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Cook Islands LLC

Understanding Cook Islands LLC Act and Charging Orders
Against the Members of the LLC

For many years, the laws regarding how LLCs can operate remained untouched. In 2009, the Cook Islands adopted a new Act that set forth provisions on how LLCs could run the company. In addition, the provisions included information in regards to charging orders and how these are handled and viewed by the Cook Island court system.

Cook Islands LLC Legislation

When it comes to dealing with offshore jurisdictions, most people will wonder which ones have favorable protections. One of those jurisdictions is Cook Islands. The LLC legislation in the Cook Islands was announced in 2009. The Act, also known as the Cook Islands International Limited Liability Companies Act, was taken from the standards often used in the United States. The Act goes a bit further in that it allows for statutory assurance on various concerns of US attorneys that rely on United States LLC statutes. In addition, the Act introduced different Asset Protection factors.
The Act offers the condition of a broad basis to structure an LLC in accordance to its own set of rules instead of having these rules be dictated by statute. The agreement can contain any number of conditions that are related to the conduct of its business provided the conditions are legal. Some condition are essential and cannot be avoided by any means.

Charging Order of Cook Islands LLC

Similar to other LLC jurisdictions, creditors will have the ability to apply for a charging order that will be issued against a membership interest. The Act takes things one step further by providing additional remedies, the rights of the creditor versus the membership interest and the actual extent of altering the changing order.
The Act begins with §45. This states that a creditor is an individual in which the High Court of the Cook Islands will recognize their judgment and also includes individuals who argue that they have a general assignment of property, either arising from bankruptcy or intestacy. § 45 (6) goes on to specify that the resolution for any creditor against a membership interest in LLCs will have the right to file an application for a charging order. In addition, the resolution awarded by this section will be the exclusive remedy that is only available to a creditor in regards to the rights of membership by the member.
There have been some comparable provisions in other jurisdictions that have also been interpreted by the courts and the courts deem that the rights included are parallel to those rights held by a mortgagee in possession, of any lien-holder and of assignees. These provisions have caused doubt to develop in regards to the extent of protection that will actually be offered by an LLC. Clear provisions have replaced uncertainties in the Cook Islands and these provisions include subclauses (7) & (8) of section 45.

Section 45 (7) & (8): Charging Order and Members

These subclauses provide that:
§45 (7) For the prevention of any doubt and without placing limits on the subsection (6):
(a) a charging order will not be interpreted to aggregate a lien on a member's interest in an LLC;
(b) the Creditor who has applied for the charging order will avoid becoming an assignee of membership interests nor shall the creditor be entitled to employ any membership rights in relation to the interest.
(c) members who retain membership interest that is subject to the charging order will continue to make use of all rights and obligations regarding those rights in every respect despite the issuance of the charging order.
(d) subsection (6) will be applicable regardless of whether the LLC has one or more members.
(8) In order to elude doubt and avoid limiting the generality of subsections (6) and (7), any individual who has been issued with a charging order shall refrain from:
(a) interfering in any form of management by the manager of the LLC, which includes the sale of assets
(b) liquidating any assets within the LLC
(c) restricting any business actions or decision on behalf of the LLC; or
(d) dissolving the LLC or taking actions to cause the dissolution
In the Cook Islands, aggravated, exemplary or pecuniary damages are not recognized and cannot be recovered with any charging order.
For the intentions of examining the amount that may be subject to a charging order, the Courts will not consider any amount that is related to an award of vindictive, punitive, exemplary or retributory damages or an amount of any damages that have arisen at by multiplying a total that has been assessed as payment for any losses or damages.
The charging order does allow the creditor to receive amounts of income or capital which would have otherwise been received by the member. Should the LLC make a call on members for an amount of income or capital in compliance with the rules, the company will then have the option of using a distribution due to the member. This is done in order to meet the capital contribution for the charging order. The distributions will never fall into the hands of the members, so the creditor therefore has no claim to these distributions.
If an interim charging order is applied, it will only be in effect for a maximum of 30 days. The defendant must be served with the proceedings and the applicant will also have to deal with the application quickly if a full charging order has been issued. Under other circumstance, the charging order will be good for a total of five years.

Charge Orders to Members of an LLC: the LLC is not affected

When a charge order is issued to a member individually, it does not affect the entire LLC. This is why it is important to know that the LLC and each individual member are separate entities in regards to charging orders.
Any order that is a result of judgment in another location outside of the Cook Islands will not be enforced or recognized in the courts of Cook Island.
In regards to the operating agreement, LLCs can be formed with members who are willing to place their interests at risk. Once this is done, it cannot be reversed. This is one of the conditions that cannot be changed and is in use to help avoid any possible involuntary amendments of the agreement.

Transferring from Cook Islands to another jurisdiction or vice versa

LLCs do have the ability to transfer from the Cook Islands to another jurisdiction, just as LLCs from another jurisdiction can transfer to the Cook Islands. However, it is important to understand that any LLCs that are in hopes of avoiding or escaping corporate debts should avoid the transferance. The Act specifically states that an LLC must take the debts with it and if there have been any actions taken against the company in another jurisdiction; these actions can be enforced in the Cook Islands. Confidentiality is still taken seriously and all proceedings are heard in private. If there is a need for information to be divulged, it may only be done with the approval of the company and even then, the information will only be released under certain circumstances.
The new set of rules and regulations known as The Act has successfully provided an understandable framework for how LLCs can operate. With the Act in place, many people now believe that LLCs will be beneficial to financial advisors in combination with the development and creation of trusts in the Cook Islands.

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