Norway
Giving or taking guarantees
In a judgment from 2012 (Rt. 2012 s. 1267), the Norwegian Supreme Court concluded that a payment guarantee was not an on-demand guarantee, but a surety only, under which the guarantor could invoke debtor objections to the payment obligations, despite the fact that the guarantee included language customarily used in on-demand guarantees in the international business arena.
The case considered a guarantee that had been written in English. The dispute centered on the nature of the guarantee; the guarantor claimed it was an on-demand guarantee, whereas the debtor claimed it was meant to be seen as a surety only. The guarantee did not say explicitly what kind of guarantee it was but contained some wording often found in on-demand guarantees, ie ‘irrevocably and unconditionally guarantee’, ‘as their own debt’, ‘immediately due on first demand’, and ‘honored forthwith’. The Supreme Court held that it had to look at the guarantee as a whole and that, on this basis, the guarantee left doubt as to whether it was a surety or an on-demand guarantee, and that such doubt should dis-benefit the party who had drafted it. The effect of this judgment is that, under Norwegian law, there are stricter requirements as to the contents of an on-demand guarantee in order to obtain the intended legal effect of such a guarantee, compared to what seems to have been the general assumption among practitioners and legal authors. It is therefore important to ensure that on-demand guarantees are drafted using language which removes any doubt as to their classification and legal effects, ie by saying explicitly that it is in fact meant to be an on-demand guarantee.
Giving or taking security
Pursuant to section 3-1 of the Partnerships Act of 1985, a limited partnership may not acquire its own shares, and cannot by agreement establish a security in its own shares. A subsidiary may not obtain shares in the parent company or by agreement establish a security in such shares. Any agreement to the contrary will be void. In addition to this, section 3-5 of the Partnership Act of 1985 stipulates that the partnership's right to receive capital cannot be assigned, nor can it be deposited as security for debt or subjected to distrain for the obligations of the partnership.
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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