ADRIAN MICHAEL CAPPON v. DOV LAROM

1995, No. A1052

IN THE HIGH COURT OF HONG KONG

COURT OF FIRST INSTANCE

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J U D G M E N T

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1. In this action, the Plaintiff claims the sum of US$60,000.00, or its HK$ equivalent, plus interest. The Plaintiff says that this sum was loaned to the Defendant on an interest free basis. The purpose of the loan was to provide finance for the Defendant's father who had cancer and needed the money for an operation.

2. There is no dispute that the sum of US$60,000.00 was paid in 2 instalments, one on the 7th January 1994 and the other on the 27th January 1994. The onus therefore falls on the Defendant to show that the sum of US$60,000.00 was not a loan but was a payment to the Defendant. The Defendant says that this sum represented an adjustment of capital between the Plaintiff and the Defendant, taking into account the cash that the Plaintiff had put into the business of the joint venture which became "Electro Power Company Limited" and the value of the work put into it by the Defendant.

HISTORY OF THE RELATIONSHIP BETWEEN THE PARTIES

3. The Plaintiff is a well established businessman in Hong Kong. His company "Audio Mechanical Corporation" is a wholesale distributor of electronic components and deals in electronic assemblies.

4. The Defendant was introduced to the Plaintiff through the Defendant's father-in-law. Prior to coming to Hong Kong he was an engineer specialising in electronic products of various descriptions including, in particular, hospital equipment, recording equipment and toys. He seems to have been a competent engineer in that field.

5. The Defendant came to Hong Kong in 1989. The Plaintiff says that the arrangement was as follows: he, the Plaintiff, was prepared to offer the Defendant the use of facilities in his company "Audio Mechanical Corporation", such as access to desk space, telephone and fax facilities and the assistance of one of his company executives, Kenneth Leung. That was to be free of charge. Last, but not least, there was to be full financing of the purchase of components needed to produce the electronic assemblies which the Defendant would be involved in. There would be pre-payment of assembly charges, which would be required for the production, and shipping facilities. These costs were to be re-couped by the Plaintiff's company after receipt of payment from the export of the electronic goods. The Plaintiff says that he imposed three conditions, namely that the Defendant should be responsible for his personal living expenses, secondly that he was not to be regarded as or associated with Audio Mechanical Corporation Ltd. in any respect as an employee, consultant or partner, and thirdly that if he succeeded in his business he would share the net profits of his business with the Audio Mechanical Corporation on a 50/50 basis.

6. The Defendant's version of the arrangement is not perhaps that different but it does differ slightly. In his evidence, it is put as follows: he says that the Plaintiff persuaded him that rather than investing capital into a business for which each party, namely the Plaintiff and the Defendant would have a 50/50 interest, the parties would work on the basis that the Plaintiff would provide through his company, Audio Mechanical Corporation Ltd., the place for work and all the funds to run the business and the work for the projects to be undertaken, whilst the Defendant would contribute full time his skill and expertise in designing and supervising the production of products to make sure that they reached the required standard for the customers. The Defendant's contribution would also be the cost of moving his family to Hong Kong and supporting themselves including the cost of accommodation for the children. The estimated moving expenses was HK$200,000.00 and it was estimated that the Defendant would need at least HK$100,000.00 to live to the standards which could be expected. The Plaintiff had in fact apparently visited the Defendant in Israel and was aware of the Defendant's living standards.

7. The major project to begin with appears to have been some form of meter reading device for one of the electric companies operating in Hong Kong. There is no need to go into any details. It is apparent on all sides that all parties were optimistic of this project to begin with. However, for one reason or another the project came to nothing. It took sometime before that became apparent, but in August of 1991 the Defendant left Hong Kong apparently for good, the premises in which he lived was given up, his children were moved out of school, the debentures were returned and so forth.

8. However, the Defendant returned to Hong Kong very soon on business. He came in contact with the Plaintiff again. As a result of that, obviously matters picked up again and a new arrangement was arrived at between the parties. According to the Defendant, the Plaintiff suggested that if the Defendant returned, the Plaintiff's company would provide accommodation for the Defendant and his family to live in and would decorate that accommodation. The Plaintiff's company was to pay for car-parking, electricity, telephone charges and other utility charges. It was also part of the arrangement that the Defendant would be entitled to take out sums as drawings from the company which would be set off against future profits or dividends. In this way the Defendant would not need to draw quite so heavily, as in the past, on his own family's funds and the arrangements which had been made by the Defendant with his father-in-law.

9. There was some dispute between the parties as to the Plaintiff's role in arranging for the accommodation for Mr. Larom. At the end of the day, it does seem to me that the Plaintiff's staff were responsible for arranging that accommodation and indeed there is a little dispute that the accommodation which the Defendant had from his return to Hong Kong in 1991 was paid for by the Plaintiff's company.

10. The parties appear to have arranged their affairs, at the end of 1992, by using the vehicle of a new company, Electro Power Company Ltd. The Plaintiff had 51% shareholding and the Defendant had 49% shareholding. There was a consultancy agreement which was backdated to the 1st January 1992 and this provided for a sum of HK$83,000.00 per month. I can note, at this stage, that figure was never paid but was said to be used to finance the Defendant's share of the equity in the company.

11. The accounts which had been prepared for the period after the Defendant's return to Hong Kong had clearly not been considered by the Defendant until the time when he was in the witness box. One fact seemed remarkable and that is that the Defendant's estimate of the profits made in 1992 by dealing in the two products which were then being dealt with, namely a heart rate monitor and a controller for an airconditioner were accurate. He had put the figures at HK$1.3m. This had been based by the Defendant on an estimate of the gross profit per piece. When the figures in the page entitled "Electro Power Co. Ltd. Trading and Profit & Loss Account for 1992" are considered, it can be seen that the gross profit was indeed put at just over HK$1.3m, if one takes the figure for total sales and deducts from that the figure for the cost of sales and the selling expenses.

12. Where the dispute between the parties lies is in the figure for administrative and financial expenses. This is put in the accounts which have been produced at $3,099,193.00. The breakdown for that figure is given on a separate page. It includes the figure of $996,000.00 for consultancy fees and $405,700.00 for mould expenses.

13. Although, as I have said, it seemed that this was the first time that Mr. Larom turned his mind to these figures, he was quick to point out that the figure given for fixed assets in the balance sheet as at 31st December 1992 did not seem to reflect the figure given for the cost of the moulds. The figure for fixed assets was $245,295.12. That figure could hardly include the value of the moulds, even given a writing down allowance. Indeed the audited accounts for Electro Power Co. Ltd. for 1993 show that the value of the machinery and equipment is put at $211,724.03. The writing down rate is said to be 15% on a reducing balance.

14. Mr. Larom had said in his evidence that Mr. Cappon had insisted that the moulds should be in the name of Audio Mechanical Corporation Ltd. and until then he had always understood that that had been the case.

15. The other matter that Mr. Larom pointed out was that the figure of $996,000.00 for consultancy was the figure derived from the consultancy agreement which had been backdated.

16. Whether or not Mr. Larom's criticisms of the accounts are justified matters not. There is no way on the cursory analysis that this trial afforded that I could begin to come to a conclusion on that. For the purposes of this trial, I accept that the way the figures have been put into the accounts was an acceptable accounting way of presenting the figures. But the difference in approach between the 2 parties is what matters.

17. Mr. Larom looked and still looks upon the matter from a cash point of view. He sees the overall picture as one where both parties had to put in an equal amount. His view was that he, himself, would be contributing his work and that was quantified primarily by his living expenses. Mr. Cappon's contribution was to be the provision of the office space and facilities, the equipment and machinery and staff such as was provided. It is impossible to say who is right about this. What is clear to me is that Mr. Larom rightly or wrongly holds the view and in 1993 held the view that he had put more into the business than had Mr. Cappon. Indeed Mr. Cappon when asked during the course of his evidence whether in 1993 Mr. Larom had said that he felt that the relative contributions had been unequal, said that Mr. Larom had been complaining about a lot of things. Mr. Cappon said that there had been no discussions about the inequality because he, Mr. Cappon, had refused to discuss the matter. But he then went on to admit that Mr. Larom had come to him many times. Mr. Cappon also says that he did not regard it as his responsibility to include in the calculations Mr. Larom's relocation expenses. This confirms my view of the matter that Mr. Larom is right that he did raise the matter of the unequal contributions over the course of the year but met with considerable resistance to his requests.

THE EVENTS OF JANUARY 1994

18. On the 7th January, Mr. Larom's service company was paid $190,000.00 by way of advance. That same day the first tranche of the sum claimed was transferred to the HK$ account of the Defendant.

19. The very next day, the Defendant signed for the purchase of a Mercedes Benz motor car for the sum of $438,000.00. He paid 10% of that by Visa card.

20. Mr. Cappon says that the loan was made for Mr. Larom's father who had cancer. I am quite satisfied that the Defendant's father never had cancer. From where and when the notion in Mr. Cappon's mind came would be a matter for speculation. Suffice it to say I see no ground whatever for attributing that to the Defendant.

21. Mr. Cappon was asked whether he thought it odd that Mr. Larom should be borrowing money for his father's operation and yet immediately on receipt of the money he would be purchasing an expensive motor car. Whilst it would seem that Mr. Cappon was aware of the purchase of a motor car, his explanation was simply that he had agreed to make the loan and that he did not regard it as his business to pry any further nor to enquire as to the health of the father. He said he was non-plussed.

22. I observe at this stage that I find it strange, to say the least, that he did not at least query the need for the second tranche of the loan which was then paid on the 27th January to the Defendant's US$ savings account.

23. The Defendant was criticised because it was said that he had at various times given different reasons as to why the money was paid through the Plaintiff's personal account and not through the company account. It is correct that in the various statements there are different reasons given. I do not consider that the Defendant has been tailoring his version as necessary to avoid other allegations which have been made. When challenged, he said that everything he said was true: the Plaintiff had been putting off his approaches for an adjustment. It seems to me quite likely that at various times the Plaintiff had used various excuses such as the feelings of other shareholders and the desire for simplicity in the accounts to put off the Defendant. However, I accept what the Defendant says that about Christmas 1993, the Plaintiff agreed to an adjustment of some US$60,000.00 which was less than the Defendant was asking, but because the Defendant had become weary of the matter by that time, he agreed to that figure and the first tranche was paid.

EVENTS LATER IN 1994

24. It is always difficult to pinpoint the breakdown in relations between parties but it seems to me that the relationship between the parties must have deteriorated during 1994.

25. Mr. Cappon said that in March 1994 Mr. Larom started to spend money like water, he hired 6 engineers and had 5 sitting around doing nothing.

26. Mr. Cappon is an elderly man, at the time his back was causing trouble which necessitated an operation in August 1994. It is said that he was on medication and indeed he attended the office less frequently in 1994. He was clearly still suffering from difficulties with his back when in Court. It may well be that his physical condition contributed to the personal difficulties and the difficulties between the parties.

27. In the end the parties agreed to part. The Defendant says that Mr. Cappon wanted it all sorted out before he went into hospital because he was very worried about his forthcoming operation and was afraid that he might not be able to carry on afterwards.

28. There was an agreement which was dated the 4th August 1994. It is an agreement which was made between Audio Mechanical Corporation Ltd., Lason Ltd., which was Mr. Larom's personal company, Mr. Cappon and Mr. Larom in the personal capacities and Electro Power Company Limited. The material parts of the agreement read as follows:

1. All the sales on E(lectro) P(ower) starting from the January 01, 1994 up to August 20, 1994, will be credited to Lason and any income from these sales will be transferred to Lason's account.

2. Lason will be debited by Electro Power for all the components purchased by Audio for the sales in 1 above excluding all the components which are currently existing in Electro Power's warehouse as stock and 50,000 kits of components for the M10 project and all these components value will be deducted from Lason's credit according to 1 above.

3. Lason will be debited by Electro Power for all the expenses and contingent, liabilities incurred for E(lectro) P(ower)'s operation for the period starting on January 01, 1994 up to August 20, 1994, and all these expenses will be deducted from Lason's credit according to 1 above.

4. DL(Mr. Larom) will transfer his shares on E(lectro) P(ower) to Audio or MC after signing this agreement.

5. Except for the above there are no further claim and/or liabilities between Audio and/or MC to Lason and/or DL.

29. The Defendant said that this was signed in the office. He said that he had typed it on his table and it had been dictated by Mr. Cappon.

30. The Plaintiff said that it could not have been signed in the office as he was in hospital at the time. It transpired from subsequent enquiries which were made, and it was agreed between the parties, that Mr. Cappon was not admitted to hospital until a day or 2 after the 4th August.

31. Mr. Harris who appeared for the Defendant suggested that the Plaintiff's demeanour was smug when he said that he was in hospital. I am not sure that that is the word I would use to describe it. But what I would say is that I noted at the time that I did not feel that he was being straightforward. Whereas I did think that Mr. Larom was being straightforward despite the fact that he felt strongly about matters which tended to make him voluble. It thus came as little surprise to hear that Mr. Cappon was not in hospital on the 4th August. It is possible that the document was prepared on the 4th August but signed later. Be that as it may, I accept that the Defendant's version that it was typed at the Plaintiff's dictation.

32. The Plaintiff says that the document did not mention the US$60,000.00 because it was an agreement to part ways in respect of business. It did not deal with personal matters between the two parties. It is perhaps, though, surprising that in the parting of the ways between these two parties, nothing was said either on paper or orally about the US$60,000.00 even if it was a personal loan. The Defendant for his part did not seek to make too much of paragraph 5 but on the face of it, the agreement does show a complete settlement of all accounts between the parties.

33. Surprisingly, the Plaintiff seemed to have little recollection of the other agreements which were made in August 1994. These provided in essence for the Defendant to carry on the Plaintiff's business for him and receive 25% of the net profit. This was apparently to be done at premises which would be separate from those occupied by the Plaintiff and his company and Electro Power.

THE FINAL FALLING OUT

34. The Plaintiff came out of hospital in September 1994. He went back to the office once for a short time in September but it was not until the end of the month that he could really take in what had happened.

35. Mr. Larom had removed furniture, equipment and files from the office of Electro Power Company Limited. He says that he was loaned the furniture and equipment by Mr. Cappon so that he could carry out the agreements of the 23rd August. He said he had to have the files to be able to carry out the work which had to be done. At the Plaintiff's insistence that was to be done away from the Plaintiff's premises.

36. Whilst the Plaintiff apparently accepts that the Defendant was permitted to borrow the furniture and perhaps some of the equipment, Mr. Cappon says that the files should have been left or at least his permission to take them away should have been sought. In Mr. Cappon's words that made him very angry. The vehemence of that anger was still apparent when Mr. Cappon was in the witness box.

37. That anger was demonstrated at the time by demands for the return of everything including the furniture within a week and the commencement of other legal proceedings, of which I have been told nothing other than that they exist, and even complaints to the police by Mr. Cappon which resulted in a police raid on the Defendant's new premises. There were no criminal proceedings which followed although it seems that Mr. Cappon would, at least at the time, have gladly seen Mr. Larom behind bars.

38. Another symptom of Mr. Cappon's anger at the time is, perhaps, his approach to the question of the advances. The terms of the 4th August agreement would indicate that the previous payments to Mr. Larom were all taken into account. Indeed in his witness statements Mr. Cappon said as follows:

39. In the 1st witness statement of the 14th November 1995 Mr. Cappon said "Larom's drawings account totalling HK$1,014,150.00 at the day of his departure was forgiven by me in an agreement between us on the 4th August 1994 and is not reflected in the above figure for 1994."

40. In the revised witness statement which is dated the 26th March 1997, it is said "Larom's drawing account totalling HK$974,150.00 at the date of his departure was forgiven by me in an agreement between us on the 4th August 1994 and is not reflected in the above figure for 1994 (document number 3 in Defendant's List of Documents). The fact that these advances were written off could be said, in reality, to have further increased Audio's investment by that amount."

41. However, in a letter of the 5th October which was written by Mr. Cappon on Audio Mechanical Corporation Ltd. heading, Mr. Cappon wrote to Mr. Larom saying "Please note that we request you to refund to us the following cash advances and disbursements made to you on a personal basis. These advances do not include the full amount of your 49% shares in the capital of Electro Power Company Limited also paid up on your behalf." And then it is said "Supporting vouchers signed by you exist for the following advances." and it lists the supporting vouchers from 1991 through to April 1994 and gives the total of HK$1,014,150.00.

CLAIM FOR THE RETURN OF THE MONEY

42. On 29th November 1994, confirmation was obtained by the Plaintiff from the Hong Kong Bank that the money was transferred as I have indicated in January 1994.

43. Demand was made on 1st December and later again on the 7th January for the return of that money. That has been met with a response that the money was paid not as a loan but as a financial adjustment between the parties. That I accept. I accept the Defendant's evidence that he really wanted considerably more but when at Christmas 1993 the Plaintiff said he would pay US$60,000.00 and no more he agreed to it because he was becoming weary of the matter.

44. The Defence pleads that the agreement was made on 1st January 1993. I accept that the agreement relating to the division of the shareholding was agreed on or about the 1st January 1993. The agreement as to the financial adjustment did not come until about Christmas 1993 which was shortly before the payment of the first tranche was made.

45. I therefore dismiss the Plaintiff's claim.