The use of trusts for asset protection purposes is well established and – in principle – not improper. However, recent history has seen increasing attempts by creditors to have transfers of assets unwound. A recent UK Supreme Court case saw the Court effectively achieve this by way of a resulting trust finding.1 This article considers the issue from a different angle: insolvency legislation.

Benjamin Franklin is reported to have said: "Creditors have better memories than debtors." He may well have been right, but – as we shall see – moving fast in certain jurisdictions is more useful than having a long memory.

Sophisticated creditors take time to learn about their debtors' asset structuring. They find out if the debtors have settled, or plan to settle, assets into trust. However, they do not necessarily think about why the governing law of the trust matters to them,  and why they should investigate further. The governing law can lead to very different results when trying to unwind transactions. In this paper, Richard Norridge2 and Joanna Caen3 consider issues arising in respect of three prominent trust jurisdictions in the Asia-Pacific region: Hong Kong, New Zealand and the Cook Islands. These jurisdictions have been chosen deliberately because two of them, Hong Kong and New Zealand, are both "on-shore" and "off-shore" jurisdictions.4 The other, the Cook Islands, is an off-shore jurisdiction. They are all common law jurisdictions, deriving their trust and creditor-protection legislation from recent English legislation.

This distinction matters to creditors. As will be demonstrated below, it seems the dual-focus regimes of Hong Kong and New Zealand are more sympathetic to creditors than the pure off-shore regime of the Cook Islands. This may be for many reasons.

One possibility is that the legislatures in Hong Kong and New Zealand recognize that the creditors seeking to reclaim assets settled into trust by debtors may well be based in those jurisdictions. By giving the creditors a longer period of time in which to seek to recover those assets, the Hong Kong and New Zealand legislatures may be taking the view that for public policy reasons they prefer the medium-term economic risk to lie with the trustees and debtor instead of the creditor. Those legislatures may believe that by doing so they minimize the likely cost to the taxpayer. On the other hand, the Cook Islands may take the view that if the creditor (and indeed  debtor) is unlikely to be in its jurisdiction, its economic interests are best served by offering the greatest protection to trustees who are in its jurisdiction. In addition, the Cook Islands may believe that offering this protection gives  it a competitive advantage against other off-shore trust jurisdictions.

It is for creditors to understand and appreciate the different positions they may be in depending on the governing law of any trusts into which their debtors have settled assets. The legislature of any jurisdiction is free to determine the respective rights of creditors, debtors and trustees (subject to any international obligations). The limits imposed in any jurisdiction on the rights of creditors to require trustees to disgorge assets for their benefit are to a certain extent arbitrary.


Before going into the regimes in our three chosen jurisdictions, let us set the scene by looking at the bigger picture.

Most common law countries have two main options by which they can apply to court to have assets settled on trust by debtors recouped to the debtors' estates to pay creditors, usually following the bankruptcy of the debtors. These options can either be exercised directly by creditors, or sometimes only by the official receiver in bankruptcy. Who can apply to recover the assets depends on the law of the jurisdiction involved.

The first such option is an application for an order that a transaction be set aside on the basis that it was a transaction entered into by the debtor with the intent to defraud his or her creditors. Whether the debtor intended to defraud his or her creditors is assessed objectively.5   This means one considers not what the individual debtor subjectively intended, but rather what a reasonable person can infer from the circumstances. An intention to defraud creditors can arise even when the debtor "hopes and expects that there will be no eventual shortfall."6 "Defraud" in this context includes the purpose of delaying or defeating creditors and does not require any nefarious motive.7 The question can be phrased as to whether there is any objective risk to the creditors by the actions taken by the debtors.8 The creditor who brings the claim need not be a creditor at the time the debtor disposed of his or her assets if the creditor can show that it was highly probably that the debtor would be unable to pay his or her debts.9

It is unlikely that the right to apply to have such transactions set aside would ever only vest in the official receiver. This is so because that person stands in the shoes of the debtor, once adjudicated bankrupt. It is accepted law that the official receiver cannot be in a better position that the debtor.10  For example, the debtor could not claim his own illegality to set aside the relevant transaction, so neither can the official receiver.

The second option relates to transactions at an undervalue. By this mechanism, transactions entered into between debtors and other persons can be set aside if the debtors made gifts of property, or transferred assets for significantly less than their worth. In addition, transactions may also be set aside if they prefer one creditor over others. For example, debtors who repay debts owed to trustees in  preference to paying other debts, can find that the payments to the trustees are recouped. In the writers' experience this cause of action is limited to the official receiver in bankruptcy.

In most common law jurisdictions, the civil standard (i.e. balance of probabilities) is applied to applications by either creditors or official receivers under either claim.

In the case of international transactions, there are also issues arising as to which Court has jurisdiction over which parties in respect of which claims. These issues can complicate, delay and increase the expense of recovery for creditors.


Looking at the respective legislation, one could take the view that both New Zealand and Hong Kong take a hard line on transactions they regard as intended to defraud creditors.

Neither jurisdiction appears to impose a time limit for transactions with intent to defraud creditors to be set aside. For example, in the case of Regal Castings Ltd v Lightbody, 11 the transaction at issue occurred in 1998. The creditor did not issue proceedings until 2005. This was beyond the six year limitation period applicable in New Zealand. The reason for the lack of a time limit may be simply that usual limitation periods do not start to run in the case of fraud until the claimant knew or ought reasonably to have known the facts giving rise to the claim.12 This often does not arise in the case of claims by creditors until after the debtor has failed to pay, or has been adjudged bankrupt.

However, where Hong Kong and New Zealand law do depart is in relation to transactions at an undervalue or by gift. In the case of applications by the official receiver to set aside transactions at an undervalue or by gift, Hong Kong has imposed the following regime:

  • The official receiver (called a trustee) can apply to set aside any such transaction made within five years of the date on which the debtor was adjudicated bankrupt.13 
  • In the case of transactions within three years of the debtor's bankruptcy, the trustee does not need to prove that the debtor was either insolvent at the time of the transactions, or became insolvent as a result of the transactions.14
  • However, for transactions within four or five years of the debtor's bankruptcy, the trustee must prove that the debtor was either insolvent at the time of the transactions, or became insolvent as a result of the transactions.15 Insolvency can be shown on either a cash-flow or balance-sheet basis.16

In New Zealand, the regime is quite different and is as follows:

  • Gifts are treated differently from transactions at an undervalue.17
  • Gifts may be cancelled within five years of adjudication.18 In the case of gifts made within two years of adjudication, no proof of insolvency is required.19 However, where the gift was made within two to five years prior to bankruptcy, the official receiver (known as the official assignee) must prove that the bankrupt would have been unable to pay his debts without the property at issue.20 This is a cash-flow test.
  • In the case of transactions at an undervalue, the official assignee can only recover the difference between the value of the property and what was paid.21 That difference is to be recovered from the recipient.22 In the case of a trust transaction, this would mean that the official assignee could only recover the difference between what the trustee paid the debtor and what the property was worth. The official assignee may only make such a claim in respect of transactions entered into by the debtor within two years of adjudication and if the debtor was insolvent (cash-flow basis) at the time.23

As can be seen from the above, Hong Kong is more sympathetic to creditors than New Zealand. The New Zealand regime requires proof of insolvency for gifts made more than two years before bankruptcy. In addition, the New Zealand regime does not permit the setting aside of transactions at an undervalue made more than two years before bankruptcy. Finally, in New Zealand only the cash-flow test of insolvency is relevant. In Hong Kong, the trustee in bankruptcy may prove insolvency either on that basis or the balance-sheet basis.

These differences highlight the public policy nature of creditor protection legislation. It reiterates that how to balance rights of creditors, debtors and trustees is a matter for individual legislatures. For creditors, it illustrates the importance of being aware of the regime in place in the particular jurisdiction in which they are operating.


In the Cook Islands, trusts with certain characteristics are known as international trusts.These characteristics include having registered trustee companies as the trustees and no Cook Island-resident beneficiaries. Such trusts are governed by the provisions of the International Trusts Act 1984 and all amendment acts ("ITA"). Domestic Cook Islands law, including the common law, does not apply to such trusts unless the ITA provides otherwise.24 In addition, pursuant to s13D ITA, foreign judgments are not enforceable in the Cook Islands in the case of an international trust.

In 1989 the Cook Islands introduced amendments to the ITA to deal with transactions which might otherwise be caught by the rules governing transactions entered into with intent to defraud creditors, gifts, and other transactions at an undervalue.25

The 1989 amendments to the ITA were a bi-partisan measure. At the time the Prime Minister, Mr Henry, was cited as saying:26

"[I extend my thanks] to those in the industry who have spent so much time putting this amendment bill together for the sake of an industry that is becoming extremely important to the economic development of this country… [I emphasize the extreme importance of maintaining] high quality services and to maintain the integrity of the industry."

The then-leader of the opposition, Mr George, also reportedly said:27

"[The Cook Islands off-shore trust industry is] growing in confidence and stature. [To get the confidence] we must display total integrity and stability."

It is thus clear that in passing the 1989 amendments to the ITA, the legislature of the Cook Islands wished to enhance its growing off-shore trusts industry. At the same time, the legislature was conscious of the need to maintain the industry's reputation.

When considering the 1989 amendments to the ITA against the general position and Hong Kong and New Zealand positions set out above, the key points of the newly introduced s13B were:

  • Only a creditor can bring a claim under the ITA.28 
  • The creditor must prove his claim beyond reasonable doubt, not on the usual civil standard. The creditor is required to prove both that the debtor had settled assets on trust with intent to defraud his creditors and that he had gifted or transferred assets to that trust when he was insolvent (balance sheet) without that property.29 
  • If the creditor successfully proves his claim, then the transfer is not set aside. Instead, the trustee is liable to satisfy the claim only to the extent of the settlor's interest in the property transferred prior to transfer.30 
  • The law deems that a transfer is not fraudulent if it took place two years or more after the creditor's cause of action accrued or the creditor failed to take action within one year of the transfer.31 This means that unlike the common law "intent to defraud creditors" test, even if the creditor did not know about the transfer, he has a maximum of two years to bring a claim. 
  • A trust to which the ITA applies is not fraudulent against a creditor if the transfer took place before the creditor's cause of action arose.32 Again this is different from the test found in other jurisdictions, which considers whether the creditor is at risk of loss because of the transaction.

The law was amended again in 1991.33 Those amendments added a new s13K to the ITA.34 For the purposes of this article, the key amendment introduced in 1991 was that the limitation period for any claim to set aside a transfer to a trust was set as two years from the date of the transfer.35 The section was also specifically retroactive to the extent that if a trust became governed by Cook Islands law, the two year time limit would apply regardless of whether the transfer was made at a time when the trust was governed by that law.36

These sections were considered by the Cook Islands Court of Appeal in a judgment issued on 6 November 1995.37 The Court held that s13K did not apply to applications under s13B.38 This was held to be the case because the claimants wished to have the trustees pay to them the value of their claims under the provisions of s13B.39 This was not an application to set aside a transfer.40

A second point in that judgment dealt with when a creditor's cause of action could be said to arise. The claimants had sued the respondents in the USA for negligence and breach of contract. They had received a money judgment. It was the amount of that money judgment which the claimants were seeking to recover from the trustees.

The claimants said their cause of action arose for the purposes of the ITA when the USA court issued the money judgment. This was within two years of the application to the Cook Islands Court. However, the respondents argued that the cause of action arose when the loss was suffered in the USA – i.e. when the respondents had breached the contract or committed the acts of negligence. This was more than two years before the claimants applied to the Cook Islands Court. If the respondents were correct, the claimants' claim in the Cook Islands would have been time-barred.

The relevant provision of s13B stated:

(8) For the purposes of this section, -

  1. the date of the cause of action accruing shall be, the date of that act or omission which shall be relied upon to either partly or wholly establish the cause of action, and if there is more than one act or the omission shall be a continuing one, the date of the first act or the date that the omission shall have first occurred, as the case may be, shall be the date that the cause of action shall have accrued.
  2. in the case of an action upon a judgment, the date of the cause of action accruing shall be, the date of that act or omission or where there is more than one act or the omission shall be a continuing one, the date of the first act or the date that the omission shall have first occurred, as the case may be, which gave rise to the judgment itself.

Based on these words, it would seem at first glance that the respondents must have been correct. This was the finding of the High Court. However, the Court of Appeal disagreed. The Court found that the only date on which the claimants' cause of action in the Cook Islands could have arisen was the date of the USA money judgment. This meant the claimants were within time. The basis for this finding was the Court's interpretation of the policy behind the legislation. Based on Messrs Henry and George's speeches, the Court would not find that the legislature had intended that the relevant cause of action be one arising in another jurisdiction. The Court recorded: 41

"We think that the better view is that Parliament, in attempting to balance the interest of settlors, trustees and creditors, has prescribed certain specific limitation periods; that the right to sue on either a cause of action or a judgment is abridged but not eliminated, and that a common sense interpretation should allow for intention to be given to those two concepts."



Following the release of this decision, the Cook Islands legislature considered the provisions of both s13B and s13K. By amendments contained in a 1996 amendment act, the legislature clarified its intention that the phrase "cause of action": 42

"means the earliest cause of action capable of assertion by a creditor against the settlor of an international trust, or as the case may be, against the settlor of property upon an international trust, by which the creditor has established (or may establish) an enforceable claim against that settlor."

By this amendment it seems clear that the legislature intended to override the decision of the Court of Appeal described above. Essentially, the Court had misinterpreted Parliament's intention. It is now the date of the claimant’s cause of action against the settlor which starts the limitation period running.

A second change made after this decision was an amendment to s13K of the ITA. This amendment means s13K now expressly applies to any application by a creditor under s13B. 43

Further changes were made to the rights of creditors of the settlor and trustees of international trusts under the 1996 amendments. Again, from the amendments discussed above and these further amendments it seems clear that the policy of the Cook Islands’ legislature is to restrict, perhaps more than other jurisdictions, the rights of creditors to pursue recovery of assets settled onto the trustees of international trusts. Essentially, it now seems that claims may only be brought within two years of the transfer of assets by the settlor of an international trust, regardless of the circumstances including allegations of fraud. It is the opinion of the writers of this article that this seems to be a policy which may make economic sense to the Cook Islands. The ITA only applies to international trusts, as defined. The settlors of those trusts will not be resident in the Cook Islands. Their creditors are unlikely to be based in the Cook Islands. The trustees are based in the Cook Islands. From an economic standpoint, to protect the Cook Island taxpayer from having to bear the brunt of any loss, it makes sense to place the risk more greatly on the overseas creditor than the domestic trustee.

These considerations do not appear to have featured in the New Zealand and Hong Kong legislation. There, the risks are more evenly balanced between trustee, creditor and debtor. The same legislation applies to both on-shore and off-shore trusts. This may be because the legislatures of those countries recognize that the settlors of the on-shore and off-shore trusts may have dealings with creditors in those jurisdictions. This may be particularly so in the case of Hong Kong which is an international financial and commercial hub. This may be why the legislation in that jurisdiction favours creditors even more greatly than the New Zealand legislation.


Creditors in all countries the need to take care when dealing with their debtors. Creditors should not only be aware of the financial position of their debtors when debts are incurred, but at all stages of their dealing. Creditors should consider taking security whenever possible. If the debtors transfer assets into trust, the creditors may find those assets quickly beyond their reach. Benjamin Franklin's creditors with well-functioning memories may wish to bear in mind that waiting can mean your chances of recovery disappear.