The Grand Court Clarifies The Ordinary Rule For Damages In Temporary Deprivation Of Property Cases

• Published date: 07 March 2024
• Subject Matter: Corporate/Commercial Law, Corporate and Company Law, Contracts and Commercial Law, Securities
• Law Firm: Appleby
• Author: Mr David Lee, Daniel Coelho, Crystal Au-Yeung and Ray Leung

The Grand Court of the Cayman Islands in Fortunate Drift Limited v Canterbury Securities, Ltd (FSD 227 of 2018) has provided helpful guidance on (i) the measure of damages ordinarily applicable in temporary deprivation of property cases; and (ii) the circumstances in which the ordinary rule may be displaced.

Background

The dispute concerned shares in Yangtze River Development Ltd (YRIV), a PRC based company listed on the NASDAQ. YRIV achieved NASDAQ listing in December 2015 through a "reverse merger" process, which became popular after the global financial crisis of 2008. The process involves a private company acquiring an existing, but often defunct, U.S. public company that still carries a symbol on a U.S. stock exchange. This enables the private company quickly to begin trading in the U.S. with the gravitas of a listed company, without having to go through the rigors of an IPO.

In the case, the key parties were Fortunate Drift Limited (FDL) and Canterbury Securities, Ltd (CSL). The sole asset of FDL, a BVI company, was said to be its shares in YRIV. CSL, a Cayman Islands securities investment company, provided brokerage services to FDL pursuant to a Brokerage Contract. FDL deposited 6 million of its YRIV shares with CSL for trading purposes.

In order to obtain finance, FDL entered into a Stock Purchase Agreement (SPA) with PFS Management Limited (PFS) in which PFS bought a certain number of YRIV shares from FDL for US$10 million. The SPA contained a put option allowing PFS to sell the shares back to FDL at a prescribed price. FDL was required to secure its obligations under the put option by leaving a sufficient amount of YRIV shares with CSL.

FDL and CSL became embroiled in a dispute which resulted in FDL terminating the Brokerage Contract and demanding the return of its YRIV shares held by CSL. CSL refused to return any shares and subsequently sold a proportion of the YRIV shares purportedly to preserve the value of the security, should PFS exercise the put option. CSL said it took this action in response to the publication of a public report by Hindenburg Research, which was going to (and did) destroy YRIV's share price.

During the relevant period, including when FDL demanded the return of the shares, YRIV's share price was around US$11.50. After publication of the Hindenburg Report, YRIV's share price collapsed. By the time of trial, the shares were worthless.

FDL brought proceedings against CSL for (amongst other things) breach of contract, breach...