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Pursing Assets in a Cook Islands Trust

Cook Islands Trust law provides for substantial legal barriers to judgment creditors. So, this article will discuss and provide a demonstration of the legal provisions that are in place to protect your assets from hungry litigants.

It all starts with a home jurisdiction court order against you, the trust settlor. When the one who holds that court order to seize your assets tries to enforce it, they come to find out that your riches are held in a Cook Islands Trust. Even with a U.S. court order demanding the return of your assets from the trust, your assets are secure. The reason is that under Cook Islands laws foreign court orders are not recognized. So, this order offers no benefit to your creditor. What your creditor would need, in theory, is a Cook Islands court order negating the transfer of the assets to the trust. However, this is a nearly insurmountable task, as we will illustrate.

Representation in the Cook Islands

First your creditor will have to retain legal counsel in the Cook Islands and build the case against you, the trust settlor. One important note is that Cook Islands legal fees are paid in advance. Thus, Cook Islands lawyers are not allowed to work for contingency fees. This is your first litigation deterrent, a contingency fee lawyer in your home jurisdiction pursing your assets in the Cook Islands will incur substantial legal fees in order to get to first base.

Statute of Limitations on Fraudulent Transfer

First base means making a determination whether or not the case can proceed in the Cook Islands under their fraudulent transfer laws. (For the record, fraudulent transfer is a civil action.) First and foremost, if the challenging action is later than one year from funding the trust or two years from the cause of action (the reason the lawsuit was filed), it's too late. If the transfer of assets is beyond this timeframe, your creditor and its legal counsel cannot proceed. Any action filed against you in the Cook Islands regarding this issue will not be accepted. The statute of limitations is a significant factor in protecting trust assets. In most cases, the legal proceedings in your home jurisdiction wind up lasting longer than the statute of limitations time limits on asset transfer in the Cook Islands.

Setting up the Case

The next unique legal barrier is a detailed statement of claim. What separates the Cook Islands requirement is that the plaintiff's side will not receive any discovery materials until after their statement of claim has been submitted. In other jurisdictions without this specific requirement, a legal team can submit a vague statement of claim and amend it after discovery phase with your party's documents. In the Cook Islands your statement of claim has to be provided via an affidavit identifying each fact in detail. If or when the case proceeds and if the discovery documents show a different story, your creditor cannot amend his claim. Instead a brand new statement must be prepared. More often than not, by then the time limit for action has expired. This means that your creditor must have his facts straight from the onset and be almost exact with the detail in order to continue proceedings against your assets in the Cook Islands.

If this sounds like a system that is designed to be a major barrier, it is. This system was deliberately designed to protect assets from contingency fee lawyers and protect trust settlors from frivolous lawsuits.

Proving Insolvency

As if the statute of limitations and procedure weren't enough, your creditor must prove that you had intent to defraud when you transferred assets, or settled the trust. This requires proof that the transfer of assets rendered you insolvent and that you set up the trust specifically to keep your assets away from the creditor pursing your assets, no others. In order to prove this, your creditor will have to have significant access to your financial affairs before being able to proceed. Just one more hoop to jump though. There are no bankruptcy laws in the Cook Islands. Plus, there is no recognition of foreign bankruptcy for a settlor of a trust. So, it doesn't matter if the transfer of assets rendered you insolvent against all of your creditors (the definition of bankruptcy). You can file bankruptcy in your home country and your trust assets can remain intact.

The Cook Islands measures solvency at the exact time the assets were transferred into the trust, and whether or not you retained enough to assets to repay this specific creditor. For example, you have $10M in assets and owe $10.1M to all of your creditors combined, this is the normal solvency test and you would fail. In the Cook Islands, if you transferred $9M to your trust and retained $1M with a creditor pursing $800.000, you are solvent at the time because you retained sufficient assets to pay the creditor immediately after the transfer was made. Using the same example, if you had transferred $9.3M in assets and your creditor was owed $800,000 at the time of transfer, it would be fraud, as you would not have retained sufficient assets to pay that specific creditor.

In English and US law it's very simple, if you have $10.1M in debt and have $10.1M (or more) elsewhere, any transfer of assets would be considered fraudulent. The Cook Islands solvency tests are in your favor. Moreover, the Cook Islands ignores the fluctuations in valuation, so if you retained enough assets to settle a claim at the time of transfer, however due to some unexpected market change the value decreased and was no longer sufficient, you are still solvent at the time of transfer and it is not considered fraudulent. But even if it is, there are still additional legal provisions in the laws to trust protect assets.

Most creditors do not choose to pursue assets held in a Cook Islands Trust. Your creditors are faced with these barriers to litigation to proceed in a Cook Islands court. It's safe to say that frivolous lawsuits don't happen in Cook Islands courtrooms.