March 30, 2018 Matthew Smith

COOK ISLANDS LEGISLATION UPDATE

BY MATTHEW SMITH

The Parliament of the Cook Islands is currently debating a number of proposed changes to the Cook Islands International Trusts Act 1984 (the ‘ITA’), and is expected to pass the Amendment Bill into law within the upcoming months. Some exciting changes are underway, which will be of interest to our clients and attorneys alike for a number of reasons: some widen the scope of application of Cook Islands trust law, whereas others serve to bolster the existing asset protection provisions of the ITA.

The amendments seem largely to have been drafted with flexibility in mind, and allow for trusts to be used for non-charitable purposes, for ownership of trust property to be described without needing to refer to the trustee, and for a significant extension of the period of time for which a trust can ‘lay dormant’ before being re-registered following a failure to renew it. Of most interest to many of our clients will be a new provision which provides for security for costs to be paid into court by a creditor seeking to bring proceedings in the Cook Islands against a Cook Islands international trust.

In this article we look in more detail at the most significant amendments which are due to be brought into force and discuss what implications they will have.

Charitable and non-charitable purpose trusts

The provisions in the ITA relating to charitable trusts are due to be replaced by a set of provisions which provide additional clarity by confirming that international trusts can be created for charitable purposes and lists six purposes which are to be regarded as charitable (adding protection of the environment and advancement of human rights and fundamental freedoms to the existing list of relief of poverty, advancement of education, advancement of religion and other purposes beneficial to the community). Charitable trusts can benefit a section or certain members of the community. Charitable purposes can be carried out in or outside the Cook Islands and can benefit a community or section thereof in or outside the Cook Islands.

A new section 12A to the ITA makes specific provision allowing the creation of non-charitable purpose trusts, which are only allowed impliedly at present, and which can be prone to failure because there is no clear mechanism in place under the current law which allows the purpose of such a trust to be varied. Section 12A is modelled on provisions contained in St Vincent and the Grenadines and Nevis law which set out the terms on which a non-charitable purpose trust may be established. In particular, a non-charitable purpose trust deed must appoint ‘a person who is capable of enforcing the trust’ and a successor to that person; must specify a termination date or event; and make provision for the disposition of surplus trust property on termination of the trust. New section 12B codifies the cy-près doctrine and makes it clear that it can apply in relation to both charitable and non-charitable purpose trusts. This allows for much greater flexibility in relation to non-charitable purpose trusts and makes it much less likely that such trusts will fail as a result of a change in circumstances, as an application can be made to the court to vary the purpose of the trust in a manner consistent with the settlor’s intentions. It is worth pointing out that, under Nevis law, there are similar provisions in relation to the cy-près doctrine but they only apply to charitable Nevis trusts, which makes non-charitable purpose trusts in Nevis less attractive and more likely to fail. Unfortunately, the new Nevis International Exempt Trust Ordinance, which is due to come into force imminently, has not changed this position.

What these new provisions mean in practice is that a trust can more readily be settled with a non-charitable intention, such as investment in a certain business area, or the accumulation of wealth within a certain family group. This allows for more flexibility going forward, and means that a settlor adopting this model of trust will no longer need to identify all possible beneficiaries at the inception of the trust, only to be faced with the administrative and financial implications of adding or removing beneficiaries at a later stage. So long as the trust deed is clear as to the intentions of the settlor and the purpose of the trust and an enforcer is appointed, a trust which is set up as a non-charitable purpose trust may be more suitable for certain clients.

Recording of title 

Proposed changes to section 13 of the ITA mean that trust property is no longer required to be registered or recorded with reference to the name of the trustee, and will be deemed to be held by the trustees instead. This means that, in the future, trust property can be described as being held by ‘the XXX Trust’ rather than by ‘Southpac Trust International Inc as Trustee of the XXX Trust’. This should be of particular benefit when there has been a change of trustee.

Security for costs

Otherwise known as a bond, the concept of security for costs entails a plaintiff being required to pay a sum of money into court when issuing a lawsuit. If the suit is unsuccessful, the payment into court is used in part or full satisfaction of the defendant’s legal fees. As a result, it can act as an additional significant disincentive against bringing frivolous lawsuits. An attractive facet of Nevis trust law, now in place for several years, is the requirement that a US$100,000 bond is paid into court prior to bringing proceedings in a Nevis court against a Nevis international trust (in fact, this figure is set to increase to US$250,000 under the soon-to-be-enacted Nevis International Exempt Trust Ordinance). The Cook Islands now looks set to follow suit: the ITA Amendment Bill provides that any creditor who seeks to bring proceedings in the Cook Islands to set aside the settlement or disposition of a Cook Islands international trust, or to seek any form of relief under the fraudulent conveyance provisions of the ITA, will be required to pay security for costs in the sum of at least 10% of the value of the claim (for claims of US$1m or less) or at least US$100,000 for claims worth above $1m.

Re-registration of de-registered trusts 

Currently, a trust whose registration is not renewed for a period of 90 days following the expiry of its renewal registration date is de-registered and removed from the register of Cook Islands trusts, losing all of its protective features that it acquired prior to that date as a result. Extensions to the 90-day time limit are only allowed in what are, in practice, exceptional circumstances, where the Registrar is satisfied that registration has lapsed due to a party’s inadvertence. The proposed amendments, however, allow for a trust which de-registers at the end of the 90-day period to re-register within 12 months of that date, on payment of the appropriate fee (which is not known at the time of writing), without losing any of its seasoning so on re-registration, the trust is deemed never to have de-registered. These provisions may be of interest to any clients who have allowed their trusts to lapse and de-register only to subsequently discover, within 12 months, that they do need the protection offered by the trust after all.

These amendments are set to cement the Cook Islands’ reputation as the premier offshore asset protection trust jurisdiction. It is hoped that they will encourage greater flexibility and creativity in the form of trusts used, while reducing the already very low incidence of lawsuits filed in the Cook Islands against international trusts. A further update confirming the passing into law of these amendments will be provided in due course.

Matthew Smith

Matthew Smith joined Southpac in March 2017 and works as Legal Counsel based in the New Zealand head office. Matthew is a dual-qualified attorney, having been admitted as a Solicitor of the Senior Courts of England and Wales in 2008 and as a Barrister and Solicitor of the High Court of New Zealand in 2017
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