The Cook Islands Foundations Act 2012 is a modern and innovative piece of legislation drawing from the experiences and features of foundation law in other financial centres, while also adding Cook Islands specialist asset protection provisions.
A foundation is formed by a person known as the founder (who may be either an individual or corporate body) who provides (through an “endowment”) the assets to be administered by the foundation. The foundation’s assets are to be administered through contractual, rather than proprietary, principles.
Unlike a trust, a foundation is a separate legal entity. It is managed by a council. A minimum of only one council member is required and corporate council members are permitted. A foundation can hold assets, enter into agreements with third parties and can sue or be sued in its own name. On the face of it a foundation is similar to a corporation. However, unlike a corporation, a foundation does not have any shareholders. A foundation can have beneficiaries, similar to a trust, or it can have purely charitable purposes.
A founder may retain some control over the foundation’s assets through reserving certain powers under its rules. Powers that are commonly reserved include powers relating to the investment strategy of the foundation and the appointment or removal of beneficiaries. The founder may also be given the power to revoke the foundation.
Registration and Rules
The Act provides a registration regime for foundations in the Cook Islands. Each foundation shall have a foundation instrument which contains its basic details including name, objects, and the registered agent in the Cook Islands. The foundation instrument is filed with the Registrar.
A foundation must also have rules that comply with the Act. Under the Cook Islands Act, while there are certain matters that must be addressed in the rules, there is significant flexibility in how the rules in general are drafted. This allows client founders and their advisors to set out clearly how they want the foundation to operate, and how they want it to benefit the beneficiaries. The rules of the foundation are not required to be filed with the Registrar, but only held by the registered agent in the Cook Islands.
The rules of the foundation provide the substantive details of how the foundation will operate. The rules will include procedures as to the establishment of the council, the appointment of registered agent, the functions of any enforcer, and the rules as to endowment of further assets. The rules may also deal with how powers can be exercised by the council, and the distribution of assets of the foundation should it be wound up and dissolved.
Asset Protection Provisions
Many of the specialist and proven asset protection provisions contained in the Cook Islands International Trusts Act have also been brought into the Foundations Act, and apply to a registered Foundation and its founder.
The Act states that only Cook Islands law applies to any questions as to a foundation or the transfer of assets to a foundation. Therefore, as with Cook Islands International Trusts, a creditor of a founder is forced to commence proceedings against the founder and foundation in the Cook Islands High Court.
The Act then provides for a number of barriers to any such creditor bringing proceedings in the Cook Islands High Court. These include the all important time limits. In particular the strict 2 year time limit for bringing an action against a foundation, as well as the deemed time limits where property is transferred to a foundation before a cause of action has accrued, or where property is transferred to a foundation more than 2 years after a cause of action has accrued.
Other important asset protection provisions for foundations include the standard of proof beyond reasonable doubt, the exclusion of punitive damages, and the requirement that all remedies against a founder, and all rights of appeal, have been exhausted.
Migration, Dissolution and Termination
An overseas foundation can be moved to and registered in the Cook Islands. This allows existing foundations to take advantage of the flexibility and protections contained in the Cook Islands Foundations Act. Upon registration in the Cook Islands, the overseas foundation is to be treated as a Cook Islands foundation. Furthermore, such registration does not in any way affect the identity or continuity of the foundation’s personality.
The Act provides for a number of situations in which a foundation is to be terminated and dissolved by its council members. The foundation rules can provide for events upon which the foundation is to terminate. A foundation may also be terminated upon bankruptcy of the foundation, the completion, failure or lapse of the foundation’s purpose, and upon the making of an order by the High Court for the winding up of the foundation. The High Court may order the winding up of the foundation upon the application of any of the foundation’s council members, founder, beneficiaries, enforcer or creditors, or upon the application of the Registrar.
As clients and planners look to flexibility in wealth planning vehicles, the foundation provides an alternative to the more traditional trust. In developing its foundations legislation the Cook Islands has taken the opportunity to learn from other jurisdictions to bring in the most advantageous provisions combined with its existing expertise in the area of asset protection.