I shall hereunder give some information as to local municipalities’ legal rights and obligations as to raising loans.
The municipalities' activities are regulated by the act concerning kommuner and fylkeskommuner (kommuneloven, abbreviated Kl.) as amended, latest 07.07.2000 (Act nr. 71, not in force per September 2000-09-06). Further, I refer to the act concerning inter-municipality companies (lov om interkommunale selskaper, abbr. Iksl) concerning companies owned by two or more municipalities.
1. Loans for financing a municipality’s own activity
a) Local municipalities may according to Kl. raise loans for own capital purposes and for converting older debts.
Loan for capital purposes where the local municipality, kommune, or regional municipality, fylkeskommune, are not owners, can only be raised where it is regulated in an act or by a resolution by the Parliament or Kommunaldepartementet (Ministry of local Government and regional Development) has given their consents to refund an advance payment.
A kommune or fylkeskommune can also raise loans to secure full insurance-technical coverage in a pension fund when transferring it from its own pension scheme to an insurance company. There are certain restrictions as to such loans, without commenting them further in this context.
A kommune or fylkeskommune can further raise loans to secure insurance-technical coverage in a pension scheme maintained by an insurance company when this is necessary to become a part in the agreement concerning transfer of accrued pension rights, as laid down in an act concerning Statens Pensjonskasse.
Loan for liquidity purposes may be raised, but have to be repaid before the end of the fiscal year, or if the economy plan of the municipality presupposes that fiscal deficits shall be covered over more than one year, repayment shall be made within the same time period.
Resolution by a municipality concerning raising loans must also specify how the loan is to be repaid.
The municipality’s total debt burden must not be heavier than what is regarded as justifiable from the balance in the annual budget and economy scheme.
The Kommunaldepartementet may issue regulations concerning amortisation periods and other loan terms, see FOR 1993-01-01 nr. 4032: Forskrift om avdragstid og andre lånevilkår for kommunale og fylkeskommunale låneopptak. Generally, the amortisation period cannot exceed 40 years, and shall correspond with the value of the asset. The amortisation amounts shall be equal annual amounts during the term of the loan as a basic rule, with some exceptions.
A resolution to raise a loan shall be approved by Kommunaldepartementet, now delegated to the Fylkesmenn (Regional state offices placed under the various Ministries). It is impossible to give an indication as to time needed for approval of such loans, but I will estimate the time period between 14 days and a month, as the loans in principle should be a part of the economy plan of the kommune.
Kommunaldepartementet shall issue regulations concerning dispositions that involve a currency risk, see FOR 1993-01-13 nr. 4034: Forskrift om adgang til å foreta disposisjoner som medfører valutarisiko. Generally, municipalities shall not engage in transactions involving a currency risk. Especially, it is not allowed to get involved in financial loans in another currency or to guarantee for such loans, or enter into currency term contracts including currency options and swaps except to hedge against income, expenses, assets or debts in a foreign currency. The Kommunaldepartementet may in particular cases grant an exemption.
b) A municipality may issue guarantees for other persons or entities financial obligations when there exists a certain municipal interest or this is regulated in an act or through a resolution by the Parliament. Guarantees for financial obligations connected to exercising business activities are not permitted.
A resolution to issue a guarantee shall be acknowledged by Kommunaldepartementet, delegated to the Fylkesmenn. According to the latest amendment of July 2000, guarantees of lesser importance do not require consent.
Kommunaldepartementet may issue regulations concerning guarantees, including guarantees for operation and for financial obligations of the employees, see FOR 1993-02-09 nr. 4046: Forskrift om kommunale og fylkeskommunale garantistillelser. This regulation concerns guarantee purposes, guarantees for employees’ loans, guarantees for debt that the municipality earlier has been directly responsible for, when establishing a company with limited liability and the debt is transferred to the company, forms of guarantees, time limit for guarantees, preparations of guarantee cases, delegation of authority, and resolutions.
A municipality cannot with legal binding effect pledge its assets as security for financial obligations of others.
c) The properties of a municipality cannot be subject to distraints or arrests.
d) A bank may never set off its claim against a municipality in the deposits of the municipality in the bank.
e) A municipality can never be subject to bankruptcy or composition proceedings according to the Bankruptcy Act.
f) KL. has in addition certain regulations concerning suspension of payments by the municipalities. I will not comment these regulations any further, just mention that payments under a suspension period shall primarily cover obligations towards physical persons, claims concerning salaries, pensions or similar to its employees or to full-time elected officers and similar, and expenses that have to be covered to avoid risks for considerable financial loss or substantial damages.
g) Kl. chapter 11 has specific regulations for so called kommunale foretak (kommune enterprise). Such foretaks are not separate legal entities, but is a part of the kommune, and the regulations in Kl. also apply for kommunale foretak unless otherwise stated in chap. 11. This is not case concerning the issues in this PM.
Kommunale foretak shall have its own board of directors, but the board of directors has as its primary task to supervise that the activity is run in accordance with its purpose, articles of association, economy plan and budget or other guidelines laid down for its activity. Thus, the board of directors are not authorised to raise loans or place guarantees unless as an accomplishment of the kommune’s annual economy plan and/or annual budget or to accomplish its purpose.
Upon exceeding the granted authority, the kommune is not obliged if the other contracting party realized or should realize that the authority was exceeded, and that it accordingly would represent an unfair act to finalise the disposition.
Kommunale foretak are represented towards third parties through its board of directors, or general manager in day-to-day matters.
i) The economy plan (which shall comprehend at least the next four budget years) and annual budget are to be resolved by the kommunestyre/fylkesting. In principle, the raising of loans and guarantees shall be approved by the kommunestyre/fylkesting, unless otherwise specified by law (kommunale or interkommunale enterprises) or through a delegation resolution by the kommunestyre/fylkesting. When negotiating loans of this kind, it is accordingly my recommendation that a legal opinion is obtained as to the legal authority of those signing on behalf of a kommune. Remember also the need for state approval.
j) It is of course impossible to say definite the time required for dealing with such matters in a kommune, as this will depend on the political situation, which body or bodies that shall pass the necessary resolutions and the negotiating situation as a whole.
In briefness, municipalities may raise loans to finance especially capital investments and may in this context pledge its assets. In case of non-fulfilment of its obligations, coverage may be sought from the pledged assets, but in case of non-coverage, there are no legal remedies to seek coverage from other assets. However, due to the rather tight control of the state authorities, it is very unlikely that a municipality is not in the position to repay its debt on due date, or alternatively seek alternative financing through state banks or similar. To my knowledge, we have no cases in the later years where municipalities have not fulfilled their financial obligations due to lack of means.
3. Lov om interkommunale selskaper (IKS)
a) Iksl. concerns companies owned by two or more municipalities. Such companies have limited liability, limited to each participant’s part of the company. IKS are basically operated according to the similar principles as joint stock companies and partnerships.
The highest authority is the so-called representantskap consisting of at least one representative from each participant, having more or less the same authority as a general meeting.
A board of directors is appointed by the representantskap and the board of directors has approximately the same authority as in joint stock companies.
IKS shall also have a general manager to be employed by the board of directors as a main rule.
IKS are represented by the board of directors, which also signs its firm, or delegates this right to one or more board members or the general manager.
The general manager represents the company within his authority.
b) IKS are not allowed to raise loans unless this is specifically stated in the company agreement. If authorised, the agreement shall specify a maximum amount for its total loans.
IKS may only raise loans for capital purposes and for converting older debt. Loans may also be raised for liquidity purposes, but if so, be repaid before the end of the actual budget year. Deficits that shall be covered over several years according to the economy plan, may be repaid over the same time period.
IKS are not allowed to issue guarantees or pledge its assets as a security for any other person or entity’s financial obligations, but can of course pledge its assets as security for own obligations.
A resolution by IKS to raise a loan must be acknowledged by Kommunaldepartementet, now delegated to the Fylkesmenn where only kommuner, not fylkeskommuner are participants.
Agreements that contradict what is said above, are legally invalid.
As for municipalities, the assets of IKS are not subject to distraints or arrests. Bankruptcy or composition proceedings cannot be opened in such companies.
In case of lack of funds to meet its running obligations, the board shall report to the representantskap. The first six months after such report has been issued, forced sales of the assets cannot be made.
Decisions concerning selling or pledging real estates or other larger capital assets or make investments of substantial effect for the company or one or more of the participants can only be made by the representantskap.
c) The representantskap shall annually approve the economy plan of the company. The plan shall form the basis for company’s activities, and shall comprise at least the next four budget years and include i.a. investment plans and the financing of these.
* * *
The information contained in this brief is given in good faith, and is believed to be correct. However, no responsibility for errors or omissions shall be attached to Seim-Haugen, Steenstrup & Co. Advokatfirma DA or its partners. The information is provided for guidance only, and shall not be relied upon in substitution for advice from a qualified lawyer directly.