In a nutshell: When founding a Marshall Islands entity, the stakeholders should carefully consider who to appoint "Qualified Intermediary". Even though a Qualified Intermediary has only certain administrative duties, the entity's shareholders would face severe issues if they lost contact or access to their Qualified Intermediary. The process of replacing a Qualified Intermediary is rather complicated as outlined in more detail below.

Purpose and Role of a Qualified Intermediary

Every Marshall Islands entity ("MI Entity") needs to appoint a "Qualified Intermediary" ("QI"), which is also known as the "Billing Address" or the "Address ofRecord". The QI is recorded by the Trust Company of the Marshall Islands ("TCMI") who operates the Marshall Islands companies' register. The QI is essential for the MI Entity as the TCMI only corresponds with the QI. This refers to annual maintenance invoices, which are sent only to the QI, the annual reporting of Economic Substance, the issuance of certificates of incumbency (also issued only to the QI) and – with some exceptions – any other correspondence between the MI Entity and the TCMI.

The QI is recorded by the TCMI at the time of the initial formation of the MI Entity. As a matter of standard practice TCMI records the party as the QI which initiates the incorporation. There are no specific requirements with regard to the QI, i.e. also foreign entities can be recorded. Further, the QI does not necessarily need to fulfill any corporate or constitutional function, such as being a director, officer or shareholder. The QI role is often taken over by professional corporate service providers, such as for example HST Service und Treuhand GmbH and many others.

The role of the QI is crucial for the continuous existence of the MI Entity for practical reasons: if, for example, corporate maintenance invoices are not paid, the TCMI will dissolve the MI Entity mandatorily after one year of non-payment and one reminder 90 days after the due date of that invoice, as specified in §104 of the Marshall Islands Business Corporations Act. Following the mandatory dissolution the MI Entity can be reinstated after all outstanding fees and a reinstatement fee have been paid, but only on the initiative of the QI. Otherwise, a reinstatement is impossible.

Consequences of Loss of Qualified Intermediary

To appoint a new QI, the current QI must notify the TCMI. Neither the shareholders of the MI Entity nor its directors can appoint a new QI.

Problems occur if the QI does not fulfill its functions, passes away or otherwise disappears and the shareholders of the MI Entity no longer have contact with their QI. This may create severe issues as the shareholders might not know that payments are due by their entity (say, for example, with annual maintenance invoices). In such a situation the possibility for the MI Entity to communicate with the TCMI is completely interrupted and cannot be redirected because – as described – TCMI does not communicate with anybody except the QI. TCMI will, for instance, continue sending corporate maintenance invoices to the QI. These invoices obviously will not reach anybody and will remain unpaid. In such case the TCMI will send a reminder and dissolve the MI Entity thereafter mandatorily.

The MI Entity's mandatory dissolution (due to nonpayment of maintenance fees) may even remain unnoticed. The director or shareholder of the MI Entity, relying on the QI to fulfill its function, continues to do business on behalf of the MI Entity which, however, has been mandatorily dissolved. For obvious reasons this may create huge uncertainties and open issues. Are transactions conducted by a MI Entity which has been mandatorily dissolved valid? If not, are the persons having presumably acted on behalf of the MI Entity personally liable for the transactions they intended to enter on behalf of the MI Entity? Have the MI Entity's assets been automatically transferred to the MI Entity's shareholders after its mandatory dissolution?

Also, practical problems may occur, for example in the course of regular compliance checks by banks running accounts for the MI Entity. The banks will for example not be able to obtain fresh certificates of goodstanding or certificates of incumbency for the MI Entity. The effect will be that the MI Entity's accounts will finally be closed leaving the MI Entity completely inoperable. The shareholders and the directors of such MI Entity cannot communicate with TCMI to find out what fees are unpaid or what can be done to reinstate the MI Entity, as the TCMI will only disclose this information to the QI.

Solution

The only possibility to change the QI without the QI's cooperation is a final judgment by the High Court of the Marshall Islands (the "High Court"). For this purpose, inter alia, a motion for a judgment needs to be filed with the High Court. The judgment will be accepted by the TCMI as binding on the TCMI and will enable the person specified in the judgment either to act as the new QI of the MI Entity or appoint the new QI for the MI Entity. Following this, the dissolved MI Entity can be reestablished with retroactive effect.

During the past years ERG has successfully replaced QIs and reestablished numerous mandatorily dissolved MI Entities, reestablished failed account relationships and put dissolved MI Entities back to business retroactively. All of this can be achieved within a time frame of two to three months at reasonable costs and expenses.

For further questions, please do not hesitate to contact either Dr. Klaus Dimigen or Dr. Stefan Rindfleisch, both registered lawyers admitted to practice in the Marshall Islands.