Letter of Demand: Offsetting a Debt

Lunapas Pty Ltd v Palermo Seafoods Pty Ltd

If you end up being served with a creditor’s letter of demand, what are your options?

Generally, the options are:

  • Pay the debt;
  • Contact the creditor to negotiate a suitable payment arrangement; or
  • Apply to have the demand set aside.

In this article, we’ll discuss some ways for setting aside the creditor’s demand.

One method is to apply to have the demand set aside on the basis of a counterclaim.

Sometimes, creditors who send a letter of demand also owe the debtor a sum of money.

In practice, this may happen when legal proceedings are initiated and the alleged debtor recalls a debt previously incurred by the creditor that the creditor has dismissed or otherwise neglected to pay.

In this situation, an offset counterclaim to this statutory demand is an option.

This opens the door to a possible reduction or complete writing-off of the debt the creditor claims the debtor owes. This will depend on the amount the creditor owes to the debtor.

As in Lunapas Pty Ltd v Palermo Seafoods Pty Ltd, other grounds for offsetting a claim include:

  • Defects in the statutory demand;
  • Dispute over the amount or existence of the debt; or
  • Failure to provide a satisfactory affidavit alongside the letter of demand.

Case Summary

In Lunapas, both parties owed each other money.

Palermo Seafoods Pty Ltd (“the Respondent”) sent Lunapas Pty Ltd (“the Applicant”) a letter of demand for a judgment amount of $334,363.87 obtained against the Applicant in a previous matter.

The Applicant claimed it had an offsetting claim for an amount equal to or greater than the Respondent’s letter of demand. The Applicant brought an application before the Supreme Court of Queensland on these grounds.

After the judge’s analysis, it was established that the Applicant did indeed have an offsetting claim on the back of cost orders which had been made in its favour against the Respondent in the past, but not quite to the extent claimed.

This was because many of the instances of cost orders made against the Respondent which contributed to the offset counterclaim of the Applicant were not supported by sufficient evidence.

The Applicant also claimed there were some defects in the letter of demand regarding the Applicant’s name and address.

It was held that these mistakes made by the Respondent in issuance of the letter of demand did not cause any confusion or injustice to the Applicant and they were found insufficient to offset the debt.

After all factors had been considered, the Applicant was successful in its application to reduce the debt.

By way of set-off, the debt owed by the Applicant to the Respondent, though not completely written off, was reduced by $141,759.29.

Letter of Demand: Lessons Learned

What are the key takeaways from this court case?

  1. Debt set-off is a feasible defence against a letter of demand; and
  2. It is vital and imperative to support any monetary claim – set-off or otherwise – with sufficient evidence.

It is also important to note that even though defects in a letter of demand may be a substantial cause for offsetting a claim, the defect must be of something necessary or essential – a material shortcoming or deficiency.

It has been held that the defect must also be of a kind that causes confusion or misleads or misinforms the debtor in some way.


If you have received a letter of demand or other indication that you owe a debt, Corney & Lind Lawyers can help with appraising, developing, and actioning your case for an offset.

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