Volume XVII, Number 2 – July/August 2008
© Donlevy-Rosen & Rosen, P.A.
COOK ISLANDS LLC LEGISLATION:
A Long Time Coming…
BACKGROUND. Rather than dictating restrictive statutory rules, the Act permits broad latitude in the structuring and operating of an LLC according to its own rules. Thus, the operating agreement may contain any provision for the conduct of LLC business as long as it is lawful. Certain provisions (designed to protect the interests of its members) are mandated by statute.
A Cook Islands trustee company (only), acting on behalf of one or more persons who are nonresidents of the Cook Islands (or for itself in any capacity), may form the LLC. The operating agreement may specify whether the LLC is to be managed by a member or by a manager. Like most LLC jurisdictions, a creditor of a member is permitted to apply for a charging order against a membership interest to satisfy a judgment. The Act goes a step further by clearly setting out the nature and extent of that charging order, and the rights of the creditor against that membership interest.
SELECTED ANALYSIS.Section 45 of the Act defines a creditor as any person whose judgment is recognized by the High Court of the Cook Islands, and includes any person who claims to have a general assignment of a member’s property whether arising from an intestacy, bankruptcy or otherwise.
Section 45(6) specifies that the sole remedy for a creditor against a membership interest in an LLC is the right to apply for a charging order:
“(6) The charging order remedy given by this section shall be the sole and exclusive remedy available to a Creditor in respect of a member’s membership rights.”
Charging order provisions in other jurisdictions have been interpreted by courts (in the absence of sufficient definition of the precise nature of a charging order) to include rights similar to those of a mortgagee in possession, of an assignee, and of a lienholder. These varied interpretations have created uncertainty as to the extent of the protection afforded by an LLC. Such uncertainty has been eliminated in the Act by unambiguous provisions including subsections (7) & (8) of section 45 which provide as follows:
“(7) For the avoidance of doubt and without limiting the generality of subsection (6):
(a) a charging order shall not be construed to constitute a lien on a member’s interest in a limited liability company;
(b) 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;
(c) 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;
(d) subsection (6) shall apply whether the limited liability company has a single member or multiple members.
(8) 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:
(a) interfere in the manager’s management of the limited liability company including any sale of its assets;
(b) liquidate or seize the assets of the limited liability company;
(c) restrict the business of the limited liability company; or
(d) dissolve, or cause the dissolution of, the limited liability company.”
Exemplary, pecuniary and aggravated damages are not recognized in the Cook Islands, and, accordingly, may not be recovered under a charging order.
As is the case under US LLC Acts, the charging order provides that the creditor shall receive distributions of capital or income which would, but for the charging order, have been received in the hands of the member. However, if the LLC makes a call on members for capital in accordance with its operating agreement, 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 operating at the member side of the equation rather than at the company side. The distribution never reaches the member so the creditor has no claim upon it.
An interim charging order may be applied for ex parte, but will only be effective for 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 nonrenewable, and is enforceable for five years. After that, the creditor is out of luck.
The Act recognizes that the member and the LLC are separate legal persons in relation to interlocutory applications. An action against a member is not sufficient to support discovery orders or injunctions being issued against the LLC in which the member holds a membership interest.
Foreign judgments relating to the availability of a membership interest to satisfy a creditor (unless consistent with Cook Islands law), cannot be recognized or enforced in a Cook Islands court.
CONCLUSION. The new legislation provides a comprehensive but not cumbersome framework for the formation and 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.
DONLEVY-ROSEN & ROSEN, P.A. gratefully acknowledges the significant contribution of BRIAN MASON, ESQ. in the preparation of this issue. Brian is General Manager of Southpac Group operations. Brian is a New Zealand attorney with degrees in history and political science (MA (hons) 1981) and law (LLB 1990). Brian has been an attorney in private practice, and has extensive experience and expertise in governmental affairs. He has been a Principal Private Secretary to the New Zealand Minister for Health, Internal Affairs, & Local Government. More recently, he served as an advisor to the Prime Minister of the Cook Islands. Brian has authored numerous articles on offshore industry matters.