Fortunate Drift Ltd v Canterbury Securities, Ltd

• Jurisdiction: Cayman Islands
• Judge: Kawaley
• Judgment Date: 16 September 2019
• Court: Grand Court (Cayman Islands)
• Docket Number: CAUSE NO: FSD 227 OF 2018 (IKJ)

Between:

Fortunate Drift Limited

Plaintiff

and

Canterbury Securities, Ltd.

Defendant

Before:

The Hon. Justice Kawaley

CAUSE NO: FSD 227 OF 2018 (IKJ)

IN THE GRAND COURT OF THE CAYMAN ISLANDS

FINANCIAL SERVICES DIVISION

HEADNOTE

Proceeds of Crime Law (2015 Revision)-Anti-Money Laundering Regulations (2018 Revision) — impact of statutory regime on financial service providers whose clients fail to respond to KYC requests-Defendant holding Plaintiff's shares and proceeds of sale pursuant to undertakings given pursuant to Court Order-whether Court has inherent jurisdiction to order production of KYC information

Appearances:

Mr Christopher Levers and Mr Harry Rasmussen, Mourant Ozannes, for the Plaintiff (“FDL”)

Mr Jalil Asif QC and Ms Pamela Mitchell, Kobre & Kim (Cayman), on behalf of the Defendant (“Canterbury”)

IN CHAMBERS

RULING ON DEFENDANT'S SUMMONS FOR DIRECTIONS

Introductory

1 The Plaintiff seeks to establish in this litigation that it validly terminated a brokerage agreement with the Defendant dated May 9, 2019 (the “Account Agreement”) and that the Defendant is required to, inter alia, return to the Plaintiff certain shares in Yangtze River Development Corp (“YRIV”) (the “Shares”) and the proceeds of sale of some of the Shares. This claim is vigorously contested by the Defendant which asserts a substantial Counterclaim.

2 After hearing the Plaintiffs Ex Parte Summons December 7, 2018, I granted an Ex Parte Injunction restraining the Defendant from liquidating any Shares it held for the benefit of the Plaintiff pursuant to the Account Agreement. Some Shares were sold by the Defendant before the Injunction was served, so the Injunction ‘bit’ on the remaining Shares and proceeds of sale still held by the Defendant. On December 13, 2018, the Return Date of the Ex Parte Injunction, I declined to discharge the Interim Injunction altogether. Instead, I discharged it on the basis of the following undertakings offered by the parties when I indicated that I had decided that the Interim Injunction should be continued but that the Plaintiff should be required to give the additional undertaking sought by the Defendant. It was ultimately ordered:

“ UPON the Defendant giving the following undertakings:

• i. that it will hold any of shares transferred out of the Plaintiffs account with the Defendant into the Defendant's account (the “Transferred Shares”) that have not been sold pending further order of the Court or the Plaintiffs agreement;

• ii. that it will hold the proceeds of sale of those Transferred Shares which have been sold, insofar as those proceeds remain in the Defendant's control (the “Proceeds”), pending further order of the Court or the Plaintiffs agreement. For the avoidance of doubt, the Proceeds amount to US$14,959,352.20; and

• iii. that, save as otherwise allowed by any later order, or by agreement with the Plaintiff the Defendant will not transfer or sell any further shares held by it for the Plaintiff (the “Shares”) in satisfaction of the Plaintiffs alleged obligations to the Defendant.

AND UPON the Plaintiff giving the following undertakings:

• iv. that, if the Court later finds that this order, or the Order dated 7 December 2018 in these proceedings (the “Order”), has caused loss to the Defendant or any third parties, and decides that the Defendant and/or such third parties should be compensated for that loss, the Plaintiff will comply with any order the Court may make;

• v. that it will make no attempt to, withdraw or transfer from the Defendant any shares in Yangtze River Port and Logistics Ltd held for it by the Defendant pending further order of the Court or agreement by the Defendant; and

• vi. that insofar as any third party is, or has been, provided with the Order or this order, by or on behalf of the Plaintiff such third parties will be told expressly by or on behalf of the Plaintiff that the Order and/or this order do not freeze the assets of the Defendant or otherwise interfere with its business dealings, including its bank accounts, custody accounts or brokerage accounts. The Order relates only to the Transferred Shares, the Shares and the Proceeds as set out above.

IT IS ORDERED THAT:

• 1. Paragraph 1 of the Order is discharged;

• 2. Costs reserved; and

• 3. The parties shall have liberty to apply.” (the “December 13, 2018 Order”)

3 Some weeks after Canterbury gave those undertakings to this Court, it learned that there had been a change in FDL's beneficial ownership and sought updated Know Your Customer (“KYC”) particulars in relation to FDL. A dispute having arisen as to whether FDL was required to give those particulars in the circumstances, Canterbury applied by Summons for Directions dated April 4, 2019 for an Order that:

“i. The Plaintiff do provide the documents and information set out in the Defendant's letter to the Plaintiff with enclosures dated 20 March 2019 and attached to this summons at Appendix ‘A’, to enable the Defendant to satisfy itself that it is compliant with the Anti- Money Laundering Regulations 2018 (“AML Regulations”)…”

4 Mr Levers beguilingly characterised FDL's position on this Summons for Directions as entirely neutral and designed to assist the Court to give guidance on the correct legal position. He invited the Court to treat the application as analogous to a trustee seeking directions under the Public Trustee v Cooper 1 jurisdiction. It is true that the Plaintiff's formal position was framed in a neutral way. But irrespective of the way in which submissions were advanced at the effective hearing of Canterbury's Summons, the application was only made and pursued because FDL declined to provide the information sought. The position adopted by FDL made the hearing feel very much like a contested one. That said:

• (a) the legal issues raised appeared to be entirely novel and the legal questions which arose could not be answered by reference to any decided cases nor based on a simple and superficial reading of the relevant legislation; and

• (b) FDL's counsel did in the course of argument narrow significantly the categories of information sought with respect to which the initial objections to production would be maintained. This was consistent with his client's avowed position that any information the Court found was properly required to be supplied would be furnished on a voluntary basis.

5 The main legal issue was whether the Court possessed the jurisdictional competence to compel FDL to produce the information sought to protect Canterbury from contravening its statutory obligations under, principally, the AML Regulations. The subsidiary factual controversy was, assuming that FDL could be compelled to produce the information sought, what scope of information FDL could properly be required to produce.

The factual matrix

Late evidence

6 The Third Affidavit of Dominic Sin was filed late. As Canterbury was able to file responsive evidence before the hearing (Seventh Affidavit of Holly Morrison), I decided to extend the time required for filing all late evidence.

The initial request

7 By letter dated March 20, 2019, Canterbury formulated the basis of their information requests as follows:

“As you are aware Canterbury Securities is registered with the Cayman Islands Monetary Authority (‘Regulator or CIMA’). In accordance with laws, rules, and regulations clients must supply corporate and personal documentation when changes are made to accounts held at any Cayman Island Broker Dealer, including Canterbury Securities. The Regulator's expectation is that all CIMA registered companies shall comply with all of its obligations as provided under the Anti-Money Laundering (AML’) Regulations (2018 Revision) (‘Regulations’). Through our continued AML reviews, we have become aware through the public filings from YRIV filed on EDGAR that there has been an undisclosed material change in the ownership structure of Fortunate Drift Ltd. In January 2019, the beneficial owner of Fortunate Drift Ltd was changed to Jielin He.

Canterbury therefore requests all necessary/required documentation to be submitted in order to comply with the regulations. In turn, you (as the client) have an obligation to supply the documentation as per CIMA AML Regulations by Monday the 25 March 2019 by close of business. Additionally, clients that do not supply the requested documentation to their broker dealer may face regulatory and/or governmental scrutiny…”

8 Fifteen items of information were then sought in an alphabetical list. In the course of argument, it became clear that items (a) (provided a new application form did not have to be signed, which it did not), (b), (e), (i), (k), (1) and (m) were not opposed in principle. Basic corporate documentation had already been supplied. Items (d), (f), (g), (h), (j), (n) and (o) were objected to on the grounds that they went too far or that their relevance had not been satisfactorily explained.

The context in which the AML requests were made

9 The Sixth Affidavit of Holly Morrison, Canterbury's Chief Operating Officer, provided important background evidence which was not (and could not credibly be) disputed by FDL. Firstly, the information requests were not litigation driven but were triggered by Canterbury's genuine compliance concerns. Ms Morrison deposed:

“ 11. On 27 March 2019 Canterbury sent a further email to FDL as FDL failed to respond to the March 2019 Letter and giving FDL until 29 March 2019 to respond to it… The deadline of 29 March 2019 was imposed by Canterbwy because during its recent CLMA audit, FDL was one of the clients CIMA's auditor randomly selected to review to prepare his audit report and that was the deadline imposed by CIMA's auditor for providing the KYC and AML documentation for FDL to CIMA's auditor.”

10 Secondly, there were objectively credible and serious grounds for Canterbury to be concerned about the...