In this feature we hear from Cook Islands Finance CEO Alan Taylor, who offers a deep dive into the legislative measures that enable the Cook Islands jurisdiction to maintain a competitive presence in wealth protection.
Why are the Cook Islands regarded as a jurisdiction of choice in terms of asset protection?
The strength of the Cook Islands offshore jurisdiction is in its ability to pass laws to meet the needs of today’s society. The Cook Islands has used this ability to focus on what is an essential, but oftenneglected, element of wealth planning – the protection of assets – making it an industry leader in the preservation and protection of wealth. The Cook Islands has developed within its trust, foundation and company laws a wealth protection framework to benefit all HNWIs.
What makes Cook Islands trusts unique?
Cook Islands trust law is derived from English common law, as modified by the International Trusts Act 1984 (‘ITA’). In 1989 the ITA was amended to introduce comprehensive asset protection provisions seeking to protect the rights of individuals whose wealth is exposed to those who may attempt to take it by force, litigation or legislation whether through illegal, unethical or immoral means. The new laws were innovative and ground-breaking at the time, their success reflected in the number of jurisdictions that have since copied them in part or in whole.
The asset protection features of the ITA include:
Foreign judgments – a Cook Islands court will not recognise any judgment that is based upon any law inconsistent with the ITA or which relates to a matter governed by the laws of the Cook Islands. Any claim against assets in a Cook Islands international trust must therefore be
commenced de novo in a Cook Islands court.
Forced heirship – no Cook Islands international trust, or any settlement on it, shall be void or voidable, and nor shall the capacity of a settlor be questioned, in the event such trust or settlement may defeat the heirship rights of any person related to the settlor.
Bankruptcy – no Cook Islands international trust or any settlement on it shall be void or voidable in the event of the settlor’s bankruptcy in his home jurisdiction.
Spendthrift beneficiaries – any interest in trust assets given to a beneficiary shall not, during their lifetime, be alienated or pass by bankruptcy, insolvency or liquidation or be seized or taken in execution, by process of law.
The most significant trust law changes, however, were with respect to a creditor’s action against a transfer or transfers to a Cook Islands international trust, strengthening the position of the settlor in protecting his/her wealth. In that regard, the starting point was to abolish the Statute of Elizabeth.[1] From an asset protection point of view it is extremely important that trust assets are not in a jurisdiction which remains subject to the Statute. In its place, rules were enacted with statutory limitation periods providing certainty in determining whether a disposition to a Cook Islands international trust is fraudulent or not.
The Cook Islands has developed within its trust, foundation and company laws a wealth protection framework to benefit all HNWIs.
Those rules are detailed in s 13B of the ITA and include provisions deeming settlements and dispositions of property not to be fraudulent against a creditor in specified circumstances, as follows:
- Settlements or transfers made prior to that creditor’s cause of action accruing will not benfraudulent (s 13B(4));
- Settlements or transfers made later than two years after that creditor’s cause of action accrued will not be fraudulent (s 13B(3)(a));
- Where settlements or transfers are made within two years of that creditor’s cause of actionnaccruing, but that creditor fails to bring an action in a court of competent jurisdiction before the expiry of one year from the date of settlement or transfer, that settlement or transfer will not be fraudulent (s 13B(3)(b)).
Section 13B(8) of the ITA provides that the date of the cause of action “shall be, the date of that act or omission which shall be relied upon to partly or wholly establish the cause of action”. Where there is more than one act or a continuing omission, the date shall be the date of the very first act or when the omission commenced.
Where a creditor’s claim is not precluded by the above deeming provisions, then the creditor must make a claim in the High Court of the Cook Islands within two years of the date of settlement or transfer of the property in question to the trust (s 13K(2)).
In summary, a creditor must commence an action in a court of competent jurisdiction within one year of the date of the disposition he is claiming against and in the Cook Islands High Court within two years of that same disposition. These rules provide a great deal of certainty for advisers and clients alike as well as the existing and future creditors of those clients.
Where a disposition is within the relevant periods, the creditor may be in a position to challenge that disposition as having been fraudulent. However, in doing so he/she must prove beyond reasonable doubt that the disposition was made with the principal intent to defraud that creditor. The standard of proof is therefore the criminal standard.
Under the ITA, where a fraudulent disposition is deemed to have taken place, it will not void the trust completely. The court will only allow the creditor access to the transfer or disposition the subject of the creditor’s claim. Accordingly, other transfers to the trust and the trust relationship itself will remain on foot.
The new laws were innovative and ground-breaking at the time, their success reflected in the number of jurisdictions that have since copied them in part or in whole.
Please tell us about the Limited Liability Companies Act 2008 and Foundations Act 2012. How have these laws enshrined asset protection in the Cook Islands?
Since the amendments to its trust laws, the Cook Islands has enacted limited liability company and foundation laws which also incorporate a number of asset protection features.
Limited Liability Companies Act 2008
The Cook Islands Limited Liability Companies Act 2008 (‘LLC Act’) contains several specific features designed to provide and enhance the protection afforded to a client’s wealth when holding, managing and investing assets through a Cook Islands limited liability company (‘CI LLC’).
- The sole and exclusive remedy for a creditor against a membership interest in a CI LLC is the right to apply for a charging order.
- A charging order only entitles a creditor to distributions, as and when made by the CI LLC, in relation to the membership interest. It is not to be construed as a lien on or assignment of a membership interest or entitle the creditor to exercise any membership rights in relation to that interest.
- The person in whose favour a charging order has been issued shall have no right to interfere in the management of the CI LLC, seize or liquidate its assets or effect its dissolution.
- Contribution calls made by the CI LLC on members can be paid by the company from capital or income otherwise payable to members as distributions. This is also the case where a charging order has been issued upon a member’s interest. In such circumstances as the distribution will never reach the member, the creditor has no claim to it.
- Foreign judgements seeking to deprive a member of a CI LLC of any membership interest or rights will not be recognised in the Cook Islands courts.
Foundations Act 2012
The Act incorporates a number of the asset protection features contained in the ITA, including those in relation to foreign judgements and forced heirship rights, but most significantly it has adopted the fraudulent conveyance rules providing dates and events to give certainty to creditors seeking to claim against transfers to the foundation.
How has the government of the Cook Islands worked to ensure that the country proves attractive for the preservation and protection of wealth?
Whilst supporting the offshore industry by passing laws to develop and enhance wealth protection, the Cook Islands government has also passed laws and regulations to ensure the Cook Islands is not included in the blacklists published by organisations such as the FATF, OECD and EU. The government’s commitment to meet its international obligations and ensure the Cook Islands is not a target for money laundering, tax evasion and other financial crimes, has cemented its international reputation and good standing ensuring the Cook Islands remains open for business and a wealth protection jurisdiction of choice.
Alan Taylor, CEO
P.O. Box 3255, Clarkes Building, Parekura, Rarotonga, Cook Islands
Tel: +682 21175
E: alan.taylor@cookislands.gov.ck
Alan Taylor is currently the interim CEO of Cook Islands Finance. He graduated from Auckland University in New Zealand with degrees in law and economics and is admitted to the bar in New Zealand, with working experience in the international financial services industry in the Cook Islands, Jersey and Singapore. Alan has held legal, business development and senior management positions in both public and private organisations and is a member of STEP, the Institute of Leadership and Management and the New Zealand Institute of Directors.
Cook Islands Finance is the operating name of the Financial Services Development Authority, the Cook Islands government agency responsible for the promotion and development of the country’s financial services industry. It seeks to increase awareness of the industry internationally in order to generate and sustain long term professional and client relationships.
[1] 13 Elizabeth 1 Ch 5 (1571).
