As a jurisdiction Nevis is highly regarded as setting the standard among offshore limited liability company (LLC) and offshore trust laws among IFCs, blazing new trails in these areas since 1995, with which other jurisdictions are still just catching up. Even as the years have passed and other jurisdictions enacted similar laws, the laws in Nevis continue to remain at the forefront of innovation and practicability. Nevertheless, the legal and business world does not remain static; therefore, with external legal developments every law needs to be updated to remain relevant. The laws of Nevis are no exception and that is what Nevis has done.
On 27 May 2015, the Nevis Island Assembly enacted the Nevis Limited Liability Company (Amendment) Ordinance, 2015 (the LLC Amendments) and the Nevis International Exempt Trust (Amendments) Ordinance, 2015 (the Trust Amendments), both effective 1 July 2015. Additionally, amendments to the international corporation law in Nevis were enacted that day; such amendments are not discussed in this article.
The LLC Amendments
Along with several important as well as housekeeping provisions, principal among the provisions as enacted are updated judgment creditor provisions, including charging order provisions, a new fraudulent transfer section and provisions relating to mind and management.
Section 43 of the LLC Amendments contains the provisions addressing the rights of a judgment creditor. This is commonly referred to as a charging order provision, although it goes further than simply charging orders. The charging order is a remedy that a judgment-creditor of a member may use to attach the distributions made to the member in satisfaction of the judgment. It is, under most laws, a lien.
The objective of the charging order is to secure the judgment-creditor’s receipt of those distributions while at the same time precluding that judgment-creditor from interfering with the activities of the LLC as a going concern.
In 1995, when first enacted, this was a state-of-the-art provision limiting the ability of certain creditors of limited liability company members from obtaining rights to property of the limited liability company. The Nevis Limited Liability Company Ordinance (NLLCO) is one of the few (and certainly one of the first) to provide that this charging order provision is the sole remedy available to the creditor. Over the years issues have developed concerning how this provision works in the context of foreclosure and other equitable remedies and single member LLCs, among others.
The section is completely revised; the changes include:
Charging order limitations apply to bankruptcy trustees as well as general creditors, such that neither the trustee nor any receiver becomes an assignee, among other things (addressing issues in In re Albright, 291 B R 538 (Bankr D Colo. 2003));
It ignores punitive damages, multiplied damages, fines and penalties;
Permits redemption of a charged interest;
Acknowledges that this remedy is, as always, the sole and exclusive remedy, legal or equitable, dealing with potential judicial developments that might permit a member’s judgment creditor to exercise equitable remedies against the limited liability company and its property, such as ‘alter ego’ and ‘reverse veil piercing.’
Also clarifies that the limitations extend to single member limited liability companies (addressing issues in cases such as Olmstead v Federal Trade Commission, 44 So.3d 76 (Fla 2010) and In re Albright);
Clarifies that the order is not a lien and therefore there are no limitations on transfers or encumbrances;
Changes the existing law to provide that the creditor does not become an assignee and that no foreign judgment that purports to do this shall be enforced, as a practical resolution of the issue of whether Nevis law or the law of the jurisdiction in which that court sits applies;
Orders shall be non-renewable and shall expire after three years;
LLCs may make a capital call from its members and may retain a distribution that would otherwise go to the charged member as such member’s satisfaction.
New Section 43A deals with fraudulent conveyance issues as they relate to transfers to an LLC, ie, the ability of creditors of a member to recover a claim against such member from property contributed to the company; this is derived from §24 of the Nevis International Exempt Trust Ordinance. This essentially provides that the creditor must prove beyond a reasonable doubt that such transfer was intended to defraud the creditor and that the member was thereby rendered insolvent, considering all of his assets including the full fair market value of the LLC interest. The claim must be made within a two year window.
The Trust Amendments
The Trust Amendments modernize the Nevis International Exempt Trust Ordinance, 1994 (the Ordinance) and makes it more competitive in the trust services market. Amendments include provisions permitting a settlor to establish a directed trust, provisions that increase the asset protection aspects of a trust and ensure that trust administration will not be interrupted by an injunction or litigation, clarification of the application of the fraudulent transfer rule, provisions that facilitate the administration of a trust, the elimination of the Rule Against Perpetuities and the Rule Against Accumulations, a provision permitting a statutory tenancy by the entireties trust and an increased bond requirement for creditors who challenge an international trust.
Section 8A was added to better define the rights of a creditor of a beneficiary (including the settlor) of a discretionary trust. It greatly limits the rights of a creditor to reach a beneficiary’s interest in such a trust. In the absence of such a provision, a creditor of a beneficiary might attempt to obtain a court order to garnish future distributions made to or for the benefit of a beneficiary. Such garnishment could result in a trustee being unable to make any distributions for the benefit of a beneficiary. This section also specifically permits a trustee to make payments on behalf of the beneficiary without incurring any liability to a creditor and prevent even the remote possibility of any such attachment, garnishment or interference.
Section 9A was added to clarify that creditors will only have a right to a beneficiary’s interest in a trust if that beneficiary has either a lifetime or testamentary general power of appointment, that is, a power to appoint the trust property to the beneficiary, the beneficiary’s estate, the beneficiary’s creditors, or the creditors of the beneficiary’s estate, however, only to the extent that the beneficiary exercises such power of appointment. This provision codifies the common law rule regarding general powers of appointment.
Section 9B was added to clarify that creditors only have a right to a settlor’s interest in a trust if the settlor retains a power to revoke the trust and to appoint the trust property to the settlor, the settlor’s estate, the settlor’s creditors, or the creditors of the settlor’s estate, however, only to the extent the settlor exercises such power. Section 9B will enhance the asset protection provided by an international trust by giving creditors the right to a settlor’s interest only in the limited circumstances where the settlor has unfettered control of the trust property and exercises such control, however, only to the extent of such exercise.
The additions of 9A and 9B were in response to the case holding of Tasarruf Mevduati Sigorta Fonu v Merrill Lynch Bank and Trust Company, et al, Privy Council of the Cayman Islands, Appeal No 0036 of 2010, decided 21 June 2010. The codification of this rule should preclude a creditor of the settlor of an international trust who has retained a power of revocation from reaching the assets held in such trust and subject to the power of revocation notwithstanding the holding in Tasarruf.
Section 22 was amended to clarify that the Court may not issue a Mareva injunction, Anton Piller order, or any similar remedy. The purpose of the amendment was to prevent a claimant from circumventing the limitations on remedies contained elsewhere in the Ordinance, such as under Section 24 concerning creditor claims.
Subsections (3) and (4) of Section 24 were amended to clarify the fraudulent transfer rule. The revision implements a fixed one year window beginning with the date on which the creditor’s cause of action accrues. Subsection (5)(b) of Section 24 was revised to expand the list of powers that a settlor can retain without having an intent to defraud a creditor imputed to the settlor.
Trust Protectors were given expanded powers, including the authority to consent to a trustee’s request for a court to vary the purpose or terms of a charitable trust (Section 11 (2) and (3)), direct a trustee to make distributions, approve distributions made by a trustee, and/or direct the trustee to make particular investments (Section 9 (3)). By giving a protector authority regarding trust distributions and investments, in conjunction with giving trustees protection for following the directions of the protector, a trustee has the ability to administer trusts it would not otherwise be able to administer.
Waiver of Notice/Accountings
Section 35C(1) provides that the terms of a trust deed may expand, restrict, eliminate, or otherwise vary the rights and interests of beneficiaries, including the right of beneficiaries to be informed of their interests in the trust for any period, the grounds for removal of a trustee, the circumstances, if any, in which the trustee must diversify investments, and a trustee’s powers, duties, standard of care, rights of indemnification and liability to persons whose interests arise from that instrument.
Elimination of Rule Against Perpetuities
Section 5(1) eliminates the Rule Against Perpetuities and permits a trust to continue forever if the terms of the trust provide that the trustee has the unlimited power to sell all trust assets or if one or more persons, one of whom may be the trustee has the unlimited power to terminate the trust. Furthermore, Sections 5(3) and (4) eliminates the rule against accumulations.
Statutory Tenancy by the Entireties Trust
Section 56(2) permits the settlors of an international trust to fund it with tenancy by the entireties property. Following funding, the property in such trust will remain tenancy by the entireties property.
Section 55 was amended by increasing the amount of the bond required by a creditor before bringing an action governed by the Ordinance to Two Hundred Seventy Thousand Eastern Caribbean Dollars. This increase was made to help eliminate frivolous claims against the trustees of international trusts.
©David Neufeld (David@DavidNeufeldLaw.com) & Jonathan Gopman (email@example.com), All rights reserved. 2015
David Neufeld, Esq, Law Office of David Neufeld and Jonathan E Gopman, Esq, Partner, Akerman LLP, US