Nevis LLCs: The Business Context for Asset Protection

Asset protection assumes that, at some point, the client may be in legal jeopardy obligating the client to account to a creditor for assets within the client’s control. Most asset-protection techniques therefore separate client control from the assets being protected: what a client does not own or control cannot be delivered to the creditor.

Offshore trusts became a popular form of asset-protection planning in the early twentieth century, with the Isle of Man recognized as a jurisdiction offering some degree of protection for trusts funded before a creditor’s claim arose. Beginning in the late 1980s and extending into the 1990s, several offshore jurisdictions codified the Isle of Man common-law principles by statute, narrowed the statutes of limitations, and imposed a high burden of proof on creditors seeking to set aside a fraudulent transfer. Asset-protection-trust laws spread to at least twelve offshore jurisdictions and at least as many U.S. states.

The inherent weakness with any asset-protection trust is that a transfer to a trust is, by its nature, a gratuitous transfer. A creditor bringing a timely claim can set the transfer aside under the Uniform Fraudulent Transfer Act, the Federal Bankruptcy Act, and other federal and state law governing transfers for no consideration. The firm has long held that asset-protection trusts ought to be established offshore, where the surrounding statutory architecture is designed to defeat the fraudulent-transfer attack rather than enable it.

The 2012 California Court of Appeal decision in Kilker v. Stillman, 2012 WL 5902348 (Cal.App. 4th Dist., Nov. 26, 2012), held that transfers made to a Nevada asset-protection trust were per se fraudulent transfers as to a future creditor not anticipated at the time the trust was funded. The court took the asset-protective nature of the vehicle as evidence of the requisite actual intent to defraud.

LLCs have become popular asset-protection vehicles for two reasons: the dissociation of ownership from control of LLC assets, and the limitation of creditor remedies to a charging order.

In an LLC there are members and there are managers. A member has rights of an owner; a manager has the rights and duties of a business manager. A member need not manage, and a manager need not own. A client seeking to protect assets may contribute them to an LLC in exchange for a membership interest while engaging a professional manager in an asset-protective jurisdiction.

Most LLC statutes provide that a judgment creditor may obtain a charging order against a member’s interest. These statutes generally describe the charging-order remedy in terms substantially identical to the rights of an assignee — the creditor may receive distributions otherwise destined for the member, and may not interfere with management or reach the property of the LLC itself.

Nevis has offered LLC legislation modeled after U.S. state law since 1995. In 2015, the Limited Liability Company Ordinance was amended in ways that materially strengthened the protective architecture.

• Charging order is the exclusive remedy. Under § 43(3) of the Nevis Limited Liability Companies Ordinance 2015, the charging order is the exclusive remedy as against a debtor’s membership interest in a Nevis LLC. The creditor receives only distributions otherwise destined for the member and may not interfere with management.
• Three-year sunset on charging orders. Section 43(11) provides that a charging order expires after three years and cannot be renewed. Throughout that period the debtor retains all rights of membership as if the charging order did not exist.
• Capital contributions and fraudulent transfers. Section 43A requires a judgment creditor to prove, beyond reasonable doubt, that property was transferred to the LLC with the principal intent to defraud that particular creditor and that the member was insolvent at the time of the transfer. Even on a successful showing, the creditor cannot void the transfer; the LLC is liable only to the extent of the interest the debtor-member had in the property before the transfer, and only against the property transferred and its proceeds.
• Bond requirement. Every creditor, before bringing an action against any member or property, must post a bond of EC $100,000 with a Nevis financial institution. The Nevis courts have the authority to apply the bond against costs awarded to the member or LLC.

In combination, these provisions place the Nevis LLC at the leading edge of charging-order asset-protection. A creditor faces a steep evidentiary threshold to prove a fraudulent transfer; the charging order, once obtained, is the only remedy available, sunsets in three years, and cannot be renewed; the bond requirement deters specious litigation while preserving access for meritorious claims. Where Cook Islands trust law has been the historical benchmark, the Nevis LLC now compares favorably across every operative dimension other than duress.