Belize is touted
to be the premiere asset protection jurisdiction in the world because it did
away with statutory fraudulent transfer laws applying to international trusts.
However, what sounds heavenly is a lot less so when you look at the actual
wording of the legislation.
Section 7(6) of
the Trusts Act Chapter 202 reads:
Where a trust is created under the
law of Belize, the Court shall not vary it or set it aside or recognise the
validity of any claim against the trust property pursuant to the law of another
jurisdiction or the order of a court of another jurisdiction in respect to –
(a)
the personal and proprietary consequences of marriage or the
termination of marriage;
(b)
succession rights (whether testate or intestate) including
the fixed shares of spouses or relatives; or
(c)
the claims of creditors in an insolvency.
Although the
restrictions upon the Court are generous, the types of claims that can’t be
pursued are actually limited. Only marital claims, estate claims and claims
from creditors in an insolvency are barred. All other types of creditor claims
for fraudulent transfer may be brought against a Belize international trust.
What
non-Commonwealth attorneys are often not made aware of is that there is a broad
and well established statutory law in Belize for fraudulent transfers, section
149(1) of the Belize Law of Property Act. Section 7(6) doesn’t do away with
this law applying to international trusts, it just limits it. The value of section
7(6) is in how well it reduces the scope of section 149(1), which reads:
Except as provided in this
section, every transfer of property
made...with intent to defraud creditors shall be voidable, at the instance of
any person thereby prejudiced. (emphasis added)
Section 149(1)
is based on the British Statute of Elizabeth dating back to 1571. The Statute
aimed to stop debtors from intentionally limiting the pool of their assets available
to creditors at common law for payment of debts lawfully due. Case law
explaining the operation of the law abounds. If a creditor wants a transfer
avoided, he needs to establish that the debtor actually intended at the time of
disposition to defraud creditors.[1]
There is no requirement for the creditor to prove the debtor is actually insolvent.[2]
The creditor need only show an intention to hinder, delay or defeat creditors.[3]
The creditor also need not prove the debtor intended to defraud him
specifically and in fact, at common law, the creditor doesn’t even need to be
an existing creditor, he may be a future creditor (post transfer of the property).[4]
Transfers avoided under s149(1) have the effect of sending the property back to
the pool of debtor’s assets available for all creditors, not the specific
creditor that sued for relief.[5]
Herein lies the yawning hole that the Belize Trusts Act left open. By
attempting only to bar certain types of claims from the operation of the Law of
Property Act, other types of creditors have the full benefit of the broad scope
of section 149(1).
For example, X
goes into business with Y, the relationship sours. Y transfer profits from the
business into offshore entities and then transfers the stock certificates for
those entities to his Belize international trust, to be placed out of X’s
reach. X sues Y for loss of profits and obtains judgment, which is affirmed after
an unsuccessful appeal by Y. X goes
after the stock certificates by suing the trust in Belize for fraudulent
transfer. Now, to protect himself Y could just voluntarily declared himself
bankrupt, making X a ‘creditor in an insolvency’ and barring X’s claim in the
Belize Court. However, not all Ys will want to do that, or can do that because
of their healthy financial situation.[6]
Unless Y is willing to render himself insolvent as against all creditors (i.e. through bankruptcy), the assets he has disposed
to the trust are exposed to a fraudulent transfer claim under section 149(1) of
the Law of Property Act. It also puts the trust in a predicament because the
trust’s protection is squarely in Y’s hands, not the trustee. Y’s decision
whether or not to be ‘in an insolvency’ determines whether the trust can be
attacked in Belize or not.
The approach to
fraudulent transfers taken in the Cook Islands International Trusts Act 1984
has often been criticised by proponents of the Belize Trusts Act because it’s
not a ban on creditor claims (not that the Belize approach is a complete ban
either!). In the Cook Islands, rather than attempt to ban claims that could
otherwise succeed under statutory fraudulent transfer law, they legislated to change
the law altogether in so far as it affects international trusts. Under the
International Trusts Act, to succeed in a fraudulent transfer claim, a creditor
has to prove beyond a reasonable doubt (in common law the higher criminal
standard of proof) that the Settlor’s principal intent in establishing the
trust was to defraud that particular creditor.[7]
The creditor must also prove beyond a reasonable doubt that the transfer of
property into the trust rendered the settlor insolvent to satisfy the
creditor’s particular claim.[8]
Future creditors therefore can’t succeed in a fraudulent transfer claim against
the trust. The Act contains a limitation period for bringing claims. [9]
It also spells out procedural requirements which the creditor needs to first satisfy
before its claim will be entertained by the Court, including affidavit evidence
demonstrating the creditor’s ability to prove the elements of the claim beyond
a reasonable doubt.[10]
If a claim is satisfied before the Court, neither the trust nor the transfer is
void or voidable.[11]
Instead, the trust becomes liable to satisfy the creditors claim out of the
property transferred.[12]
Otherwise, the avoided transfer would send the property back into the pool of
debtor’s assets available to all creditors and the particular creditor that
came to the Cook Islands to sue may not get full relief. These are all
fundamental changes to the way the law of fraudulent transfer normally applies.
The changes were necessary because existing statutory fraudulent transfer law
would have probably rendered transfers to an international trust void given
their very nature as asset protection trusts. Also the trust would be exposed
to the settlor’s future creditors for years to come.
The ‘Belize ban’
effectively condones a debtor settlor whittling down the pool of their assets
available to pay debts due to certain types of creditors. It’s a return to
debtor law pre 1571. Belize law screams ‘hide your money from your ex’, ‘avoid
giving to your family when you die’ and ‘store your assets here when you go
bankrupt’. This type of approach taints the integrity of the offshore trust
industry and makes Belize a haven for debt avoidance. In stark contrast, settlors
are restrained from using their Cook Islands international trusts for debt
avoidance. Trust assets can be exposed to a fraudulent transfer claim if the
settlor’s principal intent in transferring assets to the trust was to defraud a
known creditor and the transfer rendered the settlor insolvent as against the
creditor. The fundamental difference between Belize and the Cook Islands is
that Belize law aims to protect the settlor in flight from his debtors. Cook
Islands international trusts law, on the other hand, aims to protect the wealth
of the trust from future creditor claims. This is why the statutory limitation period
is so important. Assets legitimately transferred to a Cook Islands
international trust will be protected from future creditors of the settlor so
that, no matter what the financial circumstances of the settlor in times to come,
their creditors cannot claw back assets from the trust.
The Cook Islands
approach is uniform, transparent and fair. All creditor claims are treated the
same under the International Trusts Act. The Belize approach, on the other
hand, has created a dichotomy between barred and non-barred claims which is
significant and inequitable. If you are a wife stiffed by her ex-husband when
he transfers millions to a Belize international trust to reduce his divorce
settlement, you’re out of luck. However, if you’re a businessman chasing debts
traceable to property in a Belize international trust and the debtor is
solvent, as in the example given, you’re in. Whatever the rationale was for distinguishing different
types of claims - perhaps it was prevalence - the consequences were not well
thought out. Also, it is astounding that any legislature in this day and age
would have thought it ‘okay’ to rate spousal creditors below other types of
creditors, particularly when the burden of the law is likely to fall upon wives
given their traditional lack of control over marital assets.
What the
drafters in Belize tried to do, although novel and ambitious, was bound to be
porous because of the sheer difficulty involved in composing exceptions to a
very broad and well established rule dating back some hundred years in British
law. To its credit, section 7(6) is a great marketing tool, though buyers
beware they may be disappointed with the reality of their purchase. On the other hand, the Cook Islands approach
is sound and balanced because it introduced a new statutory fraudulent transfer
law for international trusts which reflects the very essence and purpose of an
international trust and does not purport to prejudice certain types of creditor
claims.
[1] Cannane v J Cannane Pty Ltd
(In Liquidation) [1998] HCA 26 at para 10; Williams v Lloyd; In re
Williams [1934] HCA 1; Re Barnes;
Ex part Stapleton [1962] Qd R 231 at
237; Ex part Mercer; In re Wise (1886) 17 QBD 290 at 298-299.
[2] Regal Castings Limited v
Lightbody [2009] 2 NZLR 433 (SC) at para 56.
[3] Ibid.
[4] Barton v Deputy Federal
Commissioner of Taxation (1974) 131 CLR 370 at 374; In re Lane-Fox; Ex parte
Gimblett [1900] 2 QB 508 at 512; Ex
parte Russell; In re Butterworth
(1882) 19 Ch D 588 at598-599.
[6]See http://www.nytimes.com/2014/05/10/your-money/a-multimillion-dollar-battle-could-complicate-getting-what-youre-owed.html?_r=0 for the real life
scenario the factual example is based on.
[7] Ibid at s13B(1)(a).
[8] Above n6 at s13B(1)(b).
[9] International Trusts Act, Cook Islands at s13K.
[10] Above n6 at s13K(3).
[11] Above n6 at s13B.
[12] Ibid.
