting claims to be over $6 million.
Cobolt argued that:
multiple claims raised by Duke were already merged in the Adjudication, and that the claims to complete the works and for liquidated damages were speculative with no evidentiary value;
if the Court allowed the offsetting claims, it would subvert the terms of the contract and the SOPA regime.
Issues
Whether Duke could rely on offsetting claims that were rejected by the adjudicator to set aside the statutory demand;
Whether Duke could rely on offsetting claims that were not brought to the adjudicator to set aside the statutory demand;
Whether allowing offsetting claims for the purpose of setting aside a statutory demand based on a SOPA judgment debt is contrary to the policy of the SOPA legislation.
Court Findings
The Court held offsetting claims do not have to arise solely from transactions separate from the one giving rise to the debt under section 459H of the Corporations Act.
The Court affirmed, with reference to Brereton J’s discussion in Re Douglas Aerospace, that any offsetting claim may be relied on as an offsetting claim, except to the extent that allowance has been made for it in the adjudication.
The Court did not agree with Cobolt that relying on offsetting claims to set aside a statutory demand subverted the SOPA regime. In making this finding, the Court considered section 459C(2)(a) of the Corporations Act, which outlines that the Court must presume a company is insolvent for the purpose of a winding up allocation if that company fails to satisfy a statutory demand.
The Court considered that the policy of SOPA requires timely payment for progress claims, but a debtor ‘is in no sense required to comply with a demand’ and may refuse to do so under section 459C(2)(a) of the Corporations Act. Therefore, making an offsetting claim to set aside a demand does not subvert the SOPA regime because allowing the statutory demand to stand will not necessarily mean that a debt is paid promptly.
For example, if a recipient of a statutory demand does not pay the amount claimed and subsequently resists a winding up application, then the statutory demand process may not lead to payment of the debt at all.
The Court provided guidance on the principles that apply in relation to the availability of an offsetting claim or genuine dispute under section 459H of the Corporations Act in the context of a debt adjudicated under SOPA:
a debtor cannot argue there is a ‘genuine dispute’ under section 459H of the Corporations Act in relation to the existence of a judgment debt;
a debtor cannot rely on an offsetting claim to the extent allowance has been made for that claim in the adjudication;
a debtor can rely on an offsetting claim to the extent the claim was raised before and rejected by the adjudicator;
a debtor can rely on an offsetting claim that was not raised before the adjudicator;
a debtor can rely on an offsetting claim that arises from transactions separate to the one giving rise to the debt.
Three of Duke’s offsetting claims were raised and rejected in the adjudication in relation to plumbing, fire hydrants and powder coating windows. The Court in considering whether there was an offsetting claim to apply against the amount claimed in the statutory demand determined these offsetting claims were substantiated.
All other offsetting claims were not addressed in the Adjudication, but the Court determined that offsetting claims in relation to a water tank lining, widening openings to concrete walls, window installations, rendering and GST were substantiated.
Duke’s offsetting claims in relation to missing fair rated walls, the removal of reinforcements and frameworks to suspended slabs and the replacement of non-compliant condensate pipework were rejected on the grounds of insufficient evidence.
Ultimately, the statutory demand was set aside on the basis of the offsetting claims.
Key Takeaways
Relying on offsetting claims to set aside a statutory demand does not subvert the SOPA regime.
To set aside a statutory demand debtors can rely on offsetting claims that:
were rejected by an adjudicator;
not raised before an adjudicator; and
that arise from transactions separate from the transaction giving rise to a debt.
If you would like to discuss the use or defence of a statutory demand then please contact:
Alicia Hill
Principal
T: +61 3 9611 0180 | M: +61 484 313 865
E: ahill@sladen.com.au
Chris Downes
Law Clerk
E: cdownes@sladen.com.au
