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Cook Islands LLC

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The Cook Islands LLC is a powerful asset protection tool in the arsenal of the world’s leading asset protection jurisdiction. The Cook Islands, an independently governed part of New Zealand, announced its limited liability company (LLC) act in 2008. The LLC was a welcome addition to the well renowned Cook Islands asset protection trust. Placing the Cook Islands LLC inside of the trust, gives greater control those seeking wealth protection.

Asset Protection Benefits

The legislature placed numerous features into the Cook Islands LLC laws that we do not find in other jurisdictions.

  • Cook Islands LLC members and managers are not a matter of public record.
  • The Cook Islands does not recognize foreign judgments.
  • In order to recognize a judgment, a foreign creditor must first re-litigate in the Cook Islands.
  • If the litigation against an LLC member results in a judgment in the Cook Islands, the judgment creditor can ask for a charging order against a member’s LLC.
  • However, any member of a Cook Islands LLC with a charging order* can still act and exercise their rights as a member.
  • A creditor with a charging order cannot interfere or participate with the operations of the company. Nor can they seize, transfer or liquidate any company assets or force the dissolution of the company.
  • Charging orders against a member’s interest expire after five (5) years. (U.S. charging orders can often last for 20 to 24 years.)
  • When a Cook Islands trust owns a Cook Islands LLC, there is a strict time limit in which one must file fraudulent conveyance actions. (1) Within one year from the time the trust was created and funded with the assets in question. (2) Within two years of the cause of action (reason why the lawsuit was filed).**

Cook Islands LLC Legal Report

The Cook Islands International Limited Liability Companies Act 2008 (“the Act“) follows the model adopted in a number of U.S. States. It goes further, however. That is, it gives statutory certainty on several key issues of concern to US attorneys using domestic US LLC statutes. The Act also introduces several unique asset protection features, consistent with the importance of this industry in the Cook Islands

The Act provides a broad foundation to structure an LLC according to its own rules, rather than have statute dictate them. The operating agreement may contain any provisions for the conduct of its business as long as they are lawful. Certain provisions (designed to protect the interests of its members) are mandatory.

Like most LLC jurisdictions, a creditor of a member is permitted to apply for a charging order against a membership interest. The Act goes a step further however, setting out the availability of other remedies, the nature and extent of that charging order, and the rights of the creditor against that membership interest.

S 45 of the Act is the starting point. A creditor is defined as any person whose judgment is recognised by the High Court of the Cook Islands. It includes any person who claims to have a general assignment of a member’s property whether arising from an intestacy, bankruptcy or otherwise.

S 45 (6) is specific that the sole remedy for a creditor against a membership interest in a LLC, is the right to apply for a charging order.

    The charging order remedy given by this section shall be the sole and exclusive remedy available to a Creditor in respect of a members membership rights.

Courts in other jurisdictions have interpreted similar provisions. However, they have often done so in the absence of sufficient definition of the exact nature of a charging order. This includes rights similar to those of a mortgagee in possession, of an assignee, and of a lienholder. These other jurisdictions have created uncertainty as to the extent of protection offered an LLC offers. On the other hand, the Cook Islands LLC statutes have removed uncertainty by clear provisions including subclauses (7) & (8) of section 45 providing as follows:

For the avoidance of doubt and without limiting the generality of subsection (6):

  1. a charging order shall not be construed to constitute a lien on a member’s interest in a limited liability company;
  2. the Creditor in whose favour a charging order is issued pursuant to this section shall not thereby become an assignee of any membership interest or any part thereof, nor shall that Creditor hold or be entitled to exercise any membership rights in relation to that interest;
  3. any member holding any membership interest subject to a charging order shall continue to exercise all his membership rights, and obligations in relation to those rights, in all respects as if the charging order had not been issued;
  4. subsection (6) shall apply whether the limited liability company has a single member or multiple members.

For the avoidance of doubt and without limiting the generality of subsection (6):and subsection (7), a person in whose favour a charging order has been issued shall have no right to:

  1. interfere in the manager’s management of the limited liability company including any sale of its assets;
  2. liquidate or seize the assets of the limited liability company;
  3. restrict the business of the limited liability company; or
  4. dissolve, or cause the dissolution of, the limited liability company

Exemplary, pecuniary and aggravated damages are not recognised in the Cook Islands, and accordingly are not able to be recovered under a charging order. For example, in many jurisdictions, such as the United States, there are “we are going to teach you a lesson” statutes. That is, a judge can impose damages on the debtor for many times those that the creditor incurred. Cook Islands LLC statutes forbid such damages.

S 45 (5)
“For the purposes of assessing the sum which may be subject to, and recoverable pursuant to, a charging order the Court shall disregard and exclude any amount which constitutes an award of exemplary, vindictive, retributory or punitive damages (by whatever name), or is an amount of damages arrived at by doubling, trebling or otherwise multiplying a sum assessed as compensation for loss or damage.”

What the charging order does provide for is this. It provides for the creditor to receive distributions of capital or income which would, except for the charging order, have been received in the hands of the member. If the limited liability makes a call on members for capital in accordance with its rules, the company may use a distribution due to the member to meet that capital contribution notwithstanding the charging order. This is consistent with the charging order being seated at the member side of the equation rather than the company. What that means is this. The distribution never reaches the member. Therefore, the creditor has no claim upon it.

An interim charging order may be applied for ex parte (without notifying the other party), but will only have a life of a maximum of 30 days. The applicant will need to ensure the defendant is served with the proceedings and must deal with the application expeditiously if a full charging order is to issue. Otherwise, a charging order, once granted, is only good for five years.

The Cook Islands LLC statutes give importance to member and the LLC being separate legal persons in relation to interlocutory applications. (Here is an example of an interlocutory order: An order that compels a spouse to pay a certain amount of money each week before the court resolves the issue for child support or alimony.) So, an action against a member is not sufficient to support discovery orders or injunctions one issues against the LLC merely because a certain member holds a membership interest.

Foreign judgments given in relation to the availability of a membership interest to satisfy a creditor, (unless consistent with Cook Islands law), cannot be recognised or enforced in a Cook Is court. That is, as stated previously, the Cook Islands does not recognize foreign judgments.

That said, LLCs are not required to have their members benefit from these protective statues. Plus,  these provisions apply subject to the operating agreement. This allows the formation of LLCs whose members are happy to put their interests at risk or to mortgage their interests. However, what they cannot do is to change their minds later. This is the one provision in an operating agreement which cannot be altered. This requirement is aimed to protect Cook Islands LLC members. That is, it avoida any involuntary amendments to the terms of the operating agreement affecting the applicability of that section.

LLCs may transfer their domicile from the Cook Islands to another jurisdiction. Plus, LLCs from other jurisdictions may seek registration to become Cook Islands LLCs under the legislation. However, LLCs wanting to escape existing corporate debts would do well to avoid the jurisdiction. The Act specifically provides that with redomicilation the LLC takes its prior debts with it and any action against the company, whether already filed or not, prior to redomiciliation, may be continued and any judgment entered shall be enforceable against that LLC in the Cook Islands. So, don’t move your debt-laden LLC to the Cook Islands and think you are going to get relief.

The usual confidentiality provisions apply. Proceedings are heard on camera and information may be divulged in only limited circumstances.

The Cook Islands LLC legislation provides a comprehensive but not cumbersome framework for the operation of LLCs. It is believed LLCs will provide a useful addition to attorneys and financial advisers in conjunction with the establishment of trusts in the Cook Islands.

* A charging order generally places a lien on a member’s interest in an LLC, but not in the Cook Islands. Moreover, the holder of the charging order cannot force the member to distribute assets from the LLC. Thus, that member’s assets remain safely tucked into the LLC until the charging order expires.

** This is not saying that the assets are not protected until the requisite time expires. The structure protects the assets immediately. It simply means that an opponent cannot successfully litigate a claim after this time expires.