This memorandum summarises the provisions of the Cook Islands International Trusts Act (1984) (ITA) in relation to fraudulent transfers. The information is intended to be for general advice only. It is not intended to be a substitute for a formal legal opinion.
The purpose of the ITA is to protect transfers of assets to an international trust (trust) from being set aside where the settlor is involved in litigation.
A plaintiff may take an action against a settlor and seek various remedies including an award of damages. If the plaintiff (now creditor) receives an award of damages, he must then look to how to enforce the judgment. The first step is normally an examination as to what assets the settlor owns. If the creditor finds the settlor has few if any assets, then the examination extends to whether the settlor has in recent times disposed of any of his assets. If assets have been transferred without adequate consideration by the settlor to another person, (including to a trust), then the creditor is likely to bring proceedings against the settlor alleging the transfer of those assets was fraudulent. If those proceedings are successful and the court finds the transfer of assets was fraudulent, then that transfer is void and the trustee ordered to transfer the assets back into the name of the settlor (or the trustee in bankruptcy).
If the assets were transferred by the settlor to an entity in a foreign country, the creditor will need to apply to a court in that foreign country to recognise and give effect to the decision that the transfer was fraudulent. A foreign court will normally enforce that judgment under ordinary principles of international law.
However, Cook Islands law as to fraudulent transfers to a trust differs significantly from that of most other countries. For this reason, S13 D prohibits recognition or enforcement of a foreign judgment by a Cook Islands court if the foreign judgment is based upon the application of any law inconsistent with the ITA.
For example, a fraudulent transfer judgment obtained by the creditor in a US court will not be given effect in the Cook Islands.
The creditor must therefore commence proceedings anew in a Cook Islands court relying on the US damages award against the settlor, and argue that the transfer was fraudulent under Cook Islands law. To be successful in this action, the creditor must address those aspects of fraudulent transfer law set out in S 13 A & B and S 13 K.
COOK ISLANDS FRAUDULENT TRANSFER LAW
There are 3 main sections dealing with fraudulent transfers to a trust. These are S 13 A, B, and K.
S 13 A provides that, subject to S 13 B, a disposition to a trust shall not be void or voidable in the event of the settlor’s bankruptcy or in any action by creditors of the settlor.
S 13 B To establish fraudulent transfer the creditor must prove beyond reasonable doubt that ;
- the assets were transferred with principal intent to defraud that creditor, and,
- at the time of transfer, the settlor either was insolvent, or did not retain sufficient assets outside of the trust to meet that creditors claim.
Even if these criteria are met, the transfer is not avoided, but rather the trustee of the trust is liable to satisfy the creditors claim.
S 13B sets out further tests to decide whether the settlor;
- had an intent to defraud the creditor, and
- was rendered insolvent which is defined as retaining insufficient assets outside the trust to meet the creditors claim.
S 13 B (2) takes the value of the retained assets as at the date of transfer, and not at the date of litigation, so that the settlor is not prejudiced by any loss of value.
S 13 B (3) contains an irrebuttable presumption against the settlor having a fraudulent intent where;
- The disposition of assets occurred 2 years or more after the date the cause of action accrued. (see below on how to determine the date the cause of action accrued), or
- The creditor fails to commence proceedings on that cause of action within 12 months of the date of disposition of assets.
S 13 B (5) likewise provides that where the disposition of assets takes place before the cause of action accrued, the settlor is deemed not to have any fraudulent intent.
S 13 B (7) states that the onus of proof of the settlors intent to defraud is on the creditor
S 13 B contains a number of other provisions protecting transfers of assets to a trust, including a requirement that the creditor exhaust all remedies in relation to any other property of the settlor (S 13 B (13), before coming to a Cook Islands court.
The date the cause of action accrues.
It is important for the purposes of the tests in S 13 B (3) to define the exact date the creditors cause of action accrues. This is not the date of the judgment for damages, or for fraudulent transfer, being given.
S13 B (8) sets out tests to be applied to determine this date. It is noted that where there are multiple causes, the date of the first act is taken as the effective date. (S 13 B (8) (a) & (b). The facts of each case will need to be examined carefully to reach a decision on this matter.
S 13 K
If the creditor decides to bring proceedings alleging fraudulent transfer in a Cook Islands court, he must also satisfy the requirements of S 13K.
S 13 K sets out separate tests which must be met before proceedings alleging fraudulent transfer can commence in a Cook Islands court. These tests are an absolute bar to any proceedings and relate to the date of transfer of the assets rather than to matters of intent or solvency.
S 13 K (1) prohibits proceedings alleging fraudulent transfer being brought against a settlor unless commenced in the High Court of the Cook Islands within 2 years of the date the assets were transferred to the trust. Similar provisions restrict actions by persons claiming to have, or have had, an interest in that property, whether legal or equitable. If the 2 year test is satisfied, S 13 K further requires the numerous criteria in S 13 B to be satisfied by affidavit at the time proceedings are filed. Discovery and other interlocutory remedies are not available unless the same tests are met. This has the effect of preventing fishing expeditions. The evidentiary burden of these tests are difficult to satisfy.
There are alternative courses of action available to the creditor instead of issuing proceedings in the Cook Islands.
If the creditor knows what and where the trust assets are, he may decide to ignore the trust and chase after the assets. If the trust assets are located or custodied in the US, then this is a viable option. If the trust assets are located or custodied in a third country, the success or otherwise of this approach will depend on the attitude of the courts of that third country. In Switzerland, for example, unless there is an element of criminality, the courts have declined to enforce foreign judgments against a Cook Islands trust as to fraudulent transfer, reasoning that the issue should be addressed by the courts which gave the judgments and by the law of domicile of the trust.
The creditor might also try to persuade a US court to order the settlor to bring the assets back into the US under threat of being found in contempt. The trustee is duty bound to resist any such attempt.
The creditor can go back to a US court with his original award of damages, ask the Court to apply Cook Islands law, and argue that the transfer was fraudulent, under Cook Islands law. This assumes a US court will interpret Cook Islands law differently to a Cook Islands court. I am not aware of any instance in the last 40 years where this approach has resulted in a transfer of assets being declared void.
There are perhaps 2 other courses of action which depend on whether the trustee has a presence either in the US, or in a third country outside of the Cook Islands. These are viable courses of action and for this reason it is important to choose a trustee company with no presence outside the Cook Islands.