Debt finance

Guarantees

Guarantees are extensively used in Norway, and can be considered as a highly heterogeneous instrument. Guarantees may be issued by both private individuals/companies, credit institutions and public entities. They may guarantee both existing and future liabilities. The underlying claim may be a claim for money, contribution in kind or performance. Norwegian law recognizes the concept of on-demand guarantees. Recent court practice suggests, however, that careful structuring of on-demand instruments will be required to ensure their enforceability.

In the event that the guarantee is provided by a consumer in favor of a finance institution as the beneficiary, certain mandatory rules set out in the Financial Contracts Act of 1999 will apply. These rules contain:

• certain information requirements applicable to the beneficiary before entry into the guarantee;
• an obligation to dissuade the guarantor (if required);
• requirements in respect of the specific content of the guarantee document (eg information on the maximum guaranteed amount);
• certain notification requirements of the beneficiary (eg when security is not furnished as premised, in the event of default and deferral of payment); and
• restrictions in respect of when the guarantee may be enforced (The beneficiary may not make a claim against the guarantor until legal steps have been initiated to obtain a basis for enforcement against the principal. As a result of this, a consumer may not grant a traditional on-demand guarantee or an unconditional guarantee where the beneficiary is a financial institution.).

The same rules are applicable for non-consumer guarantees where the beneficiary is a financial institution (regardless of the type of guarantee provided). However, most of these rules are non-mandatory and routinely waived in guarantee agreements.

The guarantee must:

• be entered into in writing;
• contain details of the size of the maximum guaranteed amount; and
• contain information in respect of mortgages or other security for the beneficiary's claim, whether the guarantee shall encompass older debt, and, if so, whether the principal has defaulted on such debt, as well as other circumstances which the guarantor in accordance with honesty and good faith is entitled to be informed of.

General rules in respect of contractual invalidating factors also apply to guarantees and securities.

Note also that Norwegian company law contains financial assistance restrictions. Section 8-7 of both the Private Limited Liability Companies Act of 1997 and the Public Limited Liability Companies Act of 1997 (together the Limited Liability Companies Acts) limit a Norwegian limited liability company's right to grant credit and security (including guarantees) 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 guarantees may only be granted:

• within the limits of the assets which the company may legally use for distribution of dividends (free equity); and
• only if adequate security is furnished for the claim for repayment or recovery.

The restrictions described above apply to a company's right to issue security for the benefit of a member of the board of directors, general manager or a member of the corporate assembly of the company or another company within the same group of companies, or any of their related parties, with certain exceptions in respect of issuing security for the benefit of employees.

There are, however, certain other important exceptions from the restrictions discussed above where:

• the security is of customary duration in connection with commercial agreements;
• the security is provided for the benefit of the parent company or another company within the same (Norwegian) company group;
• the security is granted in favor of a legal person that has controlling interest over the company, or in favor of a subsidiary of such legal person, provided that the credit or security shall serve the group's economic interests; or
• the security is granted for the benefit of a shareholder (owning less than 5% of the share capital in private companies and less than 1% in public companies) or related parties when the debtor is employed with the company or another company of the same group, such employment is his main occupation and the security is granted in accordance with customary rules for financial assistance to employees.

Pursuant to section 8-10 of the Limited Liability Companies Acts, a company may only provide security (hereunder provision of a guarantee) in connection with a third party's acquisition of shares or a right to shares in the company or the company's parent company within the scope of the funds that the company may use for distributing dividend and only if certain formal requirements are met, such as approval from the general meeting with 2/3 majority and satisfactory security for the recourse claim.

Exceptions to this restriction may be granted by regulations or individual decisions made by the King.

A transaction in violation of the financial assistance restriction is null and void, however, such invalidity may not be asserted against a counterparty in good faith. In extreme cases, a violation of the financial assistance restrictions may lead to criminal charges.

As guarantees are frequently granted from one company on behalf of other companies in the same group, the formal procedures set out in section 3-8 of the Limited Liability Companies Acts are of relevance. As a general rule, agreements between a company and its shareholders, the parent of the company's shareholders, or a person closely related to these, will not be binding upon the company unless the agreement is approved by a shareholders' meeting of the company.

In addition to this, there are also further formalities which must be complied with, such as:

• the requirement of a formal statement from the board of directors containing, inter alia, a declaration that the compensation that the company receives by providing the guarantee corresponds reasonably with the value of providing the guarantee (and a confirmation from the company's auditor regarding the same); and
• registration of the transaction in the Norwegian Register of Business Enterprises.

There are certain important exceptions from the main rule, such as agreements that are entered into in the course of the ordinary business of the guarantor on customary terms and conditions (eg cash pooling arrangements), agreements where the guarantor's consideration has a real value below 1/10 of its share capital (1/20 for public companies) and guarantees issued by a guarantor which is a 100% owned subsidiary of the legal person In favor of whom the security is granted, provided, however, that the security is given to serve the group's financial interests.

The main risk of non-compliance with section 3-8 is that the agreement (ie the guarantee) may be deemed void and not binding on the company, and any performance according to such an agreement shall be returned.

Pursuant to section 3-9 of the Limited Liability Companies Acts, transactions between companies of the same group shall be based on customary business terms and principles. To the extent that the value of the benefit/payment received by a Norwegian limited liability company in providing a guarantee does not correspond with the value of contribution provided by the company, such transactions may also be considered illegal distribution of dividends pursuant to the Limited Liability Companies Acts section 3-6. The consequence of an illegal distribution is that the distribution must be reversed, ie the guarantee will be invalid (with a reservation for a receiving party in good faith). An illegal contribution may also be subject to claims for compensation for loss or criminal sanctions.

It should be noted that even though interest expenses, as a general rule, are tax deductible, certain limitations apply to interest relating to intra-group loans, and guarantees and security granted in favor of a closely related entity.

Security

By agreement, a mortgage may be validly created only where authorized by the Mortgage/Liens Act of 1980 or other statue. In addition, a mortgage may not be validly attached as a whole to all the present and future property of the mortgagee.

When a right cannot be assigned, or can be assigned only on certain conditions, the same limitation applies in respect of attaching a lien to the right. However, one may always pledge the shares in a limited liability company unless the contrary is stipulated in the company's articles of association.

If a person owns only parts of an asset, this part may be pledged, but only if it is pledged in its entirety (ie if the person owns 50% of a property, then the entire 50% must be pledged).

A mortgage must set out the maximum amount (in Norwegian Krone, or in foreign currency for which a stock exchange rate is normally quoted in Norway) secured by such mortgage and is perfected by registration in a register of real property or in the movable property register.

Please see the rest of this answer in respect of guarantee limitations for further restrictions that apply equally to taking security.

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.

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.