¶ 1501
Overview
Scope of the chapter. This chapter examines the position of a person who holds a claim against a member of a Cook Islands limited liability company and wishes to be paid out of the member's interest in the company. The governing provision is section 45 of the Limited Liability Companies Act 2008 (No. 7), headed "Rights of Creditor against a member." Section 45 has eighteen subsections. It removes a member's rights in the company from the ordinary processes of execution, bankruptcy and succession; gives a defined class of creditors a single remedy, the charging order; strips that remedy of the features that make it dangerous to a company in other systems; limits the order's life to five years; and refuses effect to foreign orders and judgments that would reach the member's rights in any other way. Limited Liability Companies Act 2008, § 45(1)–(18) (Cook Is.). The Limited Liability Companies Amendment Act 2013 (No. 16) did not amend section 45, and the section stands today as enacted in 2008.
Plan of the chapter. Paragraph 1510 examines the property section 45 protects and the statutory bar on execution, assignment, intestate succession and bankruptcy. Paragraph 1520 identifies the creditor who may apply for a charging order and the effect of the requirement that the creditor's judgment be issued or recognised by the High Court of the Cook Islands. Paragraph 1530 examines the order itself: what it gives the creditor, the exclusion of punitive and multiplied damages, the procedure, interim orders made without notice and discharge. Paragraph 1540 examines the exclusive-remedy rule and the provisions that follow from it: the order is not a lien, the creditor does not become an assignee, the creditor has no part in management, and no interlocutory relief may be had against the company. Paragraph 1550 examines the five-year limit. Paragraph 1560 examines the company's distributions while an order is in force, the valuation rule in section 45(16), the repayment rule in section 45(17), capital calls under section 45(18) and the payment of a member's taxes. Paragraph 1570 examines the member's bankruptcy, death and dissolution and the special position of the company with one member. Paragraph 1580 compares section 45 with the statutes of Nevis, Belize, Delaware, Wyoming and Florida and examines how foreign courts treat interests in Cook Islands companies. Paragraph 1590 gives model provisions, a guide to conduct after an order is served and a checklist.
Relation to other chapters. The formation of the company, its registered agent and the Registrar are examined in chapter 12; members, managers and the operating agreement, including the rules on distributions in sections 35 to 41, in chapter 13; and the duties of managers in chapter 14 (see supra chs. 12–14). Transfers of membership interests, withdrawal and dissolution are examined in chapter 16, and the use of the company in international structures, its classification for United States tax purposes and the amendments to the Act now proposed are examined in chapter 17 (see infra chs. 16–17). A creditor who claims that the transfer of property into the company, or into the international trust that owns it, defrauded the creditor proceeds under different rules, examined in chapter 21; and the recognition of foreign judgments is examined in chapter 23 (see infra chs. 21, 23).
The purpose of the section. The charging order began in the law of partnership as a means of letting a partner's separate creditor reach the partner's share of profits without disrupting the business carried on by the other partners. American LLC statutes adopted it, and the strength of the remedy now varies from statute to statute. Some permit the charged interest to be foreclosed and sold; some treat the order as a lien; some permit foreclosure where the company has only one member. Section 45 belongs to the group of statutes enacted outside the United States for companies owned by non-residents, which give the member's creditor the narrowest remedy any statute gives. It was enacted to provide a holding entity for the Cook Islands international trust, and in the usual structure the international trust is the sole member of the company (see supra ch. 12). Its object is to ensure that a judgment against a member yields, at most, the distributions the company chooses to make, for a limited time, and nothing that would allow the creditor to control or liquidate the company.
Sources. The text of the 2008 Act used in this chapter is the Government Printer's copy published by the Financial Supervisory Commission, converted to text and checked against the page images. No reported decision of the High Court or the Court of Appeal of the Cook Islands interpreting section 45 has been identified, and the analysis in this chapter rests on the words of the statute, read with the Act's definitions and its other provisions. Decisions of American courts on their own charging-order statutes are cited where they illuminate a point of construction or show how a foreign court is likely to treat the interest of a member of a Cook Islands company.
Terminology. The Act distinguishes a member's "membership interest," which is "a member's share of the profits and losses of a limited liability company and the right to receive distributions of the limited liability company's assets," from the member's "membership rights," which are "all of the rights of a member in a company including membership interest, voting rights and any other right or interest arising from or incidental to being a member whether prescribed in this Act or in an operating agreement or otherwise at law." Limited Liability Companies Act 2008, § 2 (Cook Is.). Section 45 protects both. It uses "Creditor," with a capital letter, as a defined term (see infra ¶ 1520.01). "Court" means the High Court of the Cook Islands. Id. § 2. This chapter uses "the company" and "the LLC" interchangeably, and "the Act" for the 2008 Act as amended in 2013.