Norway
Common forms of guarantees
Under Norwegian law, guarantees have traditionally been classified into three main categories;
- conditional guarantees (simpel garanti);
- unconditional guarantees or sureties (selvskyldnerkausjon); and
- on-demand guarantees (påkravsgaranti).
There are also other types of guarantee which lie between these guarantees and where the degree of independence between the guarantee and the underlying obligation varies. Each guarantee must be assessed and interpreted in accordance with its specific content/wording.
Common forms of security
In Norway, security may not be validly attached as a whole to all the present and future property of the mortgagee.
Norwegian law states that security may be established in inter alia these forms and objects:
- Ownership and special rights in real property or unspecified parts of real property (including property comprised of the mortgage on a lease of land and houses thereon, mortgage of an owner section and leases of dwelling) may be mortgaged.
- Possessory liens may be created by agreement on movables that cannot be entered in a real property register.
- Liens on movables that can be entered in a real property register and accessories of such movables acquiring legal protection by being entered in the proper register.
- Business enterprises may create non-possessory liens on operating assets (driftstilbehør) that are used in or are designed for their business operations (such liens are created together with liens on ownership of or a registered and assignable right to use the real property to which the business relates).
- Business enterprises may create non-possessory liens – combined or individual – on motor vehicles that are used or intended for use in the business operation, and mobile construction machines that are used or intended for use in the enterprise's contractor business.
- Movables that are used or intended for use in agriculture operations but which are not accessories to real property and goods that are produced in the operations, can be separately attached with non-possessory liens.
- Movables that are used or intended for use in commercial operations conducted from fishing, whaling or sealing vessels, but which are not accessories of a vessel, may be separately attached with non-possessory liens.
- Business enterprises may create non-possessory liens on their stocks of goods used in the business (varelager).
- In connection with the sale of movable objects, a lien may by agreement be imposed on said objects as security for the seller's claim on the purchase price with the addition of interests and costs, or loans which a third party has granted to the buyer for full or partial payment of claims and which the lender has paid out directly to the seller.
- Securities, such as negotiable promissory notes and similar documents, share certificates and life policies, may be attached with possessory liens.
- A claim or a right evidenced by a redemption paper which is not a security may be attached with liens.
- Shares that are not registered in a securities register may be pledged unless the contrary is stated in the company's articles of association.
- Non-negotiable monetary claims on a named debtor may be attached with liens, as may non-negotiable money claims that will arise against a named debtor in a specifically mentioned legal situation.
- A business enterprise may conclude an agreement to assign, assign for security purposes or attach the non-negotiable money claims which it has or acquires in its business or a specific part thereof. It is not necessary that the debtors are named.
- Some authorizations may be pledged (see for instance section 20 of the Aquaculture Act (Akvakulturloven) and section 6-2 of the Petroleum Act (Petroleumsloven)).
- Vessels and aircraft may be pledged.
Are there any restrictions on lending and borrowing?
Lending
Lending is a regulated activity, and unless the available exemptions apply, a lender will need to be authorized by the Norwegian Financial Supervisory Authority (FSA) to conduct such business. There are particular restrictions around how:
- the loans are marketed, originated and sold;
- lenders administer the loans on an ongoing basis; and
- to deal with borrowers who fall behind with their payments.
Foreign lenders may conduct business in Norway by establishing Norwegian subsidiaries and having these apply for authorization from the FSA. Special rules apply for entities that are authorized and seated in another European Economic Area state. Such entities may conduct business in Norway by passporting their licenses to Norway or through a branch.
Norwegian company law contains restrictions as to financial assistance. Section 8-7 of both the Private Limited Liability Companies Act of 1997 and the Public Limited Liability Companies Act of 1997 limit a Norwegian limited liability company's ability to grant credit for the benefit of its shareholder or a party closely related to a shareholder, or for the benefit of a shareholder of another company in the same group or any of its closely related entities. Such credit may only be granted:
- within the limits of the assets which the company may legally use for distribution of dividends (free equity); and
- if adequate security is furnished for the claim for repayment or recovery or within companies in the same group of companies.
There are certain exceptions to the rule mentioned above. The following credit may be granted outside the limits of the assets which the company may legally use for dividends:
- credit of customary duration in connection with commercial agreements;
- credit or security for the benefit of the parent company or other group company; and
- credit or security in favor of a legal person that has a controlling interest as set out in section 1-3 over the company, or in favor of a subsidiary of such a legal person, provided that the credit or security serves the group's economic interests.
Note that the requirement concerning adequate security shall not apply if the legal person is a state, municipality or county municipality.
Section 8-10 of both the Private Limited Liability Companies Act and the Public Limited Liability Companies Act limit a Norwegian limited liability company's ability to provide financial assistance or security in connection with the acquisition of shares in that company or any of its holding companies.
Borrowing
Borrowing is generally not regulated in Norway.
What are common lending structures?
Lending in Norway can be structured in a number of different ways to include a variety of features depending on the commercial needs of the parties.
A loan can either be provided on a bilateral basis (a single lender providing the entire facility) or syndicated basis (multiple lenders each providing parts of the overall facility).
Syndicated facilities by their nature involve more parties, are more highly structured and involve more complex documentation. Larger financings will typically be done on a syndicated basis with one participant in the syndicate taking the lead in coordinating and arranging the financing.
Loans will be structured to achieve specific objectives, eg term loans, working capital loans, equity bridge facilities, project facilities and letter of credit facilities.
Loan durations
The duration of a loan can vary between:
- a term loan, provided for an agreed period of time but with a short availability period;
- a revolving loan, provided for an agreed period of time with an availability period that extends nearer to maturity of the loan and which may be redrawn if repaid;
- an overdraft, provided on a short-term basis to solve short-term cash flow issues; or
- a standby or a bridging loan, intended to be used in exceptional circumstances when other forms of finance are unavailable, and often attracting a higher margin.
Loan security
A loan can either be secured, unsecured or guaranteed. For more information, see Giving and taking guarantees and security.
Loan commitment
A loan can also be:
- committed, meaning that the lender is obliged to provide the loan if certain conditions are fulfilled; or
- uncommitted, meaning that the lender has discretion whether or not to provide the loan.
Loan repayment
A loan can also be repayable on demand, on an amortizing basis (in instalments over the life of the loan) or scheduled (usually meaning the loan is repayable in full at maturity).
What are the differences between lending to institutional / professional or other borrowers?
Lending to institutional/professional borrowers is subject to less regulatory oversight and so less burdensome from a compliance perspective. The Financial Contracts Act of 1999 chapter 3 contains several provisions that aim to protect consumers.
Do the laws recognize the principles of agency and trusts?
The concept of a trust is not recognized under Norwegian law. However, the agency function is widely used and generally accepted under Norwegian law.
Are there any other notable risks or issues around lending?
Generally
Loan agreements and other finance documents are subject to general contractual principles under Norwegian law, such as principles of revision of unfair contract terms. Certain statutory rules applying to financial institutions may also have implications to a lender, such as the mandatory requirement to include a maximum liability for a security interest or guarantee in order to ensure its validity if that security interest or guarantee is given in favor of a financial institution (other than in respect of security provided for the borrower's own debt).
Specific types of lending
Norwegian law poses certain challenges in the context of project finance and certain other types of asset lending transactions as security cannot as a general rule be granted over contracts as such (only monetary claims arising under a contract), requiring careful structuring of these types of transactions.
Standard form documentation
Most Norwegian law syndicated finance transactions are governed by documentation based on recommended forms published by the Loan Market Association (LMA), but adapted for the Nordic market excluding or reducing the scope of a number of provisions in the standard template. Bilateral finance transactions are sometimes made using a simplified form of the LMA standard, but will most often be documented on bank standard form documentation prepared in-house.
Are there any other notable risks or issues around borrowing?
Borrowers should be aware of the potential implications of the EU’s Bank Recovery and Resolution Directive (BRRD), which outlines certain measures for dealing with failing financial institutions.
The BRRD applies to financial institutions incorporated in the European Economic Area (EEA), but does not apply to EEA branches of non-EEA incorporated entities.
Article 55 of the BRRD gives authorities the power to ‘bail in’ obligations of failed EEA financial institutions and to postpone the enforcement of early termination rights against the affected institution. ‘Bail in’ describes a variety of write down and conversion powers, such as the power to convert certain liabilities into shares or cancel debt instruments. In the case of English or other EEA law contracts, such powers override what the contracts says. In the case of non-EEA law contracts, there are requirements to incorporate such provisions into the contract.
The BRRD is under consideration by the Ministry of Finance, but has not yet been implemented into Norwegian law and no deadline has been set as of today. However, Norway already has rules with effects similar to BRRD.
Egil Hatling
Partner
Advokatfirma DLA Piper Norway DA
[email protected]
T +47 24 13 15 00
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