VSCA highlights the importance of distinguishing between debt and damages in debt recovery claims

In the matter of Yang v Finder Earth Pty Ltd [2019] VSCA 22, the Victorian Supreme Court of Appeal set aside a default judgement for recovery of an unpaid debt on the basis that the underlying claim was better characterised as one for damages. Ultimately, the case illustrates the importance of properly and clearly pleading a claim when seeking to recover a debt through litigation.

The case ensued after the parties entered into two agreements where the second respondent, Ms Luo, loaned Mr Yang two sums of money totalling $700,000. The terms of the agreements noted that the money was to be applied solely for the purpose of establishing a business. Relevantly, the business was established for the purpose of obtaining an investment-based migrant visa for Ms Luo and her family.

Pursuant to the terms of the agreement, Mr Yang guaranteed and indemnified Ms Luo for the money she lent and for ‘any further loss and damage she sustained’ in connection with the agreement. If the agreement was breached by Mr Yang, all funds lent to the company in advance were to be returned to Ms Luo.

Mr Yang was alleged to have misapplied both the loan money and business revenue for his own benefit, constituting a breach of the agreement. Proceedings were initiated in the County Court where Ms Luo pleaded on the following basis:

By reason of the conduct alleged, Luo has suffered loss and damage being:

(a) a loss of the $700,000; and

(b) exposure to creditors of Finder Earth for which she has provided personal guarantees and has or will need to compensate.

The relief sought by Luo was particularised in the following terms:

$700,000 owing to [Luo] under the Finder Earth Loan Agreement and LL Loan Agreement.

A declaration as to the validity of the Yang/Luo Guarantee and Indemnity and an order for such loss and damage owing pursuant to the Yang/Luo Guarantee and Indemnity.

Damages.

Mr Yang’s defence was struck out pursuant to rule 21.02 of the County Court Civil Procedure Rules 2008 (Vic). In the absence of a defence, Ms Luo entered default judgment for $700,000 plus interest and costs. Mr Yang applied to set aside the default judgment, arguing the claim was not for recovery of debt under the guarantee and indemnity but rather a claim for damages arising from Mr Yang’s alleged misapplication of the loan. The application was refused on the basis that Ms Luo’s pleading made it sufficiently clear the claim was for a fixed monetary sum. Mr Yang appealed.

The Court of Appeal allowed Mr Yang’s appeal agreeing that while the foundation of Ms Luo’s claim was the guarantee and indemnity, the money sought was the ‘loss and damage’ suffered as a result of misapplication of the loan. On this basis, Ms Luo was not entitled to enter judgment in the manner she did. The Court noted that had the pleadings mentioned a debt arising under the guarantee by reason of default under the loan agreement, their conclusion would have been different. However, this was not the case as ‘loss and damage’ had been sought instead.

Ultimately this case serves as a reminder to creditors that when seeking to recover a debt through the courts, it is crucial that the relief sought is properly and clearly expressed as a fixed sum owing and not as a recovery of damages suffered by reason of non-payment. If the claim is not properly pleased, a judgement obtained will be open to scrutiny from higher courts.

Wiebke Herrmann

Wiebke Herrmann is a Director at James Conomos Lawyers where she practices in the areas of insolvency, bankruptcy and commercial litigation. If you or your business needs assistance navigating a legal dispute, please do not hesitate to contact her. 
3004 8214 |    |  wiebke@jcl.com.au