Taking Care of Clients When Litigation Hits

One of the primary reasons high net worth individuals have been choosing Southpac for over 40 years is the experience we bring to the table when clients come up against civil litigation. This is where Cook Islands and Nevis trusts really come into their own and provide world-beating levels of protection. Of course, the most effective protection is gained when a trust is set up before any potential creditor has a cause of action – a reason to sue you. All assets settled into a trust in those circumstances will have full protection from all future creditor claims from day 1. But great results are still possible even if litigation is threatened and often, even if it has already started.

It’s important to remember that the Settlor-Trustee relationship (or the Settlor-Attorney-Trustee relationship as is often the case) is a partnership that requires openness and honesty from all parties involved if it is to be effective. This requires clients and attorneys being upfront with us if storm clouds are gathering so that we can anticipate the threat and work effectively to counter it. We dig deep to ensure we have as much information as possible to understand our clients, their needs and their wishes, and so that we are well-equipped to counter any current or future threats. This helps us provide a better service and, in turn, provides superior protection for our clients.

If a client comes to us with litigation against them already underway, we may still be able to onboard them. Often, we will counter the threat by including an Exceptions to Trust clause (also known as a ‘Jones clause’) in the trust agreement. This provides that if a person has a specific live claim against the settlor when the trust is established and they subsequently succeed in that claim and can satisfy a range of criteria, including acting in accordance with strict timelines, the trustee may make a payment to that person from the trust in order to satisfy the claim. This is far from an open invitation to creditors however, and it is extremely rare for any payment to be made to a creditor under a Jones clause. The Jones clause provides a mechanism that creditors may use without needing to access the courts of the Cook Islands or Nevis and bring fraudulent transfer proceedings there, but there is almost always lower hanging fruit to grab, and in our experience creditors will pursue a settlement in the domestic courts before involving the trustee – assuming they are even aware of the existence of the trust. Having a Jones clause can also protect trust settlors from a domestic court making a finding of contempt of court against them because a repatriation of trust assets remains possible in theory – in this scenario, the settlor has not carried out a fraudulent transfer and has not made it impossible for the funds to be paid to the creditor.

To ensure we can protect all of our clients, we have had to let a very small number of clients go. This has happened in two limited scenarios. Firstly, where the client has received a criminal conviction for offences of a financial and/or fraudulent nature after establishing a trust with us. In many cases the regulators would severely criticize Southpac for maintaining a relationship with the client as a result of the nature of the criminal conviction. This could jeopardize our trustee licence, which would put all of our clients at risk as we are built on a foundation of protecting our clients.

In the second scenario, we have discovered that a client has set up a trust but has failed to inform us of litigation against them which was underway at that time, or to disclose the litigation in the affidavit of solvency they have provided during the trust establishment. Cook Islands trustee companies are required by law to resign as trustee if a client or their attorney has deliberately concealed the existence of litigation or some other material fact from them when a trust is established. This underscores the importance of clients and their attorneys being candid from the outset about the existence of litigation, potential creditors and other important information so that the trustee can be fully informed and can protect client assets through effective partnership. As in the first scenario, Southpac is dedicated to serving the best interests of all of our clients. This includes moving clients on where professional referrers have advised them not to share important information with the trustee. Fortunately this has not happened often.

Where clients and their referrers are upfront and honest with us we can achieve fantastic results. Here are a couple of examples. Names have been changed and some facts generalized to maintain anonymity.

1. Brad and James came to us in a David and Goliath situation, where they were being sued personally for $25m by an aggressive market-leading competitor that wanted to put them out of business and was paying very expensive attorneys whatever it took to make that happen. Southpac set up Cook Islands trusts to protect their assets with strict Jones clause provisions which placed additional hurdles in the place of any future creditor. While their opponents became aware of the existence of the trusts and sought to have them imprisoned for contempt of court, the Jones clause provided a safety valve in the trust agreement which kept them free while still placing significant hurdles in the place of their opponents – assuming their claims succeeded. The claims eventually settled for $2m.
2. Eric had built a successful family manufacturing business with clients in a number of other countries. Unfortunately, an unscrupulous client in one of those countries manufactured a complaint against Eric’s company and issued a claim in an overseas court. Eric instructed a local lawyer but they did a terrible job and Eric’s company lost the case. The former client then sought to enforce the judgment against Eric’s company in a domestic court. Eric worked closely with Southpac’s team to set up an offshore trust so that his own assets could be protected in case the client tried to ‘pierce the corporate veil’ and make him liable for the company’s debts – which they subsequently did. When the court tried to order him to direct the trustee to pay the trust fund into court, the trustee refused as the court was not a beneficiary of the trust and because the trust agreement contained anti-duress provisions. By this time the statute of limitations had expired and the creditor had no standing to bring proceedings against the trustee.

‘Without Southpac’s service, my family and I would have lost everything. Southpac safely holds 100% of my wealth and I am eternally grateful for your service.’