Asset Protection

8.1.1 INTRODUCTION: This Part of the Paper looks at the legislation of some of the Offshore jurisdictions, and considers in detail the provisions in the five jurisdictions that have recently introduced specific amendments designed to attract CPT business.  A number of other jurisdictions are currently considering amendments.

8.1.2 These new provisions vary considerably in approach, as the legal systems in these jurisdictions have evolved differently.

8.1.3 The Cayman Islands and Bahamas have focused on amending their equivalent of the Statute of Elizabeth provisions on fraudulent Transfers.  [At the same time, they have left untouched their Bankruptcy provisions, based on the Bankruptcy Act 1914].

8.1.4 Gibraltar has, on the other hand, specifically amended its Bankruptcy provisions in relation to Transfers into Trust.

8.1.5 The Offshore jurisdictions are tending to introduce as a common theme what are sometimes referred to as "guillotine" statutes, the effect of which is to cut off the possibility of legal action being brought after a stated period of time.

8.1.6 The Offshore jurisdictions currently in the process of introducing CPT legislation tend to adopt those, or parts of those, already in force elsewhere.  This "designer legislation" phenomenon is understandable in light of competitive pressures.  However, it does not necessarily follow that a Settlor/Transferor should simply select the jurisdiction with the most attractive laws.  A detailed look at the various provisions follows in 8.2-8.7.

8.2 COOK ISLANDS.

8.2.1 The Cook Islands was the first Offshore jurisdiction to adopt specific CPT legislation: this is contained in the International Trusts Amendment Act 1989, passed on the 8th of September 1989, and effective 8th of September 1989 (also known as the Fraudulent Dispositions Law 1989).  S.6 of the 1989 Act inserts new sections into the principal Act, in particular new SS.13A-I.  The Act was further amended in December 1989; and again more recently in December 1991.

8.2.2 The Act applies specifically to Transfers to "international Trusts" (as defined).  S.13A provides that an International Trust shall not be void or voidable in the event of the Settlor's bankruptcy, or in any action or proceeding at the suit of creditors of the Settlor: however, the "fraud" provisions of S.13B may apply.

8.2.3 S.131B provides a remedy in cases of fraud.  The burden is on the creditor to prove that as International Trust was settled "with principal intent to defraud that creditor of the Settlor", and that the Transfer rendered the Settlor insolvent or without properly by which that creditor's claim could (if successful) be satisfied.  If the creditor succeeds in showing this, then the Trust Fund is made available to satisfy the Creditor: the Transfer (hence the Trust itself) is not made void or voidable.

8.2.4 The expression "insolvent" is not specifically defined, but S.13B provides that in determining whether a Transfer has rendered the Settlor insolvent, regard is to be had to the fair market value of the Settlor's remaining property immediately after the Transfer, and if such, fair market value exceeded the value of the creditor's claim at that time, then the Transfer is deemed not to have been made with fraudulent intent.

8.2.5 There are other restrictions.  A Transfer is deemed not to be fraudulent if made more than two years after the creditor's cause of action "accrued", or where the creditor fails to bring an action within one year of the Transfer.  Conversely, a Transfer is not deemed fraudulent just because it is made within two years of the creditor's cause of action accruing.  And by virtue of amendments passed in December 1991, the action must be commenced in the Cook Islands within two years of the Transfer.

8.2.6 As noted, the burden of proof is on the creditor: in addition, the Act requires creditor claimants to prove their claim "beyond a reasonable doubt".

8.2.7 Where the Trust Fund is held liable to satisfy a creditor's claim but is unable to do so by reason of the fact that the property has been distributed to a beneficiary, then the distribution to the Beneficiary is itself held void.  In absence of a "good faith" test of these provisions may be impracticable, especially if the Beneficiary has spent or consumed the funds distributed.

8.2.8 As noted in 7.3.5, Section 13D provides for the non-recognition of a foreign judgment against an International Trust, its Settlor, Trustee or Protector.

8.3 CAYMAN ISLANDS.

8.3.1 The Cayman Islands were next to introduce CPT legislation: their Fraudulent Dispositions Law 1989 was passed on the 6th of November 1989, less than 2 months after the Cook Islands' Laws, and became effective on the 1st of May 1990.

8.3.2 Under S.4(1) of the Cayman provisions, a Transfer into Trust is voidable at the instance of the creditor thereby prejudiced if made with an "intent to defraud" and at an undervalue.  "Intent to defraud" is defined as an intention of a Transferor willfully to defeat an "obligation owed" to a creditor.  It is no longer sufficient to show that a creditor was merely delayed or hindered.  And "obligation" means an obligation or liability (including a contingent liability) which existed on or prior to the date of the Transfer; and of which the Transferor had notice.

8.3.3 Under S.4 (2) the burden of establishing "intent to defraud" is on the creditor seeking to set aside the Transfer.

8.3.4 Under S.4 (3) there is a limitation period of six years, measured from the date of the Transfer.  Thus, a Creditor can effectively challenge a Trust only during the first six years from its creation.  Contrast with 8.6.4 below.

8.3.5 If a Transfer is set aside pursuant to the provisions, the Creditor obtains a first charge over the property, but subject to the rights of any Beneficiary receiving a distribution in good faith.  Thus, a Beneficiary to whom Trust Assets have been distributed may retain them in the absence of the Beneficiary having acted in bad faith.

8.3.6 The Trustee, as Transferor, is awarded its costs of defending the litigation if the Court is satisfied that it has not acted in bad faith.  Likewise, a Beneficiary to whom Trust Assets have been distributed may also retain them if the Court is satisfied that the Beneficiary has not acted in bad faith.

8.3.7 The onus is placed on the Trustee and/or the Beneficiary to establish an absence of bad faith.

8.3.8 The 1989 Law did not alter the pre-existing Bankruptcy legislation in the Cayman Islands.  Cayman Islands Bankruptcy Law can be applied on jurisdictional grounds either if the debtor is a resident of the Cayman Islands, or if the debtor (being resident anywhere) commits an act of bankruptcy in the Cayman Islands.  The first jurisdictional ground (the debtor being a Cayman Island resident) is unlikely to apply as regards CPTs, as the Settlor/Transferor of these will normally be resident in the United States.

8.3.9 Thus, if there is an act of bankruptcy in the Cayman Islands and the Settlor becomes bankrupt within two years of creating a Trust, it may be set aside by his/her Trustee in bankruptcy.  Alternatively, if the Settlor becomes bankrupt within twelve years of the settlement, the Trustee in bankruptcy may apply to have the settlement set aside unless the persons who claim the benefit under the settlement can establish that at the date of the settlement, the Settlor was able to pay all his debts without taking the settled property into account, and that the interest of the Settlor in the property passed to the Trustee thereof.

8.4 GIBRALTAR.

8.4.1 Gibraltar passed CPT legislation by way of amendments to its Bankruptcy Ordinance on the 8th of March 1990. The legislation aims specifically at Transfers into Trusts made by non-resident individual Settlors. and provides fur a system of confidential Registration with the Gibraltar Authorities.

8.4.2 If a Transfer to a Trust made by an individual is duly registered, and at the date of the Transfer the individual Transferor is not insolvent and does not thereby become insolvent, the Transfer is not voidable.  In any other case, the Transfer is voidable.

8.4.3 "Insolvent" is defined as where liabilities exceed assets.  Note that the definitions of "insolvent" in relation to a Settlor/Transferor includes any of his/her liabilities, both actual, contingent or prospective.  This is mitigated by the proviso that a claim is only deemed a contingent or prospective liability of the Settlor/Transferor if he/she had (at the time of the Transfer) actual notice of the claim, or of the facts and circumstances which may render him/her liable. 

8.4.4 The details of the registration and authorization requirements are contained in the Bankruptcy (Register of Dispositions) Regulations 1990.  These are designed to safeguard the way in which Trusts are established, and by whom.  In addition to the normal licensing requirements for Trust Companies under the Gibraltar Financial Services Ordinance, the new legislation requires any proposed Trustee of a CPT to be specifically authorized by the Gibraltar Authorities as having adequate financial and administrative resources. To date, only three Trust Companies have been approved by the Authorities for this purpose.

8.4.5 It is further a requirement that any such Trustee must obtain the approval of the Authorities to the Trustee's "forms of inquiry" with regard to solvency, which must be administered to the Settlor.  The Trust Company furthermore should have a level of professional indemnity insurance considered adequate by the Gibraltar Authorities, and in any event not less than the sum of 1 Million Pounds Sterling. 

8.4.6 Any Transfer into Trust that seeks to acquire the benefit of the new legislation must be registered in a confidential Register established for such purposes.  There is an application fee of 300 pounds, and an annual fee of 100 pounds in respect to such Trusts.  The Transfer itself is what is registerable: any additions to the Trust Fund require separate notification, as the criterion of not making the Settlor insolvent is on-going. 

8.4.7 The Gibraltar provisions specifically make the Elizabethan Statue inapplicable to Trusts that are duly Registered. 

8.4.8 The Gibraltar provisions do not, however, include any requirement or test of the Transferor's intent.  They also do not deal with the treatment of distributions to a beneficiary in the event the initial Transfer to the Trust is held voidable. 

8.5 TURKS & CAICOS.

8.5.1 Turks & Caicos CPT legislation is contained in the Trusts Ordinance 1990, which came into effect in February 1991.  The Ordinance is extensive, clesling with a broad range of Trust issues, including specific provisions on Creditor Protection Trusts created by individual Settlors.

8.5.2 The CPT provisions state that a Transfer is not voidable by a Creditor unless the Settlor was insolvent at the time of the Transfer, or became insolvent by reason thereof.

8.5.3 "Insolvent" is defined in S.2 as "being subject to liabilities, whether actual, contingent or prospective, of which the value exceeds that of the assets available to meet such liabilities as they become due".

8.5.4  The Creditor has the burden of proving insolvency.

8.5.5  No limitation period for actions is stipulated.

8.6 BAHAMAS.

8.6.1 Bahamas adopted CPT Legislation with its Fraudulent Dispositions Act 1991, which came into effect on the 5th of April 1991.  These provisions are based on the Cayman Islands Legislation, but are not as detailed.  On the other hand they are generally more favorable to Transferors.

8.6.2 S.4 (1) provides that every disposition of property made with an intent to defraud and at an under-value shall be voidable at the instance of a Creditor thereby prejudiced.  "Intent to defraud" is defined as meaning an intention of a Transferor willfully to defeat an obligation owed to a Creditor, and "obligation" means an obligation or liability (including a contingent liability) which existed on or prior to the date of a relevant disposition, and of which the Transferor had actual notice.

8.6.3 Under S.4 (2) the Creditor has the burden of establishing the Transferor's "intent to defraud".

8.6.4 There is a limitation period for commencing proceedings of two years from the date of the relevant disposition.  Contrast the Cayman Islands' six year limitation period.

8.6.5 If a disposition is set aside, then Beneficiaries who have already received distributions may retain them unless the Court is satisfied that such Beneficiary has acted in bad faith. The Trustee is also given a first charge over the Trust Fund for its own costs, again unless the Court is satisfied that the Trustee has acted in bad faith.  The burden of proving that either the Trustee or a Beneficiary has acted in bad faith is placed upon the person making the allegation.  Contrast to Cayman Islands provisions, where the burden is placed on the Trustee/Beneficiary to establish they were not acting in bad faith.

8.6.6 Trustees are therefore subject to a degree of uncertainty as to what. in the circumstances, will amount to "bad faith".  The Trustee would seem to have to take certain pro-active steps in order to establish the Settlor's solvency.

8.6.7 The Bankruptcy Legislation of the Bahamas remains unchanged.  Jurisdiction for Bankruptcy Act purposes does not require the Debtor to be resident in the Bahamas, but exists irrespective of his/her domicile or residence simply if one of the "acts of bankruptcy" enumerated in the Act is committed.  These include commission of a fraudulent conveyance.

8.6.8 The territorial scope of the Bankruptcy Act limits its jurisdictions in regard to acts of bankruptcy committed outside the Bahamas to debtors who are citizens of the Bahamas, or foreign persons who are resident in the Bahamas.  Some professionals advise Settlors of a Bahamas CPT to execute any disposition of property into Trust outside the Bahamas, so as to avoid the possibility of an "act of bankruptcy" being committed within the jurisdiction of the Bahamas.

8.6.9 An alternative practice is for the Bahamian Trustee to have the assets vested in Bahamian International Business Company: Bahamian IBCs are exempt from Bahamas Exchange Controls, do not need to file Annual Returns, and their shares can be issued in bearer form.

8.7 OFFSHORE JURISDICTIONS THAT DO NOT HAVE SPECIFIC CPT LEGISLATION.

8.7.1   BERMUDA.

The Trusts (Special Previsions) Act 1989 states in its S.11, in relation to enforcement claims by foreign creditors, as follows:

 "Where a Trust is validly created under the Law of Bermuda the Court shall not vary it or set it aside pursuant to the law of another jurisdiction in respect of (c) the protection of creditors in matters of insolvency, unless the law of Bermuda has corresponding laws or public policy rules".

Bermuda has been reviewing the question of introducing specific CPT legislation for a number of months.  This review encompasses not only the existing fraudulent conveyance rules contained in the Conveyancing Act 1983 (based on LPA 1925 S.172), but also possible further amendments to the words "or public policy rules" in the 1989 Act.  To date, no firm proposals have been tabled.

8.7.2 BRITISH VIRGIN ISLANDS.

The British Virgin Islands are actively considering introducing comprehensive CPT amendments in their Trustee Ordinance and Bankruptcy Legislation.  CPT proposals circulated in the draft Trustee Amendment Act in mid-1991 were removed from the latest draft Trustee Amendment Act, as a result of comments received.  The BVI Ministry of Finance wrote in December 1991 that "in our opinion, it is perhaps prudent for us to proceed with the draft less the particular sections, and then (if necessary) address the issues later if not by way of amending the principle Statute, then through a different Act".

At the time of writing the Legislation Sub-Committee of the BVI Society of Registered Agents has just circulated a draft law on Creditor Protection Trusts (entitled "The Fraudulent Dispositions and Validity of Settlements Act").  This is intended to be the state-of-the-art in Creditor Protection legislation.  However, there is likely to be further debate in the BVI before their CPT provisions are adopted.

8.7.3 CYPRUS.

Cyprus' CPT legislations will be contained in the International Trusts Law 1992 (still in draft). This will provide that a Trust shall not be void or voidable in the event of the Settlor's bankruptcy, unless made with intent to defraud creditors.  The onus of proof of such intent is placed on the creditors.  An action against the Trustees to avoid the Trust on grounds of fraud must be brought within two years from the date of the Transfer.

8.7.4 GUERNSEY.

There is no equivalent in Guernsey to the Statute of Elizabeth 1571.  The Guernsey Courts will nevertheless not uphold a Trust created for the purpose of defeating known existing creditors. However, as regards Trusts created in anticipation of future creditors or litigation, the position is not quite so clear.  A transfer would be deemed to be a fraudulent conveyance under Guernsey law only if the Settlor already had knowledge or should reasonably have had knowledge of circumstances giving rise to a claim by creditors, and if as a result of such transfer the Settlor put the assets outside his/her power to satisfy a judgment against him/her.  If he/she had no such knowledge, the Courts would not regard such a transfer as fraudulent.

There are no limitation periods in Guernsey: all that can be said is that the longer the period between the creation of the Trust and the date when the Settlor had knowledge of the claim, or circumstances of which could potentially lead to a claim, the more likely it is that the Trust would be upheld.

There are no provisions in the Trusts (Guernsey) Law 1989 or the Trusts (Amendment) (Guernsey) Law 1990 relating to enforcement of claims by foreign creditors.

Proposals are currently under discussion in Guernsey on draft legislation entitled The Rights of Creditors (Guernsey) Law 1992.

8.7.5 ISLE OF MAN.

The Isle of Man is not a signatory to any reciprocal agreement with the United States on enforcement of United States judgments.  The United States Creditor will have difficulty in invoking Manx Bankruptcy laws on jurisdictional grounds, as the Transferor will usually not be domiciled in, or a resident of the Isle of Man.

The Isle of Man's fraudulent conveyance laws may, on the other hand, be available.  Section 4 (4) of the Evidence Act 1736 (also called the Fraudulent Assignments Act) provides that fraudulent transfers are void against Creditors.  "Fraudulent" is not defined.  The Evidence Act does not apply to future creditors.

Corin's Bankruptcy (Kermode v. Craig) [1902]
Lloyds Bank Ltd v. Marcam  [1973] 2 All E.R.. 359

Proposals are being discussed in the Isle of Man to modernize their Trust Law, particularly including provisions to clarify the scope of the Statute of Elizabeth.  Until these are implemented, the Isle of Man remains a problematic jurisdiction for establishing CPTs.

8.7.6 JERSEY.

The position in Jersey is broadly similar to that in Guernsey (8.7.4 above).  Jersey law prohibits fraudulent transfers, although the provisions are not incorporated in any Statute other than in relation to bankruptcy proceedings. The "Action Paulienne" (referred to at 4.2.9 above) is part of Jersey customary law, and enables creditors who have been defrauded to have the relevant Transfer set aside.

Golder v. Societe des Magasins Concorde Limited 1J.J 721

The Action may be brought by any creditor whose debt is in existence at the date of the Transfer. Subsequent creditors may also benefit where there has been a bankruptcy.  The debtor must be insolvent at the time of the Transfer, or if the Transfer is gratuitous must render himself insolvent thereby.

There are no statutory provisions in the Trusts (Jersey) Law 1984, or the Amendment Laws 1989 or 1991 relating to enforcement of claims by foreign creditors. 

8.8 CONFLICT OF LAWS.

It has been noted at 5.2.5-5.2.10 above that although under the Transferor's own "domestic" law the Transfer may be invalid, the Transfer may nevertheless be upheld by the law of the Off-shore jurisdiction.  It is, however, worth noting that there are conflicting arguments as to whether the law of the Offshore jurisdiction or the law of the Settlor/Transferor's domicile should be applied to consider whether a given transfer was fraudulent.  It would avail the Transferor little to find an Offshore jurisdiction in which the laws are more lax than are the laws of the Transferor's domicile if the Courts of the Offshore jurisdiction are going to apply the law of the Transferor's domicile in any event.