BANK FINANCE AND REGULATION Multi-Jurisdictional Survey SECURITY OVER COLLATERAL. NORWAY Thommessen Krefting Greve Lund AS

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1 BANK FINANCE AND REGULATION Multi-Jurisdictional Survey SECURITY OVER COLLATERAL NORWAY Thommessen Krefting Greve Lund AS CONTACT INFORMATION Dag Thomas Hansson, Associate Thommessen Krefting Greve Lund AS PO box 1484 Vika, N-0116 Oslo Can assets be charged, liened and/or encumbered in your jurisdiction? Please insert any exemptions, if any. Norwegian law provides for effectively creating security over a range of closely defined asset types (a floating charge may be established over certain asset types). 2. In your jurisdiction, under what circumstances may security arrangements be subjected to choice of law and/or choice of forum clauses (does it matter, whether the security itself is located abroad and/or governed by foreign law [e.g. a pledged claim])? What is the market practice in your jurisdiction? Is there a treaty on this in your jurisdiction, whether bilateral or multi-lateral? Are there any requirements for enforcement in your jurisdiction? Choice of law and choice of forum Norwegian courts will recognise and give effect to a choice of foreign law and submission to foreign jurisdiction as validly agreed by the parties to a security agreement relating to assets located in Norway or governed by Norwegian law (claims). However, as a rule of thumb, in order to establish an enforceable security against such assets, it must be legally permissible under Norwegian law to establish security over the relevant security assets and the necessary perfection acts under Norwegian law must

2 have been performed (lex situs). There are certain exceptions to this rule depending on elements such as the type of asset and the asset s country of origin, but the legal situation relating to many types of assets is uncertain. For security legally established under Norwegian law, but relating to assets located abroad, one would have to consider the international private law of the country in which the assets are located. Market practice The prevailing market practice in Norway is to follow the law of the country in which the security assets are located (lex situs). If, for any reason, another country s law is chosen, it is common practice to ensure that perfection requirements are fulfilled under both the law of the security agreement and the law of the country in which the assets are located. Treaties Norway has ratified the Lugano Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters (1988) and the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the conventions do not apply to real estate located in Norway). In addition, Norway has entered into a number of bi- or multilateral treaties relating to the enforcement of judicial settlement and arbitration. Enforcement The Norwegian courts will recognise as a valid judgment, and will enforce, any final civil judgment obtained in a foreign court without further re-examination of the merits of the case subject to the Norwegian Dispute Act (90/2005) Section According to said provisions of the Dispute Act a foreign judgment will be enforceable in Norway to the extent it is enforceable in accordance with Norwegian law or applicable treaties (e.g. the Lugano Convention). If no applicable treaty, the foreign judgment is enforceable if the ruling forum has been agreed between the parties in writing and relates to a specific legal relationship between the parties (which is almost always the case with security arrangements). In both cases the judgment must not contravene mandatory Norwegian law (e.g. perfection requirements) or decency. If the above criteria are satisfied, the Norwegian enforcement authorities will rely on the foreign judgment as basis for enforcement of debt against the relevant security assets located in Norway. 3. In your jurisdiction, are floating charges or security over the overall assets of an entity accepted, and if so in what terms? Norwegian law expressly prohibits an entity from providing a floating charge over its overall assets. However, since a wide range of assets may be charged, it is possible to get close to a general charge of the assets of a Norwegian entity by individually

3 charging each relevant asset type. For certain types of assets, it is also possible to establish a floating charge, please refer to the overview below. 4. In relation to the following types of assets, please explain in your jurisdiction the types of security that can be created or granted, if the security requires any type of registration or perfection requirements, an estimate of cost (including applicable taxes and any other duties/ costs) and timing for granting such security, and any special considerations regarding the asset type: (a) Aircraft; Perfection requirements: Registration of a mortgage deed with the Norwegian Civil Aircraft Register (NCAR). Estimate of costs: Nominal fees payable to NCAR depending on the face value of the mortgage deed. Nominal fee for pre-approval of documents. Timing: NCAR is relatively speedy when registrering security and will usually be able to register the security on a requested date if documents are deposited in advance. Particular considerations: A non-disposal clause may be registered over the aircraft, requiring the security holder s express consent before the aircraft is sold or further encumbered. (b) Bank Accounts; Perfection requirements: Notification to the account bank. It is not necessary to block a bank account to ensure perfection. Particular considerations: The account bank may be asked to waive its rights of set-off and other liens in respect of the bank accounts, but this is not always acceptable to the account bank. It is not possible to take security over bank accounts reserved for certain tax purposes. (c) Animals, Crops (in ground and severed) and Timber; Type of security: Floating charge over operating assets. Registration/perfection requirements: Registration of charge over the operating assets of the chargor in the Norwegian Register of Mortgaged Movable Property (the Norwegian Movables Register ). Estimate of costs: Nominal fees payable to the Norwegian Movables Register. Timing: Registration time in the Norwegian Movables Register will vary, but the

4 document. Particular considerations: Crops in ground will be considered as part of the real property, and a charge over the real property will thus include crops in ground (cf. paragraph (j) below). (d) Equipment; General: Equipment related to the business of the company including, among other things, the operating assets of a company, farming equipment, and equipment used for aquaculture purposes. Pre-claims (the right to search for minerals within a defined area for a certain period of time) are also considered a part of the operating equipment, whilst mining claims on the other hand can be charged following the same rules as real property, see section (h) below. Type of security: Floating charge over operating assets. Registration/perfection requirements: Registration of charge in the Norwegian Movables Register Estimate of costs: Nominal fees payable to the Norwegian Movables Register. Timing: Registration time in the Norwegian Movables Register will vary, but the document Particular considerations: A charge over operating assets will not include aquaculture licences, but these can be charged separately by registering with the Norwegian Aquaculture Register. The registration fees connected to such registration are nominal. The registration time will vary, but the security will have priority upon the register s receipt of the registration document. (e) Intellectual Property; Type of security: Floating charge over operating assets. Registration/perfection requirements: Registration of charge in the Norwegian Movables Register Estimate of costs: Nominal fees payable to the Norwegian Movables Register. Timing: Registration time in the Norwegian Movables Register will vary, but the document Particular considerations: The possibility to use intellectual property as security is limited. Intellectual property can only be charged to the extent that such rights are deemed a part of the operating assets of a company and are related to the chargor s business. Intellectual property can thus not be subject to a separate charge. (f) Inventory;

5 Type of security: Floating charge over inventory. Registration/perfection requirements: Registration of charge in the Norwegian Movables Register. Estimate of costs: Nominal fees payable to the Norwegian Movables Register. Timing: Registration time in the Norwegian Movables Register will vary, but the document Particular considerations: The inventory of a company can only be charged as a whole, unless there are parts of the company s inventory that form separate and economically independent entities (within the same company) that are easily held apart from the rest of the inventory. (g) Leases; (i) Registered leases (real property); Registration/perfection requirements: Registration in the Norwegian Land Register (administered by the Norwegian Mapping and Cadastre Authority). Estimate of costs: Nominal fees payable to the Norwegian Mapping and Cadastre Authority. Timing: Registration time with the Norwegian Land Register will vary, but the document. (ii) Financial lease; Registration/perfection requirements: A written agreement must be entered into between the parties describing the leased asset, the period of the lease and the monthly rent. If the object of the lease is a vehicle, the charge must be registered in the Norwegian Movables Register in order to ensure perfection. Estimate of costs: Nominal fees payable to the Norwegian Movables Register. Timing: Registration time in the Norwegian Movables Register will vary, but the document. Particular considerations: Norwegian Law distinguishes between financial lease, operating lease and residual value lease, whereby the rules described in this section only apply to financial lease. There is no particular regulation of

6 operating lease and residual value lease, assets subject to such leases can thus be charged in accordance with the rules applying to the relevant type of asset. Assets that can be charged by registering with an asset register (e.g. the Land Register, the Norwegian Aircraft Register, the Norwegian Ship Register, etc.) can not be subject to a charge following the provisions as described in this section, but will have to be charged according to the provisions governing the type of asset in question. (h) Mineral Interests, including Hydrocarbons; Type of security: (i) Fixed charge over production licences and licences for the construction and operation of installations for transportation and utilisation of petroleum. (ii) Pre-claims to claimable minerals pursuant to the Norwegian Mining Act (70/1972) will be included in a floating charge over operating assets (pre-claims), cf. section (d) above. (iii) Claims to claimable minerals can be separately charged as a right in real property, cf. paragraph (j) below. Registration/perfection requirements: (i) Petroleum interests. Registration of the charge in the Norwegian Petroleum Register (administered by the Norwegian Ministry of Petroleum and Energy). (ii) Mineral interests (pre-claims). Registration of the charge over pre-claims in the Norwegian Movables Register. (iii) Mineral interests (claims). Registration of the charge on the relevant property in the Norwegian Land Register. Estimate of costs: Nominal fees for registration of security interests payable to the Petroleum Register, the Norwegian Movables Register or the Norwegian Land Register. Timing: Registration with the Petroleum Register is estimated to take three business days under ordinary circumstances. Registration in the Norwegian Movables Register and the Norwegian Land Register will vary. In each case, security will have priority from the day the relevant registry receives the registration documents. Particular considerations: Registration of encumbrances in the Norwegian Petroleum Register requires prior consent from the Norwegian Ministry of Petroleum and Energy. A security holder over interests in claimable minerals will also have to consider particular licence requirements (applications for pre-claims and claims are administered by the Norwegian Commissioner of Mines). (i) Promissory Notes and Chattel Paper; Registration/perfection requirements: Transfer of the debt instrument from the pledgor to the pledgee or a third party who will keep it on behalf of the pledgee. Should the instrument not be in the possession of the pledgor at the time it is pledged, the holder must be notified of the pledge and informed that the document shall not be handed over to the pledgor.

7 (j) Real Estate; Registration/perfection requirements: Registration of a mortgage deed in the Norwegian Land Register. Estimate of costs: Nominal fees. Timing: Registration time with the Norwegian Land Register will vary, but the document. Particular considerations: High-voltage power lines can be subject to a fixed charge by registering with the register of power lines. (k) Receivables (credit rights under contracts or invoices); (i) Floating charge over all trade receivables: Registration/perfection requirements: Registration in the Norwegian Movables Register. Estimate of costs: Nominal fees. Timing: Registration time in the Norwegian Movables Register will vary, but the document. (ii) Fixed charge over receivables under specific contracts (including intragroup loans): Registration/perfection requirements: Notification to the debtor. (l) Rights under Contracts (excluding Receivables); Contractual rights (excluding receivables) cannot be legally charged under Norwegian law, with the exception of certain contractual rights capable of registration in a securities register (e.g. leases in real property). (m)shares (in book-entry and certificate form and other securities); Registration/perfection requirements: a) Shares registered with the Norwegian Central Securities Register ( VPS ) registration with VPS. b) Unregistered private limited company shares notification to the company. c) Unregistered limited partnership shares and other unregistered shares notification to the company and transfer of share certificates. Estimate of costs: Nominal fees for registration in the VPS.

8 Timing: Registration in the VPS is very speedy and the charge will be registered immediately upon notice from the registrar. Particular considerations: Particular legal issues may arise in relation to the charge of shares in limited partnerships. If the securities in question are shares issued by a company owning waterfalls or mining rights a 20 per cent ownership restriction applies under the Industrial Concessions Act (14 Dec 1917 No. 17). Acquisitions in excess of the ownership limitation are subject to approval from the ministry and are not valid unless consented to by the board of directors of the company in question. If the securities in question are shares issued by a credit institution or an insurance company, acquisition of more than 10% ownership interest is subject to approval from the ministry of finance (the same also applies to certain higher threshold levels). Shareholders acting in concert are consolidated with respect to the ownership limitations. (n) Vessels; Registration/perfection requirements: Registration of a mortgage deed with the Norwegian Ship Register (NOR) or the Norwegian International Ship Register (NIS). Estimate of costs: Nominal fees. Timing: NIS/NOR will normally be able to register the mortgage on a specific date. It is possible to get a pre-approval of the mortgage deed from NIS/NOR. Particular considerations: A non-disposal clause may be registered over the vessel, requiring the security holder s express consent before the vessel is sold or further encumbered. Various oil installations may also be registered with NIS and NOR. (o) Vehicles; Type of security: (i) Floating charge over all motorised vehicles, movable construction machinery and railroad material. (ii) Fixed charge over individual vehicles. Registration/perfection requirements: Registration of charge in the Norwegian Movables Register. Estimate of costs: Nominal fees payable to the Norwegian Movables Register. Timing: Registration time in the Norwegian Movables Register will vary, but the document

9 (p) Business as an ongoing concern. The prohibition under Norwegian law against providing security over the general assets a company means that it is not possible to establish security over a business as an ongoing concern. 5. Please explain briefly for each type of assets the procedure for enforcement (judicial and extra-judicial). Is it possible to enforce security governed by another jurisdiction? If yes, what is the procedure? Procedure for enforcement (a) Shares in Norwegian public and private limited liability companies (ASA and AS): For listed shares the parties may agree to enforcement by sale through an independent stock broker (but the enforcing party cannot foreclose on payment by taking over the shares). In the absence of agreement, enforcement is carried out through the Norwegian courts by sale through a broker or public auction and with prior notice sent to the chargor. For shares (and bonds) registered in the Norwegian Central Securities Depository (VPS), the sale shall as a general rule be made through an independent broker. If security over shares fall within the scope of the Norwegian Financial Collateral Act (17/2004), the enforcing party may take possession of the shares subject to prior agreement between the chargor and the secured party. (b) Real property, vessels, aircraft and offshore installations: A mortgage is not a legal charge/assignment in the sense that the security holder can transfer the charged property directly to itself or a third party. Enforcement is a formalised procedure done through the Norwegian courts. Sale of the property is made through an agent or public auction. The security holder may be granted possession by the enforcement authorities. Upon an event of default (but not before), the parties may agree how to enforce the secured asset. (c) Operating assets (equipment), intellectual property and inventory Formalised enforcement through Norwegian court. Sale by intermediary or public agent. Upon an event of default (but not before), the parties may agree how to enforce the secured asset.

10 (d) Receivables and bank accounts No formal enforcement is required as the secured party may instruct the debtor to pay directly to its account. To the extent security over cash deposits in bank accounts falls under the regime of the Norwegian Financial Collateral Act, the parties are free to agree on the enforcement procedure when establishing the security. (e) Negotiable debentures / promissory notes Enforcement is a formalised process through Norwegian court. As a general rule, sale shall be made through a broker upon prior notice sent to the grantor. The enforcement authorities may also endorse the monetary claim to the pledgee. Enforcing security governed by another jurisdiction With respect to security which is possible to enforce in Norway (e.g. if the relevant security assets are located in Norway), the Norwegian courts would recognise as a valid judgment, and would enforce, any final civil judgment obtained in a foreign court against a Norwegian company without further re-examination of the merits of the case subject to, and in accordance with, the provisions of Section of the Norwegian Dispute Act (90/2005). 6. Can a trustee or security agent be used in your jurisdiction, or must security be granted in favour of all lenders? The concept of a security trustee, as this concept is understood under common law, does not exist under Norwegian law. However, in practice the arrangement with a security agent acting on behalf of the secured parties is widely recognised. The security agent will act on behalf of the secured parties as these exist from time to time and it is therefore not necessary to grant separate security rights to the lenders or to amend the established security agreement upon changes to any of the lenders (or any other secured party). 7. In bankruptcy or insolvency scenarios, what are the suspect periods, is clawback possible, and what other types of rights (tax debts, employees, etc.) have preference over security granted? Suspect periods Under Norwegian bankruptcy legislation certain transactions (such as extraordinary payments, security for old debt, under-value disposals, etc.) effected by the debtor within a certain period of time prior to the commencement of bankruptcy proceedings may be revoked. The rules apply in bankruptcy proceedings and compulsory compositions, but not in any other formal or informal rescues.

11 A distinction should be made between objective and subjective rules. The objective rules apply to transactions regardless of whether the company was insolvent at the time of the transaction or whether the company or the counterparty in any way has acted disloyally towards the other creditors by having entered into the transaction. The objective rules apply to, among other things, gift transactions, certain set-offs, creation of security for older debt and extraordinary payments (i.e. payments which have been made with unusual means of payment or before falling due, or which have considerably weakened the company s ability to meet payments). As a main rule, only transactions entered into during the three months prior to the commencement of bankruptcy proceedings can be set aside according to the objective rules. For gift transactions (and unreasonably high salary payments) the rules apply to transactions made less than one year before the cut-off date. Further, if a suspect transaction involves a party (a person or a company) that is related to or associated with the company, the transaction can be set aside if it was made less than two years before the cut-off date. In the latter situation, however, the counterparty can avoid recovery by proving that the company was unquestionably solvent at the time the transaction took place. The subjective rule (actio pauliana) requires that (i) the company was insolvent when the transaction was entered into, (ii) the transaction is improper or otherwise unfair in relation to the group of creditors and (iii) the other party was aware of these circumstances. Various types of transactions can be set aside pursuant to this rule (including transactions which are also subject to the objective rules): a) transactions favouring one creditor at the expense of the others; b) transactions which withdraw the company s assets from the liquidation; or c) transactions which increase the company s debts to the detriment of the other creditors. The subjective rule applies to transactions made during the 10 years prior to the commencement of bankruptcy proceedings. Preferential claims Contractually agreed charges secure the creditors up to the value of the secured property and entitle them to the proceeds resulting from the realisation of the secured property or asset. Claims not covered through the realisation process will become ordinary unsecured dividend claims ranking behind preferential claims. In accordance with the Norwegian Debt Recovery Act (59/1984) creditors are paid in the following order of priority: a) secured claims (provided the security is perfected and irrevocable); b) claims pertaining to the administration of the bankruptcy estate; c) salary claims (within certain limitations); d) tax claims (e.g. withholding tax and value added tax, within certain limitations);

12 e) ordinary unsercured claims (e.g., supplier debts, indemnity claims); and f) subordinated debt. According to Section 6-4 of the Norwegian Liens Act of 1980 and for the purpose of securing recovery of the insolvency costs, provided that there are no other assets in the bankruptcy estate, the bankruptcy estate has a first priority statutory lien over all and any assets charged by the insolvent debtor (or a third-party as security for the benefit of the debtor) at the date of the opening of the insolvency proceedings. The statutory lien holds priority over all other liens or security interests in the relevant asset, regardless of whether such other liens or security interests have been created voluntarily or involuntarily. The statutory lien for the bankruptcy estate is currently limited to 5 per cent of the value of or sales proceeds for the pledged asset, however, limited to a maximum amount equal to 700 times the court fee in Norway (the court fee is currently NOK 860) in respect of each asset being mortgaged by way of registration in a register. The bankruptcy estate may only apply proceeds from the statutory lien to pay for necessary expenses related to the administration of the estate. Moratorium period Usually, the commencement of a bankruptcy implies that secured creditors cannot, withouth the estate s consent, implement enforcement sales during a six months period (which cannot be extended) that starts to run at the opening of the proceedings. In practice, this prohibition particularly applies to real estate and all types of movable property. Normally, the liqidator consents to the security holders selling their assets within the six months period or abandons the estate s seizure of the assets. Abandonment means that the bankruptcy estate abandons seizured assets which are of no financial value to the estate (because they are over-charged). The security holders thus have the assets at their disposal and can freely dispose of the securities within limitations otherwise set out in the legislation. Irrespective of whether or not the estate abandons the assets or consents to the enforcement sales of the assets, the result will be that the value of the assets is handed over to the mortgagees. For security falling under the regime of the Norwegian Financial Collateral Act (17/2004), the moratorium period does not apply provided that the security agreement excempts the normal rules for realisation. Claw-back Any charged asset sold later than three months prior to the date of the opening of insolvency proceedings can be revoked by the bankruptcy estate in a court ruling stating that the security holder who has received sales proceeds exceeding the amount the security holder would have received had the bankruptcy estate received its 5 per cent of the sales price (at the expense of the security holder with the lowest ranking priority), shall repay to the bankruptcy estate up to 5 per cent of the sales proceeds. The bankruptcy estate can only recover sales proceeds to the extent it is necessary as compensation for the administration of the estate. This will not apply if such sale of charged property is part of ordinary business.

13 8. In your jurisdiction, can borrowers or guarantors subordinate their claims and if so in what terms? Under Norwegian law the parties are free to agree on subordination of loan and guarantee obligations to any other obligations which would otherwise rank pari passu with the subordinated obligations. A creditor may also subordinate its claim against a debtor by unilateral declaration. In the event of the insolvent liquidation of a borrower or a guarantor, the bankruptcy estate will recognise and enforce such subordination when distributing the proceeds of the estate. 9. What are the consequences of a transfer, assignment or novation of an underlying credit in your jurisdiction (is new security necessary, is the security automatically transferred, etc.) Unless otherwise agreed, a security interest as well as the underlying claim are freely transferrable and no new security need be established. It is also the main rule under Norwegian law that a transfer of a secured claim entails an automatic transfer of the security interest. For claims secured by mortgage over a maritime vessel this is explicitly stated in the Norwegian Maritime Code (39/1994). However, a different conclusion could be reached depending on the agreement and the intentions of the transferor and the transferee. It is advisable that a transfer of the security interest always be addressed in the transfer arrangement relating to the secured claim. It should be noted that Norwegian law does not distinguish between transfer, assignment or novation and the terms are used interchangeably in agreements relating to a transfer of the creditor position of the underlying credit. 10. Can you have on top of a security in your jurisdiction, another layer consisting of an assignment of the collateral concerned conditional upon default by the debtor? Under Norwegian law a security interest established over an asset does not, generally speaking, confer title of the collateral to the security holder (whether the security is perfected by pledge, a mortgage deed or similar). However, depending on its legal properties a primary security interest may be sub-charged (or assigned, as applicable) to a third party by the primary security holder. It is crucial that such sub-charge can be legally perfected. Such perfection may depend on the legal properties of both the security asset as well as the principal security interest. Along with a sub-charge of the primary security interest, it is natural to provide a security interest in the underlying secured claim. This would be an ordinary charge of receivables with notice to the principal debtor being the perfection act. A sub-charge of a security interest under Norwegian law need not be made conditional upon the principal debtor s default, but the secondary security holder would of course not be able to enforce the principal security interest until the principal debtor defaults. Norwegian law also allows for creating multiple security over collateral on different priorities (and sometimes on shared priority) determined by the time the relevant

14 perfection act is performed. The relationship between two or more security holders may be regulated in a separate intercreditor agreement or similar. 11. Are step-in rights lawful in your jurisdiction or does any action to take control require the creditors to go through a court process? Under Norwegian law a secured creditor does not have a general step-in right to security assets in an enforcement situation and agreements on enforcement cannot validly be entered into prior to an event of default. Instead, the main rule is that enforcement must be sought through the Norwegian courts and/or the Norwegian enforcement authorities. An exception must be made for security over financial instruments (e.g. shares) which falls under the regime of the Norwegian Financial Collateral Act. If this is the case, and subject to prior agreement, the secured creditor may directly take possession over the security assets in an enforcement situation. The Norwegian Financail Collateral Act is the Norwgian implementation of the EC Financial Collateral Directive (2002/47/EC). Furthermore, for specific security assets, and under certain circumstances, a creditor may take possession or directly enforce its rights upon enforcement. This is the case for security established over receivables (including security over bank accounts) whereby the secured creditor may simply instruct the debtor to pay the outstanding amounts directly to the secured creditor instead of the defaulting party.