In 1996, the Nevis Island Assembly enacted the Nevis International Exempt Trust Ordinance, Cap. 7.03 (“NIETO”), to bring certainty and clarity to international trust planning. A number of provisions in the NIETO catered to the needs of lawyers and their clients engaged in asset protection planning, including:
- Preclusion of the Statute of Elizabeth principles governing the determination of a fraudulent transfer;
- Statutory presumptions against the finding of a fraudulent transfer in certain circumstances;
- A strict requirement that a creditor prove the fact of a fraudulent transfer “beyond a reasonable doubt”; and
- In a first of its kind, an explicit requirement that a creditor post a bond with the Nevis court.
After twenty successful years of trust establishments under the NIETO, the Nevis Island government is revisiting the NIETO in hopes of modernizing the legislation and extending the protections afforded under the NIETO more broadly.
Telbert Glasgow, Director of the Nevis office for Lighthouse Trust, recently formed a committee of American lawyers to review and make recommendations to the Nevis Island government on amendments to the NIETO. The committee included several accomplished estate and asset protection planning attorneys from around the United States, including drafters of trust and LLC legislation in various states and select offshore jurisdictions. The committee was chaired by Shawn Snyder, a lawyer and Adjunct Professor of Law at the University of Miami who also served as a past chair of the Will, Trusts, and Estates Certification Committee of the Florida Bar.
The starting point for the committee’s review was a comprehensive package of amendments primarily authored by Jonathan Gopman at Akerman LLP in Naples, Florida in 2014 (the “2014 Proposal”). The committee found the 2014 Proposal to be, on balance, extremely beneficial, and the 2015 Amendments advanced by the committee incorporate substantial portions of the 2014 Proposal. The 2015 Amendments also address the following concerns:
- Technical corrections (in addition to those identified by the 2014 Proposal, or arising under a few of the suggested changes in the 2014 Proposal);
- Substantive flaws in the way in which § 23 of the NIETO was modeled after § 13B of the Cook Islands International Trusts Act;
- Creditor remedies that have emerged in common law jurisdictions since the NIETO was first proposed;
- Lack of a provision governing duress; and
- Bond requirements for a creditor to proceed against an international trust governed under the NIETO.
Technical Corrections
Perhaps no other provision of the NIETO has drawn more attention than § 23, intended to deal with fraudulent transfers. The original text was modeled after the Cook Islands International Trust Act (“ITA”), which underwent significant revision after the NIETO had been enacted.
The committee identified profound errors that were made when subsections (3) and (4) of § 23 of the NIETO were drafted. In order to understand the significance of these errors, it is necessary to first explain how the corresponding provisions of the ITA operate.
The Cook Islands ITA Provisions
Subsection (3) of the ITA deems a transfer in trust to be not fraudulent as against a creditor if the transfer takes place two years from when the creditor’s cause of action accrues. If the transfer takes place within two years of the cause of action accruing, the ITA nevertheless deems the transfer to be not fraudulent if the creditor fails to commence a court action within one year. The public policy justification for these two rules is that a creditor should only have a limited period of time within which to bring a claim. If the creditor fails to diligently pursue the claim in a timely manner, the settlor should later be able to transfer assets in trust free of creditor claims.
Similarly, subsection (4) of the ITA deems a transfer in trust to be not fraudulent as against a creditor if the transfer takes place before the creditor’s cause of action accrues. This is a codification of the principle, first arising in the courts of the Isle of Man, that a transfer cannot be fraudulent as against a creditor unless there is a “present debt” at the time of the transfer. See Corlett v. Radcliffe, 14 Moo PCC 121, 15 ER 251 (1859); see also Re the Petition of Christopher Jollian Heginbotham, 2 ITELR 95 (1999) (“present debt” in Corlett v. Radcliffe refers to creditors whose claims exist at the time of the transfer).
Flaws in the NIETO Approach
In what appears to be a substantial scrivener’s error, subsections (3) and (4) of § 23 of the NIETO read to the exact opposite effect. Under the NIETO, these same transfers – which are protected under the laws of the Isle of Man, the Cook Islands, and many other common law jurisdictions – are deemed to be fraudulent. This scrivener’s error appears to relate back to the original passage of the NIETO.
The committee cautioned the Nevis Island government that the NIETO as currently in force does not offer asset protection benefits as originally intended by the legislation. As a result of scrivener’s errors in the original NIETO, creditors are entitled to a sweeping set of presumptions that characterize most all transfers to a Nevis trust as fraudulent. The committee submitted its formal recommendation that subsections (3) and (4) of § 23 of the NIETO be revised as soon as possible to correct these scrivener’s errors.
Substantive Changes
Elimination of the Cook Islands “Sliding Window” Three-Year Rule
The committee also recommended that subsection (3) of § 23 be further revised to eliminate what could be a three-year window for a creditor to bring a claim against an international trust. This “sliding window” was first introduced in § 13B(3) of the Cook Islands ITA, after which subsection (3) of § 23 of the NIETO was modeled.
While paragraph (a) is intended to protect a transfer in trust made more than two years after a creditor’s cause of action accrues, paragraph (b) gives the creditor up to one more year to bring a claim if the creditor’s claim happens to arise before the expiration of the two year period referenced in paragraph (a). This “sliding window” has been misconstrued by many experienced practitioners and remains widely misunderstood by the public at large. Even the most experienced asset protection lawyers are surprised to learn that the Cook Islands ITA potentially offers a creditor up to three years to bring a claim against a Cook Islands trust.
The committee recommended that the NIETO would benefit by eliminating the ambiguity over interpretation of the “sliding window.” Eliminating the “sliding window” altogether would also help differentiate the NIETO from legislation in competing jurisdictions. The revision to subsection (3) of § 23 proposed by the committee calls for a fixed one year window beginning with the date on which the creditor’s cause of action accrues. Instead of a “sliding window,” subsection (3) would instead be a “fixed window.”
Enhanced Bond Requirement
The NIETO has enjoyed a favorable reputation for its bond requirement imposed on claimants under § 54. The public policy aim of this particular statute is to deter a prospective creditor from bringing litigation in the Nevis court absent a firm belief in the merits of a claim, lest the bond proceeds be used to award fees and costs to the trustee-defendant.
Since the bond requirement was first introduced in 1996, the legal climate concerning international trusts has evolved. Competing jurisdictions have looked to § 54 of the NIETO for guidance in drafting similar provisions. For example, in 2011, Belize enacted a comprehensive limited liability company act affording LLCs the same degree of asset protection given to trusts under the NIETO. Under § 37(7) of the Belize International Limited Liability Companies Act, 2011, a creditor must post a bond equal to the greater of (i) BZ $50,000 and (ii) one half of the amount of the claim.
The committee concurred with the 2014 Proposal to the extent that the bond requirement under § 54 is presently inadequate and should be increased. However, the committee identified two competing concerns: (i) providing an effective barrier to specious litigation where the amount at stake is significant while (ii) not foreclosing court access to meritorious claims.
The committee recommended that the bond requirement be changed to a sliding scale formula, similar to that used in Belize LLC law. Specifically, the committee recommended that the minimum bond amount be (i) EC $100,000, as recommended by the 2014 Proposal, or (ii) one half of the claim amount, whichever is greater.
Prohibition on Mareva Injunctions and Anton Piller Orders
The 2014 Proposal recommended a number of useful amendments to further clarify creditor remedies under the NIETO, including a provision that would limit the availability of Mareva injunctions in the Nevis court. See Mareva Compania Naviera S.A. v. International Bulkcarriers S.A., 2 Lloyd’s Rep 509 (CA) (9175).
The committee agreed that the Nevis court should not entertain or issue Mareva injunctions in respect of international trusts so as to sidestep the limits on creditor remedies under § 23 of the NIETO. However, many cases in which a Mareva injunction is sought also involve the issuance of an Anton Piller order or similar interim measures. See Anton Piller v. Manufacturing Processes, Ch. 55 (1976). The committee recommended that the prohibition on Mareva injunctions be expanded to more comprehensively proscribe similar and complementary forms of interim measures.
Duress
It is generally regarded in many international trust jurisdictions that instructions given in regard to an international trust should be free of duress. The NIETO, by comparison, does not contain such a requirement.
In litigation in American courts concerning international trusts, oftentimes the settlor or beneficiary is ordered by a judge to try and effect a repatriation of trust assets. The settlor or beneficiary faces the burden of convincing the American court that repatriating the trust assets is prohibited under applicable trust law. Yet, this “impossibility defense” is difficult to maintain in the absence of an express provision in the NIETO governing duress.
The committee recommended that § 13 of the NIETO be revised to include a general duress provision applicable to all international trusts. It would require those with power over an international trust to disregard instructions given under duress. Notwithstanding this prohibition, a trustee or other person would remain free to abide by such instructions if necessary in order to avoid personal liability or personal exposure.
Next Steps
The 2015 Amendments submitted by the committee to the Nevis Island government are now under consideration by a number of departments, and it is hoped that a consensus bill will be submitted to the Nevis Island assembly within the next few weeks. The committee has expressed its reservation that the NIETO as currently drafted contains substantial scrivener’s errors that inadvertently favor creditor challenges to trusts in Nevis.
Lighthouse Trust has informed its clients of the issues under the current NIETO and our belief that the Nevis Island government will act quickly to address the committee’s concerns. We have also cautioned practitioners to advise their clients of these vulnerabilities and the options they have to minimize risk to their structures.
Footnote
Lighthouse Trust wishes to thank Mr. Snyder for sharing with us a copy of the committee’s proposal and his explanatory letter to the Nevis Island Premier. We also wish to extend our gratitude to Inga Ivsan, Manager at Swiss Private Wealth Advisors, LLC, for her insight on Mareva injunctions and Anton Piller orders.