Cook Islands: Orange Grove Decision Boosts Cooks' Credibility

By Adrian L Taylor, Legal Counsel

The decision in Orange Grove No. 1 handed down by the Full High Court of the Cook Islands in November 1995 illustrates the common sense approach of the Court in balancing the interests of settlors of Cook Islands International Trusts, trustees of those trusts and creditors of the settlors. The decision adds credibility to the Cook Islands' reputation as a progressive wealth preservation and asset protection jurisdiction which will assist prudent settlors, whilst simultaneously preventing the perpetration of obvious fraud against creditors.

In Orange Grove No. 1 ("the Victor Case") the respondent plaintiffs were purchasers of apartments in a condominium project in Los Angeles known as 515 South Orange Grove. In October 1991 the appellants wrote to one of the respondents alleging faulty workmanship and defects in the construction of the apartments and sought redress. The appellants issued proceedings in the United States in April 1992 and obtained a jury verdict and judgement in their favour on 13 April 1994.

In December 1993 the three US respondents established the Victor Trust and subsequently transferred substantially all their US assets into that Trust. There was evidence adduced that the transfers of assets were designed to defeat the existing claims of the appellants at the time of the transfers.

In December 1994 the appellants commenced proceedings in the High Court of the Cook Islands to recover the amount of the US judgement and simultaneously sought a mareva injunction against the Trustee.

An interim order for the mareva injunction was made in late December 1994 but was later discharged on the grounds that the plaintiff's proceedings were time-barred because the relevant cause of action for the purposes of section 13B related back to the purchase of the apartments by the appellants in 1988 and 1989. The appellants appealed to the Full Court which held that the proceedings had been brought within the time limits prescribed in section 13B and therefore the mareva injunction should stay on foot pending a hearing of the substantive matter.

Because the appellants' cause of action was founded on the US judgement obtained on 13 April 1994, section 13B(8) of the Act had the effect that the date of the relevant cause of action was the date of the act which gave rise to the judgement. In the Court's view, the act giving rise to the judgement was the verdict of the jury. Accordingly the relevant date for section 13B purposes was 13 April 1994 and the Cook Island proceedings brought by the appellants in December 1994 were therefore within the time limits prescribed in section 13B(3).

It is worth noting that the Court was highly critical of the fact that the transfers to the Trust had taken place after commencement of the US proceedings.

In 1996 a number of amendments were made to the International Trusts Act including amendments to section 13B. The amendments came about after a 2 year review of the ITA and were designed primarily to bring certainty to the use of the Cook Islands as an Offshore jurisdiction by ensuring that the legislation reflected the original intent of its drafters.

In the context of the Orange Grove No. 1 decision, it is interesting to note that section 13B(8) was repealed and a new section 13B(8) inserted. The effect of these amendments to ss13B(8), it is submitted, is to reiterate the draftsman's original intention that the relevant cause of action for the purposes of the limitation periods in ss13B(3), is the earliest cause of action (i.e. the date of the act or omission giving rise to the creditor's cause of action) which the creditor has against the settlor of the International Trust (see 13B(8)(a)-(c) inclusive). These amendments would overcome the possibility that a creditor could successfully institute proceedings in the Cook Islands against an International Trust by relying on a judgement as the relevant cause of action.

This is not to say however that the decision in Orange Grove No.1 would be decided differently today. Section 13B(3) was also amended in 1996 to ensure that where proceedings have already been implemented by a creditor against the settlor of an International Trust in a court of competent jurisdiction, the time limits in section 13B could not be relied upon by the settlor. The amendments are designed to provide bona fide settlements of assets on International Trusts whilst at the same time ensuring that such Trusts are not used to defeat existing creditor claims.

The Orange Grove decision and the 1996 amendments show that the Cook Islands is a credible jurisdiction for those seeking wealth preservation.

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