Debt or Damages? An Important Distinction in Debt Recovery Claims

By Jack Golding, Lawyer, MST Lawyers

In the recent decision of Yang v Finder Earth Pty Ltd [2019] VSCA 22, the Court of Appeal set aside a default judgment for recovery of an unpaid debt because the claim as pleaded was better characterised as a claim for the recovery of damages and not as a claim for the recovery of a debt.

The decision serves a timely reminder to ensure that, in debt recovery claims, the relief sought in the pleadings is expressed as a fixed sum owing and not as the recovery of damages suffered by reason of non-payment.

Background and Default Judgment

Luo’s Claim

Luo (the second respondent) had filed proceedings against Yang in the County Court seeking the recovery of $700,000 which Luo claimed to be owing under various loan agreements. Luo had pleaded their case in the County Court 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.

Luo sought relief against Yang 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.

Yang’s Defence

In the County Court, Yang’s defence was struck out under rule 21.02 of the County Court Civil Procedure Rules 2008 (Vic) (Rules).

Judgment

As a result of Yang’s defence having been struck out, Luo successfully obtained final judgment against Yang for $700,000 plus interest and costs.

Yang subsequently sought to have the default judgment set aside as “irregular” on the basis that Luo’s claim as pleaded was properly characterised as a claim “for the recovery of damages” and not a claim “for the recovery of a debt”.

This difference was important because, under rule 21.03 of the Rules, Luo was only entitled to enter final judgment against Yang for the $700,000 plus interest and costs if Luo’s claim was for the recovery of a debt. If the claim was for the recovery of damages, then Luo was only entitled to enter interlocutory judgment against Yang and the amount of damages to be awarded to Luo had to be assessed.

In the County Court, Yang’s application to have the default judgment set aside failed because it was found that the pleading as a whole made it sufficiently clear that Luo’s claim was for a fixed money sum. Yang appealed to the Court of Appeal.

The Court of Appeal’s Decision

Yang’s central argument was that Luo’s claim was not pleaded as a claim for the recovery of a debt under the relevant loan agreements. Rather, it was characterised as “a claim for loss and damage said to have been suffered by Luo as a result of [breach of the loan agreements by Yang]”.

Yang argued that Luo’s claim “lacked many of the elements which would ordinarily be found in a claim for recovery of a debt”. In particular, in a claim for debt the relief sought by Luo “would have been expected to state, clearly, that Luo was claiming the amount of $700,000 as a debt due under the guarantee and indemnity.”

In her defence, Luo argued that, despite these gaps in the pleading, the claim was characterised as a claim for the recovery of a debt.

The Court of Appeal disagreed and found that, although Luo’s claim clearly relied on breach of the loan agreements by Yang, the pleading itself did not allege that Yang was indebted to Luo under the terms of those loan agreements in the amount of $700,000. Rather, Luo’s claim for the $700,000 was stated as being for loss and damage suffered by reason of Yang’s breach of the loan agreements.

This finding was fatal to Luo’s claim. As a result, the default judgment previously obtained was found to be irregular (and therefore liable to be set aside) as the pleading did not disclose a claim for the recovery of a debt.

Lessons Learned

The decision serves as a reminder that, in debt recovery claims, the pleading must make it clear that the claim is for non-payment of a debt and not for damages suffered as a result of that non-payment.

Failing to do so is likely to leave any default judgment obtained open to scrutiny and liable to later be set aside.

If you require assistance with a debt recovery claim, please contact our Dispute Resolution and Litigation team by email or phone +61 3 8540 0200.