Yang v Finder Earth Pty Ltd [2019] VSCA 22 (15 February 2019): application to set aside default judgment, importance of pleading

March 4, 2019 |

The Victorian Court of Appeal in Yang v Finder Earth Pty Ltd [2019] VSCA 22 again highlighted the caution the courts are now taking in dealing with applications which determine a claim without trial such as summary judgment applications and default judgment applications. It is also a case which highlights the fact that pleadings matter. 

FACTS

Luo and Yang entered into the principal agreement, in October 2015 (the ‘agreement’) [8] for the stated purpose of:

to successfully obtain the 888 visa for Luo and her family to migrate to Australia and to be granted the Permanent Resident Visa (hereinafter referred to as ‘the Immigration Project’).

The agreement:

  • was described as a partnership between Luo and Yang

  • had a defined ‘project’, namely, the establishment of the first respondent company (‘Finder Earth’).
  • stated that Yang held 100 per cent company shares
    • provided that in order to obtain the 888 migrant visa (PR) by using the Company as a business platform, 100 per cent of the Company shares were held by Luo at the time of Company registration [9].
  • had an initial transfer of AUD300,000 with AUD200,000 being transferred in three months
  • stated that Luo agreed to provide capital which the Company required with no interest with the highest total lending amount being  AUD500,000 with:
  • provided that Luo agreed to lend the funds ‘as Company operation capital’,
  • provided that Luo was not allowed to take back the loan funds ‘during the course of partnership’ [10].
  • provided that Yang agreed to:
    • provide a guarantee for the fund lent in advance by Luo and
    • ensure the safety of the fund;
    • return the AUD500,000 to Luo after three years upon termination of the partnership;
    • take full responsibility of all losses occurred (sic) during Company operation [11].
  • under the heading ‘Liabilities’provided that:
    • upon termination of the agreement Yang would return the AUD500,000 to Luo and hold ownership of the Company assets.
    • during the course of partnership, if Yang breached the agreement, all funds lent to the Company in advance by Luo would be returned to Luo.
  • If Luo breached the agreement, Yang would not request compensation [12].

Pleading

The pleading alleged:

  • By reason of the terms alleged  and by necessary implication:

(a) Yang has guaranteed and indemnified Luo for the monies she advanced pursuant to her loans (see below) together with any further loss and damage she sustained by reason of her involvement with the partnership and/or Finder Earth (Yang/Luo Guarantee and Indemnity); ..

 ‘her loans’ referred to the loan of $500,000 to Finder Earth and a separate loan of $200,000 to a company called Legendary Landers Pty Ltd (‘LL’). Each of the loans was alleged to be governed by a loan agreement which included a term that the borrower ‘must apply the loan solely for the purpose of the partnership business’ [14].

  • that  since September 2015

Yang and/or BNSK have applied the monies loaned … for purposes other than the partnership business in that they have made payments of expenses from Finder Earth’s bank accounts and credit card accounts for their own benefit (or the benefit of LL) and have not deposited any or any significant monies for work performed into Finder Earth’s bank accounts, such that the credits for work performed have been applied for Yang, BNSK and/or LL’s benefit rather than for the benefit of Finder Earth and/or the partnership.

  • the misapplication of the loan funds constituted

a breach of the [respective loan agreements] in that the monies were not applied solely for the purpose of the partnership business such as to constitute an Event of Default, thereby making respective borrowers immediately liable for the Outstanding Balance …

and further:

The effect of the conduct alleged … is that the $700,000 loaned by Luo for the benefit of the partnership has not been spent for the benefit of the partnership but rather, Yang, BNSK and/or LL’s.

  •  allegations about loss and damage , at [17], are :

Further, 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.

Particulars

Further and better particulars in relation to paragraph 30.b will be provided prior to trial.

Luo claims such sums as against Yang under Yang/Luo Guarantee and Indemnity.

  • the prayer for relief was broken into two sections being[18]:

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

and [19]:

  1. 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.

The defendants in submission to set aside the default judgment as irregular did not plead a claim for recovery of a debt against the second or third defendant thereby entitling the entry of final judgment under Rule 21.03(1)(a) [20].

The defendants (correctly) submitted that paragraph F of the first prayer for relief referred to amounts owing to Luo under the two loan agreements, and that Yang was not a party to either of those agreements.

The Judge at first instance:

  • noted that ‘courts do not take an unduly technical or restrictive approach to pleadings’  
  • said he was satisfied that, when the pleading was ‘read as a whole’, it was ‘sufficiently clear’ that Luo’s case against Yang for a fixed money sum relied on pleaded allegations to the effect that:
    • Yang had agreed to guarantee the funds lent by Luo;
    • by reason of the misapplication of the loan funds, the sums advanced by Luo were ‘due and payable’;
    • by reason of that conduct, Luo had suffered ‘loss and damage including the $700,000 sums advanced’; and
    • Luo claimed those sums from Yang under the guarantee [22].
  • rejected an argument by the defendants that to read the pleading in that way was ‘tantamount to rewriting those paragraphs’ [23]

The plaintiffs applied to enter judgment following the striking out of the defence under a self-executing order [3].

The judge entered judgment in favour of Luo against Yang [3], for the amount of $700,000 together with interest and costs.

The court subsequently refused an application by Yang to set aside the default judgment as irregular holding that the claim as pleaded was properly characterised as a claim ‘for the recovery of a debt’ and not as a claim ‘for the recovery of damages’ [4].

DECISION

The court noted that under the Rules:

  • the failure of a defendant to serve a defence within the required time entitles the plaintiff to ‘enter or apply for judgment’ [2]
  • expressly extend that entitlement to where a defence is struck out by order of the Court [2]
  • Rule 21.03 which governs the procedure for the entry of judgment in default if the claim:
    • is for the recovery of a debt, a plaintiff may enter final judgment ‘for an amount not exceeding the amount claimed’, together with interest
    • is for the recovery of damages, the plaintiff may enter ‘interlocutory judgment … for damages to be assessed’ [2]

The Court noted that where there is no defence to a statement of claim:

  • each of the allegations in the statement of claim is taken to be admitted
  • the defendant is to be treated as if it had not defended the claim at all
  • the specification in the pleading of a precise amount said to be payable would not foreclose the question whether the claim was to be characterised as one for the recovery of a debt.

While the appellant conceded that the Court should treat as admitted the pleaded allegation that Yang had given Luo the ‘Yang/Luo Guarantee and Indemnity’, that is:

  • a guarantee in respect of amounts repayable to her by the borrowers under the respective loan agreements; and
  • an indemnity for losses she might incur by reason of her ‘involvement with the partnership’.

the claim as pleaded was not a claim for the recovery of a debt under the guarantee and indemnity.  Rather, it was a claim for loss and damage said to have been suffered by Luo as a result of the misapplication of the loan funds [25]

The appellant highlighted that the pleading alleged:

  • an event of default under each of the loan agreements, rendering the loan amounts repayable;
  • a demand by Luo for repayment from each of the borrowers;
  • a failure by each borrower to repay;
  • a demand to Yang under the guarantee and indemnity;
  • a failure by Yang to perform his obligations under the guarantee and indemnity;
  • the prayer for relief 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 [26].

Luo submitted:

  • that the essential character of the pleaded allegation as being a claim for recovery of a debt.
  • while there were gaps in the pleading the judge was entitled to have regard to the particular paragraphs which ‘Considered in isolation’ could constitute a claim under the guarantee and indemnity for the loan amounts which had become repayable [27].

The court agreed with the appellant stating:

  • it was “clear enough” that Luo sought to rely on the guarantee and indemnity but the ‘sums’ sought to be recovered were those referred to  as the ‘loss and damage’ she had suffered by reason of the misapplication of the loan funds.
  • while the pleading allege events of default under the loan agreements there was no allegation that any notice of default was given,  necessary to constitute an ‘event of default’ as defined by the agreements.
  • all allegations are all expressed in the language of ‘loss and damage suffered by reason of the defendants’ conduct’ [29].  Accordingly, the only judgment to which she was entitled was an interlocutory judgment for damages to be assessed [5].

The court stated that the position would have been “quite different” if the claim had been pleaded as one for a debt owing under the guarantee by reason of the non-payment by the borrowers of amounts due and payable by them [30].

To emphasise the point the court stated that when considering an application under r 21.03 a judge must:

  • determine the true character of the claim
  • decide whether the claim is properly pleaded[32]

The court made the salutory point about the importance of pleadings when it stated, at [7]:

If for any reason the contingency of judgment in default is to be anticipated, the pleader must take care to ensure that any claim for the recovery of a debt is clearly pleaded as such. As in every case, care must be taken to ensure that all of the material facts necessary to establish the cause(s) of action are pleaded.

ISSUE

It is trite to say that pleadings matter. They especially matter when what is being sought is final relief.  General, vague and imprecise pleadings, as was the case here, will not give rise to final relief on quantum. To do that one must first appreciate the claim being made which informs the relief.  Here a claim for damages on a purported debt claim proved to be fatal.  In fact in went further, the claim morphed into a claim about misapplication of funds. 

The Court of Appeal has not made new law in this case but highlighted the scrutiny that a court should apply when dealing with a default judgment application.

In my experience it is important to both plead with precision but also hasten slowly when seeking final relief by application.  What may be dealt with practically and pragmatically at trial, after the issues have been thrashed out in the interlocutory process and correspondence will not be given such latitude where a defendant’s rights are being affected because that person failed to file a defence or had one struck out. Pleadings fights may be arid affairs but they become a very effective means of setting aside a default judgment or responding to a summary judgment application. 

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