John Ivsan gives an extensive overview of the benefits of Cook Islands Limited Liability Companies for asset protection planning.
‘Asset protection’ is a term used to describe legal planning that shields a client’s assets from the unanticipated claims of creditors. Asset protection planning employs any number of techniques in isolation or in conjunction to achieve this objective. A competent asset protection plan assumes that, at some point in the future, the client may be in some form of legal jeopardy obligating the client to account to his creditor those assets that are within the client’s control. Therefore, most asset protection planning techniques incorporate the separation of client control from the assets being protected.
Limited liability companies (‘LLCs’) have become popular asset protection planning devices in the United States and other jurisdictions for a variety of reasons. However, there are two prominent features of an LLC most frequently cited as reasons for their asset protectiveness: (i) The disassociation of ownership (as a member) of LLC assets from control of LLC assets (as a manager); and (ii) the limitation of creditor remedies to a charging order.
Disassociation of Ownership (Member) and Control (Manager)
On formation of a limited liability company, the parties to the LLC may specify in the articles of organisation or the operating agreement whether the LLC will be managed by its members or by managers. A member need not be a manager of an LLC.
A creditor in pursuit of an LLC member may wish to attach the member’s membership interest. LLC law generally regards a member’s interest as personal property capable of being transferred. When a creditor obtains rights to a member’s interest by way of voluntary or involuntary assignment, the creditor may be regarded as an assignee under the laws of most LLC jurisdictions. However, as previously stated, the assignee of a membership interest has no right to participate in, or interfere with, the management of the LLC.
The Charging Order Remedy
Most LLC jurisdictions provide that a judgment creditor may obtain by court process a charging order in respect of a member’s interest in an LLC. These same statutes generally describe the charging order remedy in terms that are substantially identical to the rights of an assignee of a membership interest. For example, the charging order may only permit the creditor to receive distributions otherwise destined for the member. In most jurisdictions, the creditor is not permitted to interfere with the LLC’s management or obtain direct recourse against the property of the LLC.
Certain jurisdictions provide that the charging order is the exclusive remedy for the creditor. One example is Section 45(6) of the Cook Islands LLC Act, which specifies that the charging order is the exclusive remedy as against a debtor’s membership interest.
Some jurisdictions do not provide limiting language, meaning that creditors may be able to pursue remedies other than, or in addition to, the charging order. In a handful of these jurisdictions, judges have permitted the creditor of a member to foreclose upon a single-member LLC, reasoning that there is little public interest served where there are no other interested parties in the LLC. Accordingly, asset protection planners generally prefer to form LLCs under the laws of a jurisdiction that contain such limiting language.
The Cook Islands: Background and LLC Law
In the 1980s, the Cook Islands enacted the world’s first asset protection trust legislation, reflected in 1989 amendments to the Cook Islands International Trusts Act, 1982 (the ‘ITA’). While certain common law jurisdictions, such as the Isle of Man, were perceived to limit the application of the Statute of Elizabeth on fraudulent transfers, the Cook Islands was the first jurisdiction to codify those limitations.
The protective provisions implemented under the ITA include:
Today, the Cook Islands is widely regarded as one of the most asset protective jurisdictions in the world.
LLCs are frequently used in conjunction with asset protection trusts. In the most common arrangement, the client settles a Cook Islands asset protection trust with a Cook Islands trustee, and the trustee acquires a membership interest in an LLC managed by the client. Assets held within the LLC thus become equitably owned by the trust but controlled by the client in his or her role as manager of the LLC.
The Cook Islands sought to bring additional certainty to the use of LLCs in asset protection planning by helping to develop and implement the Cook Islands LLC Act in 2008. The LLC Act is modelled on certain provisions of US state LLC law, but with important modifications that distinguish Cook Islands LLC law from any other jurisdiction.
Resignations & Withdrawals of Members
Section 37 permits the operating agreement to contain a provision requiring that a member, who withdraws from the LLC in breach of the operating agreement, compensate the LLC for damages arising from the breach. Such damages may be offset against amounts otherwise distributable to the member. For example, an operating agreement could specify that a member is liable for the cost of replacement capital upon premature withdrawal; damages in the case of a closely-held LLC may be substantially equal to the amount otherwise distributable to the withdrawing member. Section 38 reinforces this point by denying the withdrawing member any right to participate in the management of the LLC.
Assignment of Membership Interest
Upon the assignment of a membership interest, the assignor ceases to be a member of the LLC. However, the assignee is not admitted as a member with respect to the membership interest absent a provision to the contrary in the LLC’s operating agreement.
Limitations on Creditor Remedies
Section 45 contains a comprehensive set of limitations on creditor remedies in respect of a member’s interest in a Cook Islands LLC. Paragraph (2) specifically denies the creditor the ability to seize, charge, or levy against the membership interest. Furthermore, a membership interest cannot pass under a general assignment of a member’s property, become available to pay debts under intestacy, or pass to a trustee in bankruptcy.
The charging order remedy is permitted under the Cook Islands LLC Act. In fact, the charging order is the sole and exclusive remedy available to a creditor in respect of a member’s interest in the LLC. This is the case even with a single-member LLC. The charging order remedy cannot be used to recover amounts that are considered exemplary or punitive in nature. It is non-renewable and expires after five years.
Upon application, the charging order entitles the creditor only to receive distributions in relation to the debtor’s membership interest, and only when those distributions are otherwise made by the LLC. The creditor is not treated as an assignee of the membership interest and gains no membership rights. The member continues to enjoy his membership rights as if the charging order does not exist. The creditor is barred from interfering with the management or assets of the LLC. Moreover, the LLC may make calls upon its members for additional capital, which the member may meet through distributions otherwise payable to the member.
A creditor cannot obtain interlocutory orders against an LLC in relation to a claim against a member. The creditor can only apply for an interim charging order ex parte, and the term of the order cannot exceed 30 days in length, subject to additional extensions no longer than 30 days each time. Foreign interlocutory orders are not enforceable against a Cook Islands LLC.
In a first for LLC law, the Cook Islands bars the recognition and enforceability of foreign judgments against a member’s interest in a Cook Islands LLC. The bar on recognition applies to any judgment pertaining to a member’s “membership rights, including a membership interest.”
Section 48 excludes a creditor from enjoying a member’s entitlement to information regarding the LLC. In addition, under Section 72(1), all proceedings (other than criminal proceedings) relating to an LLC, or its managers, members, and registered agents, and any appeals must be conducted in camera, and details of the proceedings are generally not to be published. Divulging confidential information concerning the LLC is a crime in the Cook Islands punishable by up to one year in jail or a fine of up to NZ $10,000.
 See Cook Islands Limited Liability Company Act, 2008 § 44 (first sentence).
 See, e.g., 6 Del. Code § 18-703(a) (Delaware law on charging orders).
 See: 6 Del. Code § 18-703(e); CI LLC Act § 45(8).
 6 Del. Code § 18-703(d).
 See: In re: Ashley Albright, 291 B.R. 538 (Bkr. D. Colo. 2003) (foreclosure permitted against single-member LLC in Colorado bankruptcy proceedings); Olmstead, et al. v. Federal Trade Commission, 44 So. 3d 76 (Fl. 2010) (foreclosure permitted against single-member LLC in Florida).
 Cook Islands International Trusts Act, 1982 (“ITA”) § 13B(3).
 ITA § 13B(2).
 ITA § 13B(5).
 ITA § 13B(1).
 ITA § 13B(14) & (15).
 ITA § 13D.
 CI LLC Act § 44.
 CI LLC Act § 43.
 CI LLC Act § 45(3).
 CI LLC Act § 45(6).
 CI LLC Act § 45(7)(d).
 CI LLC Act § 45(5).
 CI LLC Act § 45(12).
 It is important to note in this regard that Section 8(2) lists specific sections of the Cook Islands LLC Act that cannot be modified under the operating agreement; Section 35, governing allocations and distributions, is not listed and, arguably, may be modified under the operating agreement. Thus, one may consider drafting a provision in the operating agreement that permits the manager to make non-simultaneous distributions among the members.
 CI LLC Act § 45(4).
 CI LLC Act § 45(7)(b).
 CI LLC Act § 45(7)(c).
 CI LLC Act § 45(8).
 CI LLC Act § 45(18).
 CI LLC Act § 45(9).
 CI LLC Act § 45(10).
 CI LLC Act § 45(13).
 CI LLC Act § 45(14).
 CI LLC Act § 72(4); CI LLC Act § 78.
John Ivsan, Director, Southpac Group Switzerland Gmbh, Zurich, Switzerland