In some transactions, a non-Norwegian company may wish to register its ship with the Norwegian International Ship Register (NIS). This can be done only if the ship is managed by a shipping company that has its head office in Norway. This requirement has a bearing on the contractual structures and financing schemes that can be put in place and also raises issues concerning enforcement.
The NIS was established to enhance the competitiveness of Norwegian ships used in international trade. This is achieved primarily by allowing NIS ships to be crewed by foreign seafarers in accordance with favourable tariff agreements negotiated with foreign unions, which reduces costs compared with ships registered with the Norwegian Ordinary Ship Register. Consequently, the NIS has become the preferred shipping register for Norwegian ships used in international trade.
Various financing schemes for ships intended for registration with the NIS may require the owner to be a non-Norwegian company. This could be the case in connection with a sale lease-back transaction where a special purpose vehicle (SPV) is incorporated – for example, if a Chinese leasing house purchased a ship in order to charter it back to the seller on bareboat terms, it would typically require the ship-owning SPV to be incorporated in a tax-efficient jurisdiction. Another example is the Spanish tax lease scheme, under which ships must be owned by a Spanish company for a certain period.
The NIS Act permits foreign owners to register otherwise eligible ships with the NIS, subject to certain requirements. The most important requirement is that the ship be "managed by a Norwegian shipping company with its head office in Norway" (Section 1.2).
The motive behind this management requirement is to ensure that there is a genuine link between the ship and the flag state. The preparatory works to the NIS Act state that 'management' means the technical management (eg, crewing, supply and maintenance) and commercial management (eg, employment and chartering) of a ship.(1) However, it is sufficient for a substantial part of either of these management functions to be carried out in Norway. Consequently, parts of the management may be outsourced to foreign entities abroad. Which specific management activities must be carried out in Norway in order to meet the requirement is not explained in the act or its preparatory works and must instead be assessed by the owners. This is because the organisation of ship-owning companies is not always the same, which makes it impractical for the requirements to be specified further.
This management requirement will invariably have a bearing on the contractual structures available to parties involved in these types of transaction and any financing schemes. It is therefore important for parties to consider the management requirement at an early stage of the structuring process.
In sale lease-back schemes, the leasing house should be aware that the termination of the bareboat charter will usually end the contractual connection between the foreign owner and the Norwegian management company. Consequently, the foreign owner will have to change the ship's place of registration or enlist a Norwegian manager immediately after termination.
Further, stakeholders (eg, secured bank lenders and investors in bonds secured by ship mortgages) should note that the Norwegian management requirement may be an issue in connection with the enforcement of a ship mortgage over an NIS-registered ship. Where a mortgage is enforced, the ship's ownership may need to be transferred from a Norwegian to a foreign entity. As a result, the mortgagee will have to:
- ensure sufficient Norwegian management of the ship (which may not have been required and in place when the ship was owned by the Norwegian entity); or
- change the ship's flag.
The latter alternative may cause problems if the ship under charter is restricted with regard to a change in management or flag.
In light of the above, the various parties involved in shipping transactions which involve registering a ship with the NIS will need to structure the deal and the related contracts carefully in order to take into account the Norwegian management requirement.
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For further information on this topic please contact Øyvind Axe or Peter Jebsen at Wikborg Rein by telephone (+47 55 21 52 00) or email (firstname.lastname@example.org or email@example.com). The Wikborg Rein website can be accessed at www.wr.no.